Obalon Therapeutics, Inc.
Q2 2017 Earnings Call Transcript

Published: 3 Aug 2017

[Operator:]

Good day ladies and gentlemen and welcome to the Obalon Therapeutics’ Second Quarter 2017 Financial Results Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instruction will be given at that time. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to Bill Plovanic, Chief Financial Officer for Obalon. You may begin.

[Bill Plovanic:]

Thank you. Good morning and welcome to Obalon Therapeutics’ second quarter 2017 financial results call. I am Bill Plovanic, Chief Financial Officer for Obalon Therapeutics. With me on today’s call is Andy Rasdal, Chief Executive Officer of Obalon. This morning, the company issued a press release detailing financial results for the three months ended June 30, 2017. This can be accessed through the Investor Relations section of the Obalon website and obalon.com. You can also access the webcast of this call from there. Before we get started, I would like to remind everyone that any statements made on today’s conference call that expresses a belief, expectation, projection, forecast, anticipation or intent regarding future events and the company’s future performance maybe considered forward-looking statements as defined by the Private Securities Litigation Reform Act. These forward-looking statements are based on information available to Obalon management as of today and involves risks and uncertainties, including those noted in this morning’s press release and Obalon’s filings with the SEC. Such forward-looking statements are not guarantees of future performance. Actual results may differ materially from those projected in the forward-looking statements. Obalon specifically disclaims any intent or obligation to update these forward-looking statements except as required by law. A telephone replay of the call will be available shortly after completion of this call for seven days. You’ll find the dial-in information in today’s press release. The archived webcast will be available for one year on the company’s website obalon.com. For the benefit of those who may be listening to replay or archived webcast, this call was held and recorded on August 2, 2017, since then Obalon may have made announcements related to the topics discussed, so please reference the company’s most recent press releases and SEC filings. And with that, I’ll turn the call over to Obalon’s CEO, Andy Rasdal.

[Andy Rasdal:]

Thank you, Bill. Good morning everyone. Thank you for joining us today. On this call, we will provide some background on our products and technology, as well as discuss highlights from our first six months of U.S. commercial experience. Finally, Bill will review our second quarter financial results after which we will answer questions. First, I’m very pleased with our first six months of U.S. launch. I’m quite impressed by the commitment and discipline of our team to focus on the activities to build a sustainable new category and company. We are pleased with the product controlled performance of our unique swallowable, gas-filled balloon, especially compared to the older technology endoscopic replaced liquid-filled balloons. Based on the physician and patient experience in the first six months, we believe we have a novel technology to provide a meaningful solution to address this very large chronic disease state. Revenues in Q2 were $2 million, up 33% over Q1. Although we did not have the advantage of a pre-launch or run-in period like we did in Q1, position interest in offering the Obalon balloon continue to be strong and we sold into approximately the same number of new accounts in Q2. We’re pleased to see that accounts we opened in Q1 reorder products in Q2 and in some case displacing multiple reorders. Overall, we believe we are building a high quality foundation for sustainable revenue. In Q2, we shift only in inventorial amount of accessory products to our distributor partner in the Middle East. However, in July, we began shipping the new third generation six month Obalon balloon system to the Middle East is our intention to continue shipping monthly to the Middle East for the remainder of fiscal year 2017. Gross margins improved 44% in Q1 to 50% in Q2, mostly as increased production volumes absorbed more overhead. Even with the higher product volumes in Q2, we maintained a very high level of quality and we have not had any product performance defects in our first full six months of launch that required a field action. However, we continue to operate a very conservative manner, still test samples for finished goods relatively high rates to help ensure high quality performance from our products as we continue to scale to higher volumes. Additionally, this testing is also allowing us to build a strong database of measures so we can use to drive continual improvement in manufacturing processes and efficiencies we believe will translate into continuing gross margin improvement. Clinically, the product continues to perform reliably and we had no serious adverse events or patient injuries to report in the first six months of our US launch. Participation in our commercial registry continues to be quite strong and is providing valuable real-time information to us, as well as to our accounts. Although it’s too early to provide meaningful end of treatment weight loss data, interim trends are showing weight loss running ahead of our US pivotal trial results. Initial patient interest continues to be strong and top line metrics improved sequentially from Q1. We had more than 190,000 unique visits to our website, and more than 32,000 visits to find a doctor. On social media, we had more than 150,000 engagements, over 900,000 video views now amounting to over 6,400 patient hours, and over 5 million ad views. In Q2, our digital activities generated nearly 19,000 leads to physicians, and this is in addition to what individual practices may generate through their own efforts. This data reinforces our belief that people are very interested in the overall treatment for weight loss. However, as we said previously, this top-level patient interest does not immediately translate to treatment. There are number of leaks and lags in the patient interest and treatment funnel and we’re continually working closely with our accounts to optimize the funnel more efficiently and for patient interest to treatment. We had over 40 earned medium placements, which resulted in almost 100 million medium impressions. We are pleased that the strong media interest in Q1 was not just an initial curiosity and was sustained in Q2. Overall, we believe awareness about Obalon is a frontline treatment for weight losses continue to increase. Despite the intense average successfully commercialized in the U.S., we have continued to make progress on our future product pipeline that we believe will provide improvements to what helped the field to larger and broader segments of the weight loss market, with again shifting our HPMC veggie capsule product in the U.S. in July. We completed the unique configuration of our Gen 3, 6-month product flow in the Middle East that helps to prevent forward or backward compatibility within our absolutely three-month product and began shipments of that product to our distributor in July. We have made clinical progress with our navigation tracking system, which is intended to eliminate the need for x-ray during balloon replacement. The development of our touch inflation dispenser, which is intended to make balloon placement even easier or reliable and safer continue to achieve meaningful milestones towards commercialization. I would now like to hand the call over to Bill Plovanic, Obalon’s CFO, so that he may review our first quarter financial results.

[Bill Plovanic:]

Thanks Andy. Good morning everyone. Today, I’d like to share details on our financial results posted for the second quarter ended June 30, 2017. As Andy previously stated, we began with annual U.S. commercialization in January 2017, and continued to be fully focused on the successful U.S. launch in the second quarter of 2017. Although, we did not ship our current generation Obalon balloon product to our international distributor in the second quarter of 2017, I am pleased to say that we began shipping our third generation six-month product to our Middle East distributor in July. We intend to ship monthly for the remainder of the year. Second quarter revenue was reported at $2 million as compared to $1.5 million in the first quarter of 2017. The sequential growth of 33% was driven by reorders as we opened similar number of new accounts in the U.S. in both quarters this year. Cost of goods sold increased to $990,000, up from $823,000 in the first quarter 2017. Gross profit for the second quarter 2017 was $973,000. This was up from 649,000 in the first quarter of 2017. And gross margins increased almost 600 basis points, sequentially to 50% from 44% in the first quarter. ASPs remain consistent quarter-to-quarter with gross margin improvements generated mostly from improved absorption of fixed overhead as more units were produced in the second quarter as compared to the first quarter of 2017. R&D expense for the second quarter totaled $2.8 million, up from $2.4 million in the first quarter as we continue to increase employee headcount and support our product pipeline. This compared to $2.6 million in the second quarter of 2016, which included expenses associated with the conclusion of our smart pivotal trial that supported our U.S. PMA submission and approval. As Andy mentioned, we will continue to support development projects that make the Obalon balloon system easier to use, more convenient, and more economical for both the physician and patient and expands our overall market opportunity. SG&A expenses for the second quarter was $5.9 million. This was in-line with $5.9 million in the first quarter of this year as our U.S. field force and marketing spend combined remained relatively unchanged on a sequential basis. For the second quarter of 2016, SG&A expenses were only $1.6 million, as we had not invested in our U.S. sales and marketing organization that did not have the added expenses of being a public company. Operating loss for the second quarter of 2017 was $7.6 million. This compared to an operating loss of $7.7 million in the first quarter of this year. Higher revenue, gross profits, and gross margins offset the sequential increase in operating expenses. GAAP net loss for the second quarter 2017 was $7.7 million, as compared to a loss of $7.7 million in the first quarter of 2017, and a loss of $0.46 per weighted average diluted common share outstanding as compared to a loss of $0.47 in the first quarter 2017. We utilized $6 million of cash in the second quarter of 2017. And as of June 30 we had $60.7 million in cash, equivalents, and short-term investments, and $10 million in long-term debt. We ended the quarter with $16.6 million weighted average common shares outstanding. Our top priority for use of cash is to support our U.S. commercialization efforts, as well as continued research and development projects. With that my comments on Obalon second quarter are complete. We’re pleased with the second quarter financial results and continue to make important commercial progress. More importantly, I believe we continue to put the building blocks in place to support long-term growth. We will be participating in the Canaccord Global Growth Conference on August 9 in Boston. Operator, will you please now open the line for questions.

[Operator:]

Thank you. [Operator Instructions] Our first question is from Matt Miksic of UBS. Your line is open. Please check your mute button. We will move on to the next - Matt, if you are on this line, your line is open.

[Matt Miksic:]

Hi, this is Matt, can you hear me?

[Bill Plovanic:]

Hi. Good morning, Matt.

[Matt Miksic:]

Not sure what happened there, sorry about that. So, couple of questions, just on the quarterly if I could, you mentioned the growth driven by reorders, can you talk about where that ends in your expectations for the quarter, you know if you open these new accounts in the quarter is that a pace you expect to kind of continue, I think you mentioned you opened the same number of accounts in the second quarter and the first quarter, just some sense on the ebbs and flows of reorders on the growth side, and maybe new stocking orders, new centers on the other side, and then I have a couple of quick follow-ups?

[Andy Rasdal:]

Thanks Matt. I think, we were pleased with the continued interest of new account. I think the focus continues to be however in keeping that somewhat constrained and continuing to try to build the highest quality revenue base such that it is sustainable, annuity type flow and that the accounts we opened find value and continued invest and to grow their business, and so look it’s only kind of a three-month comparison period, but yes overall, I think we are pleased that we had accounts who got up and going in the first quarter, reorder product in the second quarter, and in some case they placed multiple reorders. So, going forward, we will continue to try to respond in a positive manner to continued position interest. We don't want to disappoint people by telling them we can't service you, and we can't open you quite yet balanced, we're still staying true to the story that it is important to create a depth in this business, and to create a sustainable revenue base not just create stocking orders into new accounts.

[Matt Miksic:]

Right and that’s been the strategy, I think as you talked about sort of avoiding the pitfall of a significant number of stocking orders, one of the things you mentioned last period, and I think has been a little bit of a surprise this year is the earlier than expected interest in plastic surgery as a channel, we spoke to some of those folks and despite the strength in the quarter, it sounded like many of them were still kind of early in their uptake, they were just beginning a month or so ago, a month or two ago, is that your sense or was some of the strength due to that channel, are we seeing any evidence of that yet in the numbers?

[Andy Rasdal:]

Sure I think as we said that the first quarter we’re pleased that some of that initial interest turned into action on the part of the aesthetic channel. As you would expect, the existence sort of bariatric base and bariatric surgery centers who have been previously offering balloons and the GI community who had been doing that is still a big piece of the foundation as we move forward, but we are increasingly and continue to see interest by the aesthetic channel and new accounts are showing strong interest to become involved, and so that’s very encouraging. Yes, they had a financial impact and as I think we said last quarter that the - from the time we sort of sell into account to the time they become really operational functional is depended on a lot - a number of things, and of course in the aesthetic channel, they don't have the same history in the weight loss market, and they don't have all of the clinical logistics. Some of them start up and become effective fairly quickly. Some take a little bit of time to provide that foundation and they are very - in tuned in this cash pay business to making sure that they deliver on customer promises also to create sustainable revenues for themselves.

[Matt Miksic:]

Thank you, Andy and just, if I could just one more quickly on the sort of forward modeling and projections and trends and I know this is, you haven't provided us with an outlook for the year, with encouraging progress on the pipeline and navigation, but just in terms of tone as this is your first time around the Horn hear, you now with the new U.S. launch and so I understand that maybe you have a great sense of what seasonality may look like, but is there anything that you could guide us to in terms of the pace of new centers, the vacation habits of your key channels or anything that might help us sort of layout the color on the pace for the rest of the year?

[Bill Plovanic:]

Sure Matt. As you know, we don't provide guidance that said we are in our first year of commercialization, I think for folks that have covered medical device and companies over their careers, you know seasonality is not typically something that comes into play until your multiple years into commercialization. It’s a new market, we are a new technology in that market and we are building in that market today. We don't have experience with whether there will or won’t be seasonality, but we are very early into this big market opportunity as we all know of 70 million adults in the U.S. alone are overweight and have 30 BMI to 40 BMI category or 30 to 100 pounds.

[Matt Miksic:]

Okay, so continued trajectory and as I guess so we should expect in the U.S.?

[Bill Plovanic:]

Your words, not mine.

[Matt Miksic:]

Okay. Thank you very much for taking the questions

[Operator:]

Our next question is from Kyle Rose of Canaccord. Your line is open.

[Kyle Rose:]

Great, thank you very much for taking the question. Can you hear me alright?

[Andy Rasdal:]

Good morning, Kyle

[Bill Plovanic:]

Good morning, Kyle.

[Kyle Rose:]

Good morning. So just wanted to first start on the OUS there, I started shipping again in the Q3, is still early in July with monthly shipments I guess expected in the rest of the year. How should we think about, I guess the first shipment relative to the remainder of the shipments and was there any stocking that we should think about, particularly in the Q3? And then just what should we think about, as far as the pace or cadence of those type of shipments moving forward?

[Bill Plovanic:]

Sure Kyle, thanks for the question. As we think about the international markets as we have said before, our focus is really on the U.S. International we had a great, we have a partner [indiscernible] they have been very supportive in the past. They have done a great job with the Middle East. We want to be supported of that partner, but again we are, the US is really the value creation for this company and we are very focused on the US.

[Kyle Rose:]

Okay. And then you have been in the market for six months. I realize it’s early days from a commercial standpoint. That said, you do have a set of competitors that have been on the market for a bit longer now. Just wanted to see if you could give us an update on the competitive dynamics and what you are saying at the market at this point and is the majority of some of the accounts that you have opened, more share taking from some of those existing users versus, I guess bringing de novo physicians in and the aesthetics channel in or how should we think about the physician additions year-to-date.?

[Andy Rasdal:]

Yes, sure Kyle, I think, look we will always try to be revenue and efficient and if there is large centers that have developed balloon practices, you know at this point, I think word is getting out enough that this is a very, very differentiated technology, you know what I will say, if we put a little bit of color on that, if physicians have any experience with the other balloons, a couple of the things that they come back and reinforce is just the ease of placement, how easy it is to put patients in the channel. How it is to place the balloon and then perhaps most importantly is the whole patient tolerance, patient discomfort is considerably minimized with this and it is easy to manage more patients. So, I think that’s a natural piece, but that being said, we will continue to focus not so much on trying to take whatever share is out there, but to try to establish this is a very important and meaningful category, and this is really about category growth, and I think that’s always on the basis of having actually a novel technology that overcomes the organic issues that not just other balloons have had, but previous weight loss devices hadn’t. Only six months into it as you noted and I've mentioned in my comments, I think we’re very pleased with the performance with the product and the feedback we’ve got.

[Kyle Rose:]

Great. I appreciate the color and then there is two quick questions, and I will hop back in the queue. One, is there any expectations or color you want to give as far as the commercial channel, and whether or not you will be expanding new additional territories, whether that’s on track with your previous expectations or maybe even ahead, and then lastly any expectations for data to be coming out this fall as we head into obesity week and things of that sort?

[Andy Rasdal:]

Yes, in terms of, yes you can imagine in any of the limited geographies that we are involved with, there is certainly a number of - a sufficient number of obese patients and certainly enough interested centers I think for us to be productive, and I think that’s the general answer to your question in terms of territory, I suppose implied sales force and expansion is the same thing to two big accounts that we choose. We want to focus on making sure that we go deep and then we make sure that the territories we have are both effective and efficient and revenue productive and we understand the dynamics as we understand that in revenue growth will of course make an incremental decision on whether to expand. On the data piece, we haven’t done a clinical study realistically that will be ready to well in advance of the obesity week deadlines, which I think we are back in April or May to submit to have any brand-new earth-shattering data there that being said, we will have a presence at that meeting for sure.

[Kyle Rose:]

Great, thank you very much for taking the questions.

[Operator:]

Our next question is from Rick Wise with Stifel. Your line is open.

[Rick Wise:]

Good morning folks. Just on the revenue side, it does look like a very solid quarter and I have no idea where my friends on the call were modeling International, but we did have in our modern some international revenues this quarter, so you did better than we were looking for overall with U.S. alone. I mean was the quarter better than you expected Andy and maybe just as part of that, you could, and I know you are not anxious to give specifics, but whatever you can give us, any updates on the number of reps or number of accounts or docs trained as part of that? Are you ahead/behind where you thought you would be? Thank you.

[Andy Rasdal:]

Yeah, well I mean, look as you know that is a tough question. You always try to set a plan and march to it, I mean - yes I think with our question it is hard - last quarter, we were pleased with the first quarter results, but there is nothing to compare too. For me, having launched a number of new novel products into novel markets and try to create this in the past, I am, as I said I am very pleased with both the performance of the team, the clinical and product performance, which I think are both important things and building sustainability, and then I think the overall response and the revenue that generated it’s only one quarter of comparisons, but look I’m pleased that we have the percentage of reorder reduce. Bill mentioned that essentially the growth from quarter to quarter is driven by reorder is not simply new stocking. And so I think that’s an encouraging sign, but we are only one quarters of comparison and either, and we will obviously try to grow both of those things in the next quarter.

[Rick Wise:]

And updates on any of those metrics, reps, accounts, doc trained, anything else?

[Andy Rasdal:]

Not at this time.

[Rick Wise:]

Okay. And one clarification, I was a little confused and maybe, my bad, and I misheard, at first I thought you said that you sold to the same number of accounts, as in the first quarter, but later it seemed to be - you seemed to be saying, we added the same number of accounts in the second quarter as we did in the first. If you just clarify that for me.

[Andy Rasdal:]

We opened approximately the same number of new accounts in Q2 that we opened in Q1.

[Rick Wise:]

Got you. On the gross margin, may be your Chief Financial Officer would like to chime in. Bill obviously you made some progress 50%, a set of 44% in the first quarter, just directionally, how do we think about gross margin from here scaling in-line with volume continuing to move sequentially higher as we proceed through the year, any color there?

[Bill Plovanic:]

As in our remarks Rick, gross margin improvements are a function of absorbing our overhead on more units. If we sell more units, our gross margin would be taking that overhead and pushing it over those more units, and it would see an improvement, but that’s all volume dependent.

[Rick Wise:]

So the answer is yes. I will take it. The pipeline, again you made a couple of comments, can you just a little more color Andy on the pipeline, you are making progress for example on the navigation tracking system, any more specifics on timing or again more specifics on the 12-month loan or the self passing below and any updates there? Thanks so much.

[Andy Rasdal:]

Yes, I think we will stay focused on sort of the things with obviously the more near-term impacts will continue to look getting rid of the need for X-ray imaging and having navigation replace that from both the ease of use convenience and economics would be very strong. We continue to make clinical progress on that, the ease of use dispenser, which allows somebody to more reliably and easily, and safely inflate balloons, only increases throughput and the repeatability of this, I think of the good things. In terms of specifics these development projects and FDA approvals are always uncertain, and I think when we have some more clarity around the timing, which we might not only have approvals, but also be able to and the commercial is products, I think will be the time to be more specific about timelines.

[Rick Wise:]

Thanks so much.

[Operator:]

Thank you. The next question is from Ryan Zimmerman of BTIG. Your line is open.

[Ryan Zimmerman:]

Great. Thanks for taking the question.

[Andy Rasdal:]

Good morning, Ryan.

[Ryan Zimmerman:]

Just wanted to follow up, a lot of questions have been asked already, but you talked about the reorder rate, it sounds like system is what you saw in the first quarter, just curious kind of how much control or maybe to put it a better way, how much influence do you feel you have to move that rate higher over time, and then maybe as a follow-up to that and then conjunction with that question, what have you seen in terms of marketing on the practice side of things, and whether that is separated from accounts and how do you take those learning’s to other accounts that may not be reordering as much? Thank you.

[Andy Rasdal:]

Well without question, I would say the whole strategy is to try to drive a sustainable reorder driven revenue base and so our goal will absolutely be to try to drive more reorder or across at higher rates across more accounts, and as we move open new accounts going forward to try to call up on the experiences of the first six months and try to select accounts that have the characteristics of those which become more productive. In the end, this all gets driven by patient flow. Reorder should be driven organically by balloons being used up, it being a value to the practice, them spending in investing their time to attract more patients into the channel, and thus generate continued growth within the accounts that are already open not just simply generate growth by opening more accounts, which I think is the encouraging piece of the very early, but still Q1 to Q2 comparisons. In terms of the practice, marketing as you would expect we’re in three different channels and the sophistication of those marketing efforts by practice run the entire gamma that’s as broad as you could imagine, as you know we took the sales and marketing team here, who have strong track records in the aesthetic business, especially the ability to use digital, social marketing as a very efficient means to drive patient interest into this thing, and so we’re both taking the characteristics of the best practices. We see who are repeating that patient blow on their [indiscernible] driving reorder intake and the tribal knowledge so to speak of these aesthetic people here and overlaying that, and I think the initial results are certainly encouraging.

[Ryan Zimmerman:]

Great, and then just as a second question for me, and I will hop back in queue, you called off the HPMC, the veggie capsule sales began in July, just want to understand if there is any incremental benefit to the use of that beyond the gross margin improvement you spoke about before and in terms of sales or potentially patient that may choose to adopt because of the new capsule?

[Andy Rasdal:]

Yes, I mean we can make some general comments. It is a much more - internally of course it is a much more efficient capsule for us to produce. We have not scientifically studied the difference between [indiscernible] and a vegetable based capsule and [indiscernible] scientific data around there. We do know that, if I put that thing in my mouth versus the porcine it tastes better for lack of a better word that may appeal with some patience, but I don't see this is the kind of thing that sincerely patients are going to go. They have a new capsule that’s great. I think it will improve some ease of the use as well at the administration level by the accounts.

[Ryan Zimmerman:]

Okay. Thanks for taking the question Andy and Bill, thank you.

[Bill Plovanic:]

Thanks Ryan.

[Operator:]

Thank you. This sends the Q&A portion of today's conference. I would like to turn the conference over to Bill Plovanic for any closing remarks.

[Bill Plovanic:]

Great. Thank you for your interest in the Obalon. We will be presenting at Canaccord next week in Boston on Wednesday, August 9 and this concludes today's call. Thank you.

[Operator:]

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program. You may now disconnect. Have a wonderful day.