Obalon Therapeutics, Inc.
Q3 2017 Earnings Call Transcript

Published: 3 Nov 2017

[Operator:]

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

[William Plovanic:]

Thank you. Good morning and welcome to Obalon Therapeutics’ third quarter 2017 financial results call. I am Bill Plovanic, Chief Financial Officer for Obalon. 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 September 30, 2017. Also last night the company issued a press release regarding the first sales to a national multi-store aesthetic chain, Sono Bello. These releases can be accessed through the Investor Relations section of the Obalon website at 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 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.

[Andrew Rasdal:]

Thank you, Bill. Good morning everyone. Thank you for joining us today. On this call, I will highlights of our commercial experience and provide an update on developments in our product pipeline. Finally Bill will review our third quarter financial results after which we will answer questions. First, I'm impressed with our progress and continuing to methodically build the foundation to establish an important new therapy for weight loss and create a sustainable business franchise. We continue to be pleased with the product performance and clinical outcomes of our unique swallowable gas-filled balloon in actual commercial use compared to the results from our controlled pivotal clinical trial and especially compared to the older technology endoscopically placed liquid filled balloons. Based on our registry data and customer feedback since U.S. launch we have increased confidence we have a novel technology solution that is performing as intended both in terms of clinical outcomes and economically as a business with the practices making the commitment to provide Obalon. The Annual Bariatric Surgery Meeting, ASMBS took place earlier this week and we are very pleased with physician traffic and response. Last year ASMBS was our introduction to the U.S. bariatric community. We had just received approval and had not yet launched. This year we have definitely seen a shift in tone from curiosity to one of physicians looking to understand how they can make Obalon a meaningful part of their practices for those patients who would not otherwise consider or be eligible for surgery. Revenue in Q3 2017 was $2.8 million up 42% over Q2 2017 and up 260% over Q3 2016. We made our first ever international shipments of our six-month balloon to our Middle East distributor. Reorders from existing accounts in the U.S. grew again in Q3 2017 providing additional support that our strategy to create a foundation for sustainable revenue is beginning to take hold. New patient starts and total balloons placed also grew in Q3 2017. Given our concentrated geographical footprint and focused launch, revenues were impacted by the hurricanes in Florida and Texas two of our three largest markets. We do not believe the FDA letter regarding unanticipated deaths with a reshape in Obalon [ph] balloons had any sustained impact on physician and patient interest in Obalon. The second half of Q3 was stronger in all metrics than the first half. We continue to make progress in all three of our target specialties, bariatric surgeons, gastroenterologists and plastic surgeons. We are especially pleased to have signed our first ever multi-store national aesthetic account Sono Bello. Sono Bello is the largest cosmetic surgery group practice in the U.S. with more than 40 locations in over 100 board-certified plastic surgeons who have performed more than 100,000 face and body procedures. The data from our commercial registry continues to be very encouraging for the performance of the Obalon balloon in actual commercial use. As reported in the registry adverse events are substantially lower and weight loss is higher than our controlled pivotal trial that supported approval. This is extremely unusual in medical devices. Typically commercial data is inferior to the data generated from carefully controlled clinical trials. Reasonably we've proactively and voluntarily shared that data from the Obalon commercial registry with the FDA as part of our continued collaborative relationship with the agency. The metrics measuring patient interest increase substantially with Q3 top line metrics equal to the combined total of Q1 and Q2. In the third quarter alone we had more than 370,000 unique visits to our website and more than 170,000 doctors. On social media we had more than 300,000 engagements over 1.7 million video views amounting to over 14,000 patient hours and over 10 million add views. We had over 30 earned media placements which resulted in almost 32 million media impressions. In Q3 our digital activities generated nearly 13,000 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 Obalon treatment for weight loss. However, as we said previously, this top-level patient interest is not immediately translated to treatment. There are a number of leaks and lags in the patient interest to treatment funnel and we are continually working to optimize the funnel and more efficiently convert patient interest to treatment. We are concurrently conducting a pilot program in a limited geography intended to increase the efficiency of convergence and initial results are encouraging. We continue to believe that the timely introduction of new products will help drive the market development and Obalon leadership. We made significant progress in our R&D pipeline, specifically we have submitted to PMA supplements since our last financial results call which we believe will provide improvements and use and use of safety which positions Obalon to appeal to larger and broader segments of the physician specialties interested in or participating in the weight loss market. We submitted a PMA supplement for our Obalon Navigation System which is intended to eliminate the need for x-ray imaging during balloon placements. As we continue to penetrate deeper into our target channels for new customers, the cost and logistics related to x-ray are becoming bigger payers. We believe the Obalon Navigation System will substantially accelerate the adoption of the Obalon balloon by physicians and potentially expand our channels to other specialties by further reducing the cost and clinical logistics for providers. Navigation has the potential to improve patient lower accounts by enabling the placement of the Obalon balloon almost anytime and anywhere. We've also submitted a PMA supplement for the Obalon Touch, a more automated version of our dispenser used to inflate the balloon. We believe the Obalon Touch is simple to operate and is intended to make balloon placement even easier, more reliable and safer. Finally, I am pleased to announce that we have removed all outstanding litigation as of this week which eliminates any uncertainty of outcomes and related expenses and most importantly, will allow management to fully focus on the activities which will create value. The current market for the Obalon balloon system is in its infancy in terms of size and development. We are encouraged by our progress in commercial experience to date as it continues to reinforce our belief that there is significant interest in the unique Obalon swallowable gas-filled balloon because it solves a very large and important problem and provides strong economic outcomes for providers. We will continue to make the investments we believe are required to grow the market to its potential and to create a valuable and sustainable business franchise. I could not be more optimistic about the future. I would now like to hand the call over to Bill Plovanic, Obalon's CFO so that he may review our third quarter financial results.

[William Plovanic:]

Thanks, Andy. Good morning everyone. Today I'd like to share details of our financial results posted for the third quarter ended September 30, 2017. As a reminder, we began U.S. commercialization in January 2017 and in the third quarter of this year we began shipping our current generation six-month product to our Middle East distributor. My following commentary will compare Q3 2017 to Q2 2017 financial results, as we believe this is most relevant given we are in the first year of U.S. commercialization and were only selling in international markets in 2016. Third quarter revenue was reported at $2.8 million as compared to $2.0 million in the second quarter 2017 an increase of 42% sequentially. U.S. revenues of $2 million increased its reorders once again drove sequential growth. Similar to other discretionary product companies, Obalon was impacted by the hurricanes in the quarter, specifically there were fewer new accounts added in hurricane impacted geographies in Q3 as compared to Q2. International sales were reported at 788,000 in Q3 2017 up from 40,000 in Q2 2017 driven by initial shipments of our current generation product to our Middle East distributor. Cost of goods sold increased to $1.3 million up from $1.0 million in the second quarter of 2017. Gross profit for the third quarter of 2017 was $1.5 million up from $1.0 million in the second quarter. Gross margins increased 300 basis points sequentially to 53% from 50%. Gross margin improvements were a result of improved absorption of fixed overhead as more units were produced in the third quarter as compared to the second quarter of 2017 which was partially offset by lower ASPs as we began shipping to our distributor in the Middle East in the third quarter. R&D expense for the third quarter totaled $2.8 million which was in-line with $2.8 million of R&D expense in the second quarter. R&D expenses remain consistent as we continue to make investments to support development of our new product pipeline which culminated in our PMAs submissions for both Obalon Navigation System and Obalon Touch Inflation Dispenser. As Andy mentioned, we will continue to support development projects that make the Obalon balloon system easier to use or convenient and more economical for both the physician and patient to expand our overall market opportunity. SG&A expense for the third quarter totaled $7.8 million up from $5.9 million in the second quarter of 2017. In the third quarter of 2017 we increased our U.S. field force to include product development managers for support of our physician practices with the task of driving patient flow at the practice level. Included in Q3 2017 SG&A expenses was a one-time non-cash charge of $1.4 million associated with the settlement of litigation. Operating loss for the third quarter was $9.1 million as compared to $7.6 million in the second quarter of 2017. Higher revenue and gross profits offset most of the sequential increase in operating expenses excluding one-time non-cash charges to settle litigation. GAAP net loss for the third quarter 2017 was $9.2 million or $0.55 per weighted diluted average common share outstanding as compared to $7.7 million or $0.46 in the second quarter 2017. We utilized $7.4 million of cash in the third quarter 2017 and as of September 30, we had $53.4 million in cash equivalents and short-term investments and $10 million of debt. We ended the quarter with 16.7 million weighted diluted 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 in Obalon's third quarter are complete. We will be participating in two upcoming conferences in New York City. On November 09, we will be presenting at the Canaccord Medical Technology and Diagnostics Forum and at November 14, we will be presenting at the Stifel Healthcare Conference. We look forward to seeing many of you at these events. Operator, will you please now open the line for questions.

[Operator:]

Thank you. [Operator Instructions] Our first question comes from the line of [indiscernible] of UBS. Your line is now opened.

[Unidentified Analyst:]

Hey good morning guys. Thanks for taking the question.

[Andrew Rasdal:]

Good morning.

[William Plovanic:]

Good morning.

[Unidentified Analyst:]

So just a couple if I could, so maybe more of an update on the Sono Bello announcement last night and when we can expect that partnership to start having an impact on your growth rate? And you know when you start to expect to offer the balloon and would it be on a region by region basis? And I have a followup after that.

[Andrew Rasdal:]

Yes, I don’t think at this point we're in a position to share any further details on our relationship with Sono Bello. I think jointly we'll begin to provide more detail on color on that. Obviously we will more through it in a tiered manner. They are extremely well organized both in terms of the marketing they intend to do and their clinical logistics and we hope to begin starting in the first centers yet this year.

[Unidentified Analyst:]

Okay, great. And then on the PMA supplement for the navigation system and the Touch Dispenser what is the time line for potential approval and commercialization post that?

[Andrew Rasdal:]

Yes at this point we really can't comment any specific timing as we said in the past when we have specific timelines at this point it is with the FDA that is a process that we don't control. We're very disciplined into selling and creating value with the product that we have in hand today and as we get further delineation about the status of those both for approval and our intention is to launch as quickly as possible after approval. But as we get more clarity around those timelines we will begin to share them.

[Unidentified Analyst:]

Okay, great. I'll let some others hop in. Thank you.

[Andrew Rasdal:]

Thank you.

[Operator:]

Thank you. [Operator Instructions] Our next question comes from the line of Rick Wise from Stifel. Your line is now open.

[Unidentified Analyst:]

Hi guys, it's Drew Renerio [ph] on for Rick. But I just had a few questions first on the weather and I am sorry if I missed this, but I don’t think you brought this up weather up on the call when a lot of other Med Tech companies this quarter have been impacted by the hurricanes and California wildfires I know a lot of your centers or some of your centers are in Texas and Florida. But did you see any impact from weather issues and could you put any numbers around that?

[Andrew Rasdal:]

Yes we did mention that in two of our three largest markets Florida and Texas were certainly impacted by the hurricanes. There were fewer new accounts brought into the Obalon system during that period of time. Patient volume was impacted. The patient volume seems to have begun to recover over subsequent months with of course Florida being more resilient than Texas given the extent of the damage.

[Unidentified Analyst:]

Okay and just sequentially you grew 30% in the second quarter and now 42% in the third. You have the new agreements with Sono Bello. You are adding new accounts. You have good reorders and new products coming along, but maybe from a 10,000 foot perspectives can you maybe just talk about some of the puts and takes as we head into 2018?

[William Plovanic:]

Yes Drew, so as we, at this time as you know we haven’t provided guidance and we won't provide guidance. You know it really comes down to when we have metrics that are repeatable that we can accurately predict the business out we're more than happy to share those metrics with you, but I think at this time we just don’t have enough historical data to provide any guidance.

[Andrew Rasdal:]

I do think Drew, I think there is a very unique dynamic right that occurs around the beginning of the new year called the New Year’s resolution, where we all say that we're going to eat better, drink less, and loose weight, exercise more. And you know if you look at some of the proxies that are available for instance in health club memberships those things in the month of January are up 50% compared to other months. If you happened to go to health club you know you can’t find a parking spot in January and so we know that giving that momentum although this will be really the first full quarter we will be able to be prepared in advance for that. We are certainly looking to try to take advantage of that and try to give people reasons to accept these practices and be more involved with that. You know hopefully then we really do believe that in our past successes the introduction of new products which drives, improve the ease of use which drives improved economics have been very, very critical in driving increased market adoption and we are excited about the potential in particular for navigation to remove a significant cost and logistical barrier moving into 2018.

[Unidentified Analyst:]

Okay and just one last one on the ASMBS conference that just occurred earlier this week. Andy, you talked about the conversations have been better than they were last year when you were pre-commercialized, but if I remember correctly, last year there was still few intragastric balloons approved, so what are the doctors getting now that they didn’t get 12 months ago, and I'm thinking about intragastric balloons?

[Andrew Rasdal:]

Well, I think the biggest, you know there are two obvious changes, one is the FDA has put out two advisory letters related to the liquid filled, gastric balloons and an increasing number of people now have been able to have direct experience with our swallowable gas-filled balloon which has a substantially different adverse event and ease of use profile. And so a number of them are beginning to share their experiences more widely, informally in conversations and even up on the stage to the point you know one of the in the balloon sessions as I read the notes from there, you know one of the couple of the clinicians even suggested it’s good to have more than one balloon in your practice, but you should always lead with the Obalon gas-filled balloon because it provides the best tolerability, best of use and appears to be best for our patients. And only if for some reason that that is not applicable to your patient would you consider the other balloons. So, strong and strong statements, very different from last year when there is theory and a concept and a curiosity now we are beginning to see actual experiences shared both from the podium and perhaps even more informally over dinners and drinks.

[Unidentified Analyst:]

Great, thanks for taking the questions.

[Andrew Rasdal:]

Thanks Drew.

[Operator:]

Thank you. Our next question comes from Kyle Rose of Canaccord. Your line is now open.

[Kyle Rose:]

Great, thank you very much, can you guys hear me all right?

[Andrew Rasdal:]

Yes, good morning Kyle.

[William Plovanic:]

Good morning Kyle.

[Kyle Rose:]

Good morning, so I wanted to ask another question about the hurricanes, and it sounded like you were impacted two ways from the hurricanes, one was fewer physicians adopted the technology and then the two is your patient treatments. I think you commented that patient treatments picked up in the second half of the third quarter, but just wanted to see, is it fair to think that you know in the Q3 the bigger impact may have been the fact that you didn’t bring on the same amount of physicians in those same regions and then we might see an uptick in physician addition in the Q4, or how should we think about the lingering impact of the hurricane in those regions?

[William Plovanic:]

Yes, I think Kyle, just from the patient flow standpoint exactly as Andy mentioned, you know you can imagine and in places like Houston that were flooded and some of those were sites were just taken out for a while, you know it takes a while for them to get back-up and running. You know I think the state of Florida almost didn’t have power for half the month, right. But we did see a bounce back in those patient treatments and as Andy said our patient treatments were higher in the second half of the quarter than they were in the first half. And if you know the timing of the hurricanes mid August and early September, that’s a pretty powerful statement. From the physicians you know and the delay of purchasing, is it a delay will it bounce back in Q4, listen we don’t have enough experience to answer that question. I don’t think we have the data to give you and the answer.

[Kyle Rose:]

Okay. Okay, and then when we think about just the overall channel dynamics, when you talked about good progression across your three channels, you know obviously the feedback at ASMBS, it seems positive, just any learnings over the course of the past nine months that really stand out and just may be talk about the progression into the aesthetics channel?

[William Plovanic:]

Yes, I think we candidly we have learnings almost every day here. This is a first of its kind therapy, first of its kind product and so certainly we learned at each of channels you know as I think we predicted and spoke about you know has different strengths and different weaknesses and I think we are getting more efficient at being able to solve those problems more quickly. You know today, the bariatric surgery community who really has, always had the channel most loaded, and most quick to begin this is doing more of the heavy lifting, from the share volumes standpoint, but certainly we continue to be pleased that the aesthetic continues to be the fasted growing segment of that piece. I think that they are starting to really figure out how to make this a meaningful piece of their practice, not only are they not being able to keep patients in the channel who come in looking for an alternative that they otherwise, would have told to go home and have a diet and exercise program, get a personal trainer and come back when you lose 30 or 40 pounds. They are now able to keep that patient in the channel, treat them which is attractive to them and we are already seeing a number of the leading aesthetic channels to add on additional services as part of the package that when you lose your 25 or 30 pounds, you get hydro facial, you get body sculpting at discounted rates and so the theory was not only was it good for these practices to be able to keep patients in their channel, but they will be able to downstream them to subsequent services. You know we are reaching the timeframe where patients who are just coming off of their six months treatment into those accounts and we are indeed seeing trends driven by proactive practices by those. The Sono Bello is very exciting for us. I think we will be the first ever invasive weight loss product ever in any kind of aesthetic channel let alone the nation’s largest leading chain. The level of their marketing sophistication is outstanding and the rigor to which they place practices and protocols is really makes them an ideal partner. And so I think obviously that business in and of itself is important given the size and the magnitude for growth, but I think it’s a strong signal to the aesthetic community about the potential for both patient and economic outcomes with this product.

[Kyle Rose:]

Good, I really appreciate that additional color. I have got one more question and then I’ll hop back in the queue. The progress from a regulatory standpoint, very exciting as far as the two PMA supplements. I understand that you’re not going to comment on the timing perspective, but I just wonder if you could give us a little more information on the navigation component in particular just because that really seems to be potentially open up the door to make it meaningful use it to onboard accounts and patients if we don’t have to find some sort of an x-ray for a new account. So can you just talk to us, one how do you think about the business model there, is that your placed with them, is that a capital sale? And then two, just specifically how that product looks and feels and what that technology is?

[Andrew Rasdal:]

Yes, I think we, you know I’ll just give you a little bit of color on the technology perhaps. It uses essentially a magnetic means that is well proven, in a couple of specialties, for instances in the field of cardiac ablation. Think of this as localized mini GPS, but requires no special room to be equipped, it’s fairly simple. At that level it can be highly accurate down to less than a millimeter which is far outweighs our accuracy needs. It’s simple; it’s easy to use, quite intuitive. A very similar technology is marketed by two other companies for the placement of feeding tubes into the stomach which is exactly what we do. So we don’t think there is a big leap to sort of understanding it. There is a fair amount of technology and we have strong IP around how we develop that specific for our application on our set of products. But for us it’s much more intuitive, if for no other reason when you take an x-ray to confirm placement which is obviously working very well it is a static image. By using the navigation technology and it simply displays on a computer screen, any kind of screen, it’s very dynamic, right. It shows the whole path and it actually motion which if you relate to my past life in continues glucose monitor it says much more important to see what is happening through the whole process than a static point in time. So I think it makes it a simpler, easier to use and removes substantial barriers that not only did people not have to have x-ray. If they have to have x-ray in a corporate room to be able to do use that or they using x-ray in another location then they have to schedule. Now if the patient were to come in and say look, okay I'm in, I want to do this, they literally walk into the next room and they could place it which sort of I think increases the opportunity for patient flow.

[Andrew Rasdal:]

Yes, Kyle from a financial standpoint we're not going to make predictions on the timing of the new product approvals. We don't control that process with the FDA. When we do have milestones that are meaningful and we have a timeline we'll share that with you, but from a financial standpoint given that I'm not going to make a prediction on the timing of that approval the way I think about it is we are focused on creating value with the products we have in hand today.

[Kyle Rose:]

Okay, thank you.

[Andrew Rasdal:]

Thanks Kyle.

[Operator:]

Thank you. Our next question comes from the line of Ryan Zimmerman of BTIG. Your line is now open.

[Ryan Zimmerman:]

Great. Thanks. So a lot of questions have been asked all ready, but I just want to, Andy you talked a little bit about a pilot program and kind of filling up the gaps or stopping the leaks in the channel and just if you could talk a little bit about the specifics of what you're doing to do that pilot program or how you're, what you are you seeing with the pilot program in specific geographies I think that will be very helpful.

[Andrew Rasdal:]

Yes, I am going to be, we're still in a competitive marketplace and what we're doing is both preliminary and proprietary and we're not completely done with the pilot program, so there are still learnings to come. So I am going to be a little cautious in commenting on the specifics. These are the kind of things that you rarely see these are the kind of pilot programs that I would call very sophisticated marketing and analysis you rarely see in traditional medical devices for people in the cash pay aesthetics you see a little bit more of this and this is again folks on the in-house side that have that experience with us, people that have extreme digital experience in consumer products being able to structure these pilot programs to very precisely measure the impact of that and we're trying to wrap around approach of there are a number of things, mostly intended of converting when a patient has interest converting that to consultation at a higher rate and then enabling once that patient books an appointment and shows up giving some tools that will help that patient convert more at a higher percentage to treatment. And we've seen roughly double the conversion in those accounts who are participating in the program to date, which is very encouraging. It doesn't take much of a increase given the magnitude of those top line metrics or 16,000 leads. It doesn't take much of an increase, if we can scale that to make a really substantial impact.

[William Plovanic:]

Yes, Ryan I’d also like to add, I mean we're really pleased with these top line patient metrics. I mean these are extremely strong. Again Q3 metrics were equal to the whole first half of the year and that's all with very little DTC spend. I mean we've seen significant increasing efficiencies around our DTC spend as the consumer awareness grows.

[Ryan Zimmerman:]

Okay, great. Thanks for the color on that. And then the patient registry that you shared with FDA, it sounds, the data sounds very compelling it sounds like you're getting higher weight loss and lower as either and the adverse event rates. Will investors have a chance to see that data at any point in publication?

[Andrew Rasdal:]

I mean, I think we’re still sort of determining when and how as best to share that data. I think in general as we've guided before it's probably somewhere around when you're through the first full year of usage. I think that's a generally good time to be and thinking about that and then I think it would be our intent to have those presented in a valid scientific forum by clinicians rather than the company. The timing of that we'll have to see where those things, where the best forum would be and the best timing for that, but I think we had intended to present it scientifically.

[Ryan Zimmerman:]

Okay, I appreciate the color today guys. Thank you.

[Andrew Rasdal:]

Thanks Ryan.

[Operator:]

Thank you. [Operator Instructions] I’m showing no further questions at this time. I'll turn the call back over to Bill Plovanic for any closing remarks.

[William Plovanic:]

Great, thank you everybody for joining the call today and we look forward to participating in the upcoming investor conferences. Have a great day.

[Operator:]

Ladies and gentlemen, thank you for participating in today’s conference. That does conclude today’s program. You may all disconnect. Everyone have a great day.