Allurion Technologies Inc. (ALUR) on Q3 2023 Results - Earnings Call Transcript
Operator: Hello, and welcome to the Allurion Third Quarter Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session [Operator Instructions]. I'll now turn the conference over to Mike Cavanaugh, ICR of Westwicke. Please go ahead.
Mike Cavanaugh: Good morning, and thanks everyone for joining us today. Earlier today, Allurion Technologies Incorporated issued a press release announcing financial results for the quarter ended September 30, 2023 and describing the company's recent business highlights. You can access a copy of the announcement on the company's Web site at www.investors.allurion.com. With me on the call today are Shantanu Gaur, Founder and Chief Executive Officer; and Chris Geberth, Chief Financial Officer. Shantanu will begin the call by discussing the quarter's business and operational highlights. Chris will then review our financial results and we will close the call with a question-and-answer session. Before we begin, I would like to inform you that today's call will include forward-looking statements, which are made in pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include, but are not limited to, statements concerning the benefits of the Allurion program compared to other weight loss solutions, the market for weight loss drugs and elective procedures, the impact of investments on sales and marketing, growth of revenue, cost of revenue, increase in procedure volumes and operating expenses. Forward-looking statements are statements other than statements of fact and can be identified by words such as expect, can, anticipate, intend, plan, believe, seek or will. These statements reflect our views as of today only and should not be relied upon as representing our views at any subsequent date, and we do not undertake any duty to update these statements. Forward-looking statements address matters that are subject to risks and uncertainties that could cause actual results to differ materially from those forward-looking statements. For a discussion of the risks and important factors that could affect our actual results, please refer to our proxy statement and prospectus filed pursuant to Rule 424B(3) on July 7, 2023 with the SEC as well as our other filings with the SEC. Please note that this conference call is being recorded and will be available for audio replay on our Web site at allurion.com under the Events and Presentations section on our Investor Relations page shortly after the conclusion of this call. Today's press release and supplementary financial data tables have been posted to our Web site. And with that, I will turn the call over to Shantanu.
Shantanu Gaur: Thank you, Mike, and good morning, everyone. It is an honor to be here today reporting Allurion's financial results, our first such call as a public company. With obvious and well documented headwinds in medtech, I am pleased to report that Allurion generated $18.2 million in revenue for the third quarter, which was a 13% increase from the third quarter of 2022 and a 40% sequential increase from the second quarter of 2023. We also observed strong year-over-year growth in procedural volume in the quarter despite increasing headwinds that may impact consumer spending on healthcare. On our Q4 call in March of 2024, we will be reporting out our full year results for 2023 and will provide financial guidance at that time. As I reflect on Allurion's third quarter, I am so proud of the progress we have made as a company since we founded it back in 2009 and particularly proud of the milestones we have achieved in the past 12 months, culminating and ringing the bell at the New York Stock Exchange as a public company in August. I'd like to take this opportunity to introduce Allurion to all our new stakeholders, and describe how we are executing on our mission to end obesity globally and to help our patient's live fuller and longer lives. Obesity is a massive worldwide epidemic. Current treatment alternatives for patients who are overweight begin with lifestyle modification, such as diet and exercise. If this course of treatment fails to produce the desired results, as is often the case, physicians may prescribe pharmaceutical therapies. And in patients with more severe obesity, physicians may recommend invasive bariatric surgery. However, these approaches are associated with concerns around safety, lifestyle impact, ease of use, cost and compliance issues and long term weight regain. We founded Allurion to address these shortcomings. The Allurion program is a comprehensive weight loss program that includes our revolutionary gastric balloon technology, which we believe has solved the shortcomings of legacy treatments. This is coupled with our proprietary virtual care suite, which includes our AI powered remote patient monitoring platform and behavior change program. On average, Allurion patients achieved at least 30 pounds of weight loss in just four months and crucially keep 95% of the weight loss after one year. First and foremost, it's important to understand our balloon, where we have taken a 40-year old technology and brought it into the 21st century. Importantly, the burden on the patient is greatly reduced. And unlike previous balloons, ours is swallowed by the patient in just a 15-minute visit to the doctor. No anesthesia or endoscopy is required to place our device. And after approximately four months, our patented release valve opens and allows the balloon to empty and pass naturally from the patient with no further medical intervention necessary. Beyond that, the material used to construct the balloon is smooth to the gastrointestinal lining, allowing for a more comfortable and seamless treatment than legacy devices and alternative obesity treatments such as surgery and medications, which often have uncomfortable side effects. The balloon is covered by over 40 patents around the world and has already been used to treat over 130,000 patients. The Allurion balloon is turbocharged by the Virtual Care Suite and our proprietary behavior change program. The Virtual Care Suite is an AI powered remote monitoring platform that conveniently monitors patient weight, body fat, activity, sleep and several other critical metrics and enable clinician intervention via secure messaging and telehealth as needed to keep patients on track with their weight loss goals. The Virtual Care Suite integrates data from the Allurion mobile app, connected scale and health tracker, so that providers are receiving data on their patients in real time. With traditional weight loss methods, it's notoriously difficult to keep the weight off over the long term, because ultimately weight maintenance is driven by behavior change. Allurion's behavior change program was developed by our in-house behavioral science team and consists of over 150 modules of content related to healthy eating, exercise, sleep and stress management that are delivered to patients as they go through their balloon journey. We also recently introduced Coach Iris, a personalized 20x7 weight loss coach powered by GPT to further increase the engagement with our behavior change program. Coach Iris has been trained to deliver Allurion program content in a conversational manner. We believe this will be a game changer for both providers and patients as Coach Iris has the ability to relieve clinics and their staff from patient inquiries and provide personalized always-on support for patients all over the world. With the launch of Coach Iris, we believe the Virtual Care Suite can function as a standalone, full stack weight loss operating system that leverages AI for any type of weight loss therapy, including balloons, anti-obesity medications or even bariatric surgery. This is an exciting proposition and I'll be providing more updates on this in the future. With all of this said and the value proposition clear, how does the Allurion program perform in the real world? In short, the results have been transformational for our patients. The data is compelling. On average, Allurion patients achieve approximately 30 pounds of weight loss in just fourmonths and crucially keep 95% of the weight off after one year. Additional clinical data from a recent study presented at the Annual Meeting of the International Federation for the Surgery of Obesity and Metabolic Disorders in over 5,000 patients treated consecutively with the Allurion program demonstrated over 14% body weight loss on average in just four months with improvements in obesity related comorbidities, including diabetes. Taken together, these results underscore the fast and sustainable weight loss that can be achieved by the Allurion program. The Allurion program may be viewed as complementary to bariatric surgery practices, as an alternative treatment for patients who do not want surgery. Earlier this year, we announced the collaboration agreement with Medtronic to help expand access to the Allurion program by leveraging Medtronic sales channels. The partnership also enables Allurion to accelerate utilization of our AI platform in the management of bariatric surgery patients potentially further augmenting our base business within the bariatric surgery channel. Turning to the long term opportunity. The recent rise and prominence of GLP-1 drugs is a strong indicator of just how large the market for weight loss solutions is with analysts calling for $100 billion in revenue by 2030. These drugs are increasing awareness of obesity as a disease, creating interest among patients to seek medical weight loss options and driving more patients towards medical weight loss providers. We believe that these trends will create tailwinds for us in the long term, especially as we expect patients churn off the drug treatments due to compliance issues, cost and side effects, especially with long term chronic use. In addition, the Allurion program can be used in combination with GLP-1 drugs. Two recent studies demonstrate that combining the two treatments can lead to weight loss of 18% of total body weight in just four months and 19% of total body weight at eight months. We believe that in the future, combination therapy will play an important role in managing a patient's weight over the course of a lifetime. In summary, these drugs will likely have a large positive impact on the obesity market. But we believe they won't be the right therapy for millions of people seeking a durable solution for obesity. We are conducting market research on the impact GLP-1 drugs are having on Allurion patients and providers and we'll share the results of that research on a future call. Additionally, we believe we are just scratching the surface of this massive obesity market. We are currently active in over 50 countries around the world, but have yet to enter the United States. Last year, we began enrolling subjects into the AUDACITY trial, a randomized pivotal controlled trial designed to support a pre-market approval application or PMA for the Allurion balloon to the U.S. Food and Drug Administration. As we announced in October, we completed enrollment in the AUDACITY trial two months ahead of schedule after receiving unprecedented interest from US subjects. We will be providing further updates on the AUDACITY trial and our PMA submission in future calls. As I touched on briefly, 2023 was a busy year for Allurion, capped off by going public in August, which resulted in $92 million added to our balance sheet, which we promptly began to put to work and the results are starting to show. We have taken and will continue to take a thoughtful approach to expanding globally and will take great care to allocate our resources with an eye toward optimizing the return on incremental investment. We will continue to expand judiciously so that we may keep this momentum and accelerate our growth in the coming quarters and years. With that, I'd like to turn the call over to Chris Geberth, Allurion's Chief Financial Officer, for a review of our financials. Chris?
Chris Geberth: Thanks, Shantanu, and thank you all for joining the call today. Third quarter revenue totaled $18.2 million, representing an increase of 13% from the third quarter of 2022 and a 40% increase sequentially from $13 million in the second quarter of 2023. Gross margins in the quarter were 77% compared to 78% for the same period a year ago. Sales and marketing expenses of $14 million decreased by $1.7 million or 11% for the quarter, driven largely by our decision to delay investment while completing the business combination with Compute Health. Now that the transaction is complete, we've accelerated investment in direct to consumer marketing initiatives and the expansion for the sales team. Research and development expenses of $7.2 million increased by $2.1 million or 42% related to cost incurred in our AUDACITY FDA study. General and administrative expenses of $18.9 million increased by $15.1 million, driven by $10 million in transaction related expenses and stock based compensation expenses related to the business combination and other administrative costs as we begin to operate as a publicly traded company. Loss from operations for the third quarter was $26.2 million compared to $12 million in the year ago period. Loss from operations includes $10 million in transaction related expenses and stock based compensation expense incurred in connection with the business combination. At September 30, 2023, we had cash and cash equivalents of $79.9 million, an increase of $72 million from December 31, 2022, as a result of completion of the business combination in August. Revenue for the year-to-date period ended September 30, 2023 was $45.2 million, essentially even for the same period of 2022. As the business combination closed later than planned, we delayed sales and marketing initiatives during the year. We began to reinvest in the middle of third quarter and we believe that those investments will lead to procedural volume growth in future quarters. We are obviously watching with great caution the headwinds that have been highlighted across medtech that may lead to a reduction in elective procedures, including lower consumer spending, higher interest rates leading to constraints and procedure financing, lower purchase efficiency from providers observing a drop in patient demand and geopolitical unrest in the Middle East. We will continue to monitor these trends in the coming quarters and calibrate our investments in sales and marketing accordingly. With that, I'd like to turn the call back to Shantanu for some final thoughts before we begin the questions and answers portion of the call.
Shantanu Gaur: Thank you, Chris. As you've heard now, we have launched several exciting initiatives to expand distribution of the Allurion program globally, advance our artificial intelligence platform and most importantly improve patient outcomes. With unprecedented interest in weight loss globally, I believe this is an ideal time to be pursuing these initiatives at Allurion. And with that, I'd like to begin the questions and answer portion of the call. Operator, please open the call for questions.
Operator: [Operator Instructions] Your first question comes from the line of Anthony Petrone of Mizuho.
Anthony Petrone: Congratulations on the quarter here, the listing in August as well. Maybe just looking first at just 40% sequential revenue growth here coming out of the gate. Obviously, putting up that result amidst a lot of GLP-1 sort of focus in the marketplace. Maybe just a little bit on the halo effect. You talked about it a little bit at the event in August. How much focus do you think -- how much of a tailwind do you think actually the focus on GLP-1s has been? And as the Allurion sort of effort here continues to grow, do you see potentially that combination approach really driving this to another level over the next couple of years? And then I'll have a few follow ups.
Shantanu Gaur: I believe unequivocally that these GLP-1 drugs will be a tailwind for our business, because they're raising awareness around obesity, bringing millions of people into the doctor's office, seeking medical weight loss solutions. And we really like our positioning here. Allurion is a first line option for many patients who simply aren't interested in taking the GLP-1 drugs but are still interested in losing weight. And a lot of those concerns come from the cost of these GLP-1s, the long term side effects. And Allurion is also a great second line option for patients who churn off the drugs due to costs, side effects, adherence. There was a study done by, I believe a PDM here in the United States, that concluded that 68% of patients who start a GLP-1 drug will actually churn off within one year and that's a massive opportunity for us to pick up on. And then as you heard earlier in the call, Allurion can be a true combination approach with these GLP-1 drugs to boost weight loss even further. In one study we recently presented, we had an 18% total body weight loss in just four months by combining the Allurion program with an oral GLP-1. And we had another study that recently was presented that showed a 19% total body weight loss by actually using the Allurion program first for four months and then starting Saxenda for four months afterwards. So there's a lot here that Allurion can gain from, from the GLP-1s and I truly believe unequivocally that they will be a tailwind for us and our business.
Anthony Petrone: And maybe going to the other end, when we think of bariatric surgery, there's still a relatively high proportion of those target population where they're contraindicated given that they have comorbidities or they're above a certain BMI threshold. Where does Allurion fit in that market opportunity? Is it -- can it be used for patients that are contraindicated for bariatric? And then the last one from me, you completed enrollment on AUDACITY, the trial here in the US PMA trial for the balloon. Maybe just a little bit on timing on when we could see perhaps maybe an interim readout on that trial?
Shantanu Gaur: On your first question regarding bariatric surgery, as you may well know, the penetration rate for bariatric surgery is less than 1% of patients, less than 1% of patients who qualify for bariatric surgery actually end up getting it. And so the opportunity to treat patients who are contraindicated for bariatric surgery is actually quite small. The bigger opportunity is treating patients who qualify for bariatric surgery, but simply don't want it, because of fear of complications or cost, or some other issue. And to that end, we actually recently published or presented rather a study looking at the Allurion program in patients who have a BMI greater than 40 and that's a population that is really primed for bariatric surgery. And in that population, we showed nearly a 20% total body weight loss with just the Allurion program alone. So I think the opportunity in that high BMI segment is really significant. And as we go deeper into the bariatric surgery channel, propelled and accelerated a bit by this partnership with Medtronic, I really do believe that the Allurion program could be a fantastic first line option for patients with a BMI greater than 40. Regarding the AUDACITY study, you're correct, we completed enrollment earlier this year, two months ahead of schedule. The study is a randomized controlled study with one year follow-up patients in the treatment arm are eligible for up to two balloon cycles. And so we'll be providing more guidance in the future as to when the data will be available and also further guidance as we submit the modules for the PMA submission.
Operator: Your next question comes from the line of Ross Osborn of Cantor Fitzgerald.
Ross Osborn: Maybe starting off -- to the GLP theme, it sounds like you're pretty excited about the halo effect. Any thoughts around partnering with a pharma company to promote your balloon for use with a GLP?
Shantanu Gaur: I think the opportunity to combine our product with the GLP-1 drugs is significant one, as I mentioned earlier. In terms of partnerships, we're obviously very open to exploring how we can get the Allurion program into the hands of more providers and more patients. I do believe that there is an opportunity to couple our balloon with the drug, both in combination within the four month balloon period but also using the drug as a longer term weight maintenance or further weight loss mechanism. But there's another interesting opportunity here, which is related to our software. Our virtual care suite last year was expanded to actually take in patients who not only have the Allurion balloon but are also going through weight loss drug therapy and also going through bariatric surgery. So I actually believe our software and our AI platform and now with the advent of Coach Iris, our 24x7 weight loss coach, we could actually be a great service to patients who are going through GLP-1 drug therapy, who are in need of a behavior change program, which we've developed in-house at Allurion and who are in need of long term remote monitoring. Those are all issues that pharma companies are facing now and grappling with, and I believe that Allurion software could solve a lot of those issues for them.
Ross Osborn: And going off to that, is there any initial patient feedback on Coach Iris that you could share?
Shantanu Gaur: We recently launched Coach Iris in the field commercially. We did conduct some alpha and beta testing prior to its launch, and got feedback from both patients and providers. And what we heard from first providers was really validating our hypothesis just going into the development work that we put in Coach Iris. We wanted to develop Coach Iris so that providers were unburdened from the day-to-day inquiries that they were getting from patients, so that providers could see more patients and really do more with the additional time that Coach Iris provides during the day and also actually provides better customer service and patient engagement. We heard from patients in our alpha and beta testing that they felt like they could really trust Coach Iris, that they appreciated the empathetic responses that Coach Iris gives. And most importantly, they appreciated the 24x7 access that Coach Iris provides them to answer their questions. And so this is just part of this next era of healthcare that we are entering. And Allurion is really a pioneer in bringing AI, generative AI and cutting edge machine learning into the weight loss space. And I really believe that Coach Iris is a game changer, not just for patients but also providers.
Operator: [Operator Instructions] Your next question comes from the line of Ryan Zimmerman of BTIG.
Ryan Zimmerman: Just a couple for me. I guess, Shantanu, I'm curious kind of you guys are commercial in a lot of countries around the world. I'm curious if you've seen any trends where there may be reluctance to pharmaceutical therapy for weight management and kind of how that has progressed in terms of balloon adoption and patient behaviors in the face of all the GLP-1 talk?
Shantanu Gaur: What we have seen internationally with GLP-1s is a much more, I'd say, tempered approach to their application in weight loss. Many of these countries already have access and supply issues for certain drugs and they want to reserve those drugs for those who need it most and typically, Type 2 diabetics are first in line. And also, we haven't really observed much sort of hype around these GLP-1s in our markets outside the United States. Now as these GLP-1s come to market in these countries and they do drive awareness, I believe that those are going to -- that phenomena is actually going to create even more tailwinds for our business internationally. But you're right, there is a segment of the population and I believe that segment is quite pronounced outside the United States that simply does not want to use medications that are going to impact their physiology, change their biology and medications that need to be taken for a lifetime in order to keep the weight off. We have found that many consumers are actually more likely to actually use the Allurion program for the balloon but more importantly, for the behavior change program that comes with it, so that it can actually change their lifestyle and keep the weight off in the long run.
Ryan Zimmerman: And then to follow-up on that and it kind of dovetails it's just -- I know Medtronic operates a number of bariatric clinics within Europe. And since you guys have announced that partnership, I'm curious kind o what you've learned from that, what you've seen from a patient behavior perspective, kind of how that's going? Any color there I think would be helpful.
Shantanu Gaur: Yes, we've seen historically in the bariatric accounts that we've entered with the Allurion balloon that we are able to drive more foot traffic to those clinics, we're able to increase the number of patients that that bariatric surgeons and their team is able to see. And for the most part, we actually drive incremental revenue to that practice if we don't really compete with the patients who are interested in bariatric surgery. And we're starting to see those same themes play out in the partnership with Medtronic. I think the interesting thing too here is that now with the launch of our Virtual Care Suite and Coach Iris, we have a real opportunity in this partnership with Medtronic to get some very valuable information as to how bariatric patients and bariatric practices are going to be interacting with our generative AI coach and whether we can actually increase and streamline workflow for those bariatric practices, giving them better productivity, allowing them to see more patients and do more surgeries, as well as do more Allurion Balloon. So we'll be very interested to see how that partnership develops and whether those themes really come to fruition.
Operator: Your next question comes from the line of Chris Pasquale of Nephron.
Chris Pasquale: Shantanu, the software infrastructure you guys are developing is very interesting. Could you talk a little bit about where adoption of the virtual suite stands today among your customers and how you're commercializing that? Just trying to get a sense for the incremental revenue opportunity versus something that's more of an additional pull through for the balloon demand?
Shantanu Gaur: We sell the Virtual Care Suite as part of the balloon program. So any practice or any provider that is using the Allurion balloon is going to be using our Virtual Care Suite, it's part of the whole program, they come hand-in-hand. And so once the patient downloads the Allurion app and gets their balloon, they are automatically loaded into the software and providers can then track those patients longitudinally. We see a bigger opportunity here. There are many bariatric practices who are using our balloon and non-bariatric practices who are using our balloon who are looking to expand their practice and looking to see more patients in the weight loss space. We actually believe our software could be used to track those patients. So non-balloon patients who are not on the Allurion program but patients who are getting a GLP-1 drug are undergoing a bariatric surgery. We also see an opportunity potentially to bring our behavior change program and all of the knowhow that we've developed over the past several years to those same patients. And so in the future, I really believe that our Virtual Care Suite could be a one stop, we call it, a weight loss operating system, for any type of weight loss practice. And that could be an additional source of revenue for us that would resemble more of a software sale rather than a medical device sale.
Chris Pasquale: And then you mentioned some headwinds related to consumer spending. We're certainly seeing a pullback in demand for some aesthetic procedures due to those factors that you cited. I'm curious whether you can just walk through what the typical economics look like for an Allurion patient and whether there are any opportunities for the company to offer additional financing options that could mitigate those challenges?
Shantanu Gaur: Yes, we're certainly seeing the same headwinds that have been reported previously. We know consumer sentiment is trending downward, higher interest rates makes it a little bit more expensive for providers and patients to finance these types of purchases and procedures. It's something that we are watching very closely. But I'd say I wouldn't be surprised if we see a drop in total weight loss procedures in the short term. But in the long term, it's very clear. This market is growing incredibly fast. We have a technology and a program that is proven and we have a market that is clear. And so I really believe that with these headwinds behind us in the short term, we will be able to really drive sustainable long term growth. And when you compare our price point to something like bariatric surgery or something like lifelong GLP-1 therapy, you're really talking about a fraction of the cost. Typically, patients are paying less than $5,000 out of pocket for the entire Allurion program experience. So this is something that's in the wheelhouse for the middle class consumer. And therefore, we're very bullish on the long term potential here in a fast rapidly growing market.
Operator: There are no further questions at this time. This concludes today’s conference call. You may now disconnect.
