Apollo Endosurgery, Inc. (APEN) on Q1 2021 Results - Earnings Call Transcript
Operator: Good afternoon, ladies and gentlemen, and welcome to the Apollo Endosurgery First Quarter 2021 Results. At this time, all participants are placed on listen-only mode. And the floor will be opened for your questions and comments following the presentation. It is now my pleasure to turn the floor over to your host, Matt Kreps of Darrow Associates. Sir, the floor is yours.
Matt Kreps: Thank you, Catherine and thanks everyone for participating in today's call to discuss Apollo's first quarter 2021 financial and operating results. Joining me on the call are Charles McKhann, our Chief Executive Officer; and Stefanie Cavanaugh, Chief Financial Officer. Before we begin, I'd like to caution listeners that comments made by management during this conference call will include forward-looking statements within the meaning of federal securities laws, including Apollo's financial outlook and Apollo's plans and timing for product development and sales.
Charles McKhann: Thanks Matt. Good afternoon everyone. Thank you for joining today's call. I'm pleased to speak with you today on my first quarterly conference call as Apollo CEO. We're off to a great start to the year. On the call, we will discuss Apollo's third straight quarter posting robust sales growth. But first, I'd like to take the time to share our strategy to transform the company into a market leader in the field of therapeutic endoscopy. In recent weeks, many of you are asked me why I decided to join Apollo. I follow the company for many years. I know the founding CEO and some of the company's original venture capital investors. For years I've been impressed with Apollo's long held vision to build an entirely new field of therapeutic endoscopy as well as the company's remarkable technical innovation, most notably the OverStitch devices. I'm also familiar with the ups and downs that the company has faced since its formation 15 years ago. And so with that understanding of the history that I'm thrilled to be joining Apollo at such a pivotal time as we transform into a market leading growth company. I believe that we have a distinctive, differentiated product portfolio that advances minimally invasive endoscopic surgery, and helps GI and bariatric professionals, enhance the standard-of-care, potentially for millions of patients around the world. At times, the words pivotal and transformational can be so overused in the business community that they lose their meaning. When I was approached about the CEO role, I did my homework on the company's products, procedures, and prospects with three different product lines, all of which have very attractive growth opportunities.
Stefanie Cavanaugh: Thank you, Todd, and good afternoon, everyone. As Todd mentioned, the first quarter of 2021 overall, demonstrated strong growth against a relatively stable fourth quarter and a prior your first quarter that saw the first impacts of the COVID 19 shutdowns. Total revenue was $13.9 million, a 29% increase from the $10.7 million a year ago, as a result of 26% growth in our ESS franchise and 41% growth of IGB product sales. Geographically, revenue performance was driven by 43% growth in US sales and 18% growth OUS. In US, ESS sales increased 44% and IGB sales increased 64%. X-Tack sales are included in our ESS results, which we don't intend to disclose separately, but sales of our ESS products excluding X-Tack, increased greater than 30% over the prior year, which is evidencing a return of our OverStitch product sales growth to our pre-COVID historical experience. OUS markets also performed well in the quarter as distributor activity increased following the recovery of many of their markets from the effects of the pandemic, which helped to offset the impact of evolving COVID restrictions in certain direct European markets throughout the quarter. Overall, we generated a 5% increase in ESS sales and 33% increase in IGB sales for the quarter on a year-over-year basis. The low ESS growth primarily reflects the impact of those recent COVID waves in certain direct markets in Europe, which we believe will continue to pose some challenges in the near term, until the global recovery expands. Gross margin also continued to improve, increasing 2% over the prior year to 54% due to higher sales, and the benefit of our continuing gross margin improvement projects. The most important gross margin improvement project coming online this year is the X-Tack launch. X-Tack has been designed from the beginning to be accretive to our current consolidated gross margin. Operating expenses also compared favorably year-over-year, down $1.1 million, as a result of the long-term restructuring benefits of our 2020 cost reduction and operating efficiency program. As a result of all of these factors, higher revenue, improved gross margin and lower operating costs, operating loss declined by 44% to just $3.8 million for the quarter. Turning to the balance sheet, our cash balance remains strong at $32.6 million, reflecting the use of approximately $4.3 million dollars for the quarter, of which approximately 1.3 million was due to working capital changes associated with our increased revenue. We also further extended our balance sheet runway by achieving our financial targets necessary to qualify for an additional six month extension of the interest only period and are renegotiated and more favorable debt terms announced in December last year, meaning, we will have no principal payments due as of September 2022. Turning to the topic of 2021 outlook, we are pleased to have a solid start to the year in our first quarter results. Today, we are establishing a full year revenue target of $55 million to $57 million in 2021 or 30% to 35% growth over 2020. In arriving at this range, we have taken a cautious approach for several reasons. First, we continue to experience ongoing uncertainty around the impact of COVID-19, especially in our OUS markets. And this includes uncertainty around how the various lockdowns may influence traditional Q3 European holiday schedules this year. We are also still in the early days of our X-Tack product launch. And while the launch is going well and we are excited about continued growth in this line, we are still early in the process of learning how quickly we will grow new accounts and extract utilization. And finally, we are actively updating our execution plans for our existing business lines as part of our recent change in the future. We plan to revisit this outlook later in the year as we gain greater clarity and advance our plans on the items I just mentioned. So, this will conclude our prepared remarks and with that Catherine, please open the line for questions.
Operator: Certainly. Your first question is coming from Matt Hewitt. Your line is live.
Matt Hewitt: Good afternoon. Congratulations on the strong quarter and welcome, Chas.
Charles McKhann: Matt, you just cut out on us.
Matt Hewitt: Can you hear me?
Charles McKhann: Back now. You are back.
Matt Hewitt: Okay, great. Well, congratulations on the strong start to the year and welcome Chas. Maybe the first question regarding X-Tack, obviously that was a pretty significant jump in just a couple months from nine sites to -- roughly 50. What kind of ramp should we be anticipating in the number of sites and doctors over the course of the year, or was this kind of, you want to get to this stage, kind of see how it plays out and then maybe add further later in the year?
Charles McKhann: Yes. No great, great question Matt. And honestly we're still learning as we go, but as you know, the hospital group procurement processes are called value analysis committees typically. And there's a variable process right now. What I can say is that the value proposition for X-Tack is very favorable, and so when we go through those reviews, they've been very well-received. But some hospitals are quite slow right now in coming out of a COVID environment of how quickly they just even will put things through the process. I mentioned that we've got a very robust pipeline, valued at more than a $1 million. This potential -- is referencing. And -- but they'll take a number of months to unfold, we would anticipate, but the sales team has done a nice job of casting a wide net, but still focused primarily within an original group that was referred to in the prior calls of our existing overseas user. So, in a targeted way, but making sure we get the quotes out and into the processes and all those accounts.
Matt Hewitt: Understood. And, I guess, maybe digging in a little bit deeper within the existing user group. What kind of feedback and kind of reorder patterns are you seeing from some of the initial users?
Charles McKhann: Yes. No -- also great question. First, I mentioned it in the prepared remarks, but really to emphasize one of the things that we've seen is the range of uses of X-Tack. I know in the prior communication, there was a lot of focus on the lower GI because that is new for Apollo, right OverStitch primarily use the upper GI. But what we've seen is and there's a new slide in our investor deck that shows even from the limited launch, a whole wide range of uses across upper and lower GI. So we're really encouraged by that. It's still quite early in terms of hospitals that have a number of months of runway, but we are pleased to see that a number of those have already started to reorder monthly, and we have a little bit more history under our belts, we'll be able to provide more granularity about reorder patterns.
Matt Hewitt: Okay. Okay. And then, shifting gears to Orbera. Obviously, it was a pretty remarkable quarter, and I think, as I look at the performance, given even some of the continued issues with COVID, it was a pretty strong quarter. As you look out, I would expect, as the vaccines are rolled out and maybe COVID subsides a little more, you should expect some more growth, both domestically and internationally, but as you start to think about next year, particularly with, I think, you mentioned the need for a trial. Help us think about that piece of it a little bit. So you've gotten feedback that you're going to be required to do a trial. How should we think about the size of that trial, the duration, cost? And I guess, the another piece is, can you use existing data? How much -- obviously, you've developed a long history of data, can you use that as part of any trial that the FDA requires?
Charles McKhann: All really good questions and frankly, ones that we're still working through with not one, but two agencies, that's part of the benefit of having a breakthrough designation. You negotiate and ultimately agree on a trial with both FDA and CMS. I can tell you we are in active discussions with both agencies. And as we work through those, we’ll get better direction from them about the size of the trial, but we do expect it's going to take a new trial to prospectively evaluate, specifically, in this patient population. But you're asking me great questions about the size of the trial, and number of patients, those sorts of things. And we just don't have that agreement yet with the agency. I did very intentionally, as I described my three phases. Think of the NASH opportunity in a third phase. I think it is going to take a few years to really work through. In the meantime, we are incredibly encouraged by what we're seeing with the balloons. And I think some of it, there's some factors that are more near term in nature, contributing that, the gene 15 associated with COVID is real. There have been articles published in the New York Times and a recent publication in JAMA, about how much weight gain we've seen, typically at a 1.5 pounds per month. So we think that is actually impacting end user demand. We are seeing some differences in site of service and bariatric practices embracing the balloon. And then I mentioned the age lines, which are very positive development and for the first time embracing the balloon. So I think we do have some opportunities in the near term with our existing balloon business, while we work on the strategic repositioning associated with that.
Matt Hewitt : Got it. Yes. Actually that’s perfect, you've kind of answered the next question, which was are you seeing a pickup in demand just because of the news earlier this year with breakthrough designation in CPT code, is that alone starting to drive some adoption, so it's good to hear that that is. Maybe one last one and then I'll hop back in the queue, regarding OverStitch, obviously, that has continued to be a strong performer for you, but it still is somewhat of early days. As the country and quite frankly, the world starts to reopen, how should we anticipate that the growth profile for that device, particularly as we think about it from an ESG perspective, but just in general, are you anticipating, maybe that growth accelerates as the country and world reopens? Thank you.
Charles McKhann: Yeah. Matt, great questions, Let's take the outside of the U.S. part of that question first, because as Stef mentioned, the one area where we've some downsized from a COVID standpoint, mostly has been with Endoscopic Suturing, especially in our direct markets in Europe. And it's not surprising, right? Those cases typically are more impatient procedures. And if you go back to Q1, the U.K. was basically shutdown then other markets were shutdown. And we're still seeing some lingering effects of that. So, just in the month of April, again, not telling you anything you don't know about markets like France being closed down over the month of April. So, these are -- so we certainly see a recovery there overtime. And it's hard to predict exactly the pace. We need to remind ourselves even a lot of -- as a people in the U.S. are getting vaccinated. I think it's accurate to say that more people are currently suffering from the virus than any point during the pandemic when we look globally. So, we're watching it all very carefully. Having said all that, as we come out of it, I do think that the benefits of the medical education programs that the company has had in place for years will continue to pay dividends, meeting with new users who are embracing the technology. And then, as we start having additional information about ESG and then the MERIT results. And then an education will be a big deal for us, right? Because we do not -- we are very careful about how we promote and not promote this procedure. And having a new indication, which we're anticipating in the first half of next year, will allow us to do a lot of different things from a training standpoint, from education standpoint to physicians, from an education standpoint to patients. And we think that can be big accelerator as we move forward.
Matt Hewitt: That's great. Thank you.
Stefanie Cavanaugh: Thanks Matt.
Operator: Our next question is coming from Adam Maeder. Your line is live.
Unidentified Analyst: Hi guys, this is actually Duran for Adam. Thanks for taking the question and congrats on the really nice quarter. And Charles congrats on the new role, I'm looking forward to seeing what changes you have in place for Apollo. I was wondering, if you could just speak to a little bit on how you intend to deliver on some of those pieces, especially those lined-up on the Energize portion of the slide. What are the biggest factors or milestones that we need to see to be successful with some of those items in the initial phase? And then, as we start thinking about some of the recent commercial changes that you guys have announced over the last couple of weeks, maybe you could speak to how you see the new commercial team reshaping, how the organization operates today?
Charles McKhann: Sure, Thanks, Duran. Yeah, so on the Energize phase. The way we're thinking about it, really is a combination of near-term growth. And then important milestones then lay the foundation for the next wave. And on the near-term growth, the good news, part of it is we're already seeing it, right? And so it's a matter of being able to extend it and continue so with OverStitch, for example, as I mentioned, we are starting to return, OverStitch have been growing a little bit under the radar, 25% or more per year. And putting aside a bit last year for COVID, we're getting back to that. And it's with new users, it's with existing users, finding additional uses for the devices. And it is starting to see the growth of some Endo-Bariatric practices, and there are a number of them as I've made my travels. And as I mentioned, we're not actively promoting that, but there are a number of physicians that have now embraced ESG and are starting to really feature that in their practices. So that'll be I think a big element here in – in that part of it. The second will X-Tack, X-Tack does not require – well, let me put in the positive. X-Tack has a relatively short learning curve. It can be used rather than one or two specialists in institution. We think it could be four or five or more physicians in some of our larger institutions. So for that, it's going to be continued account growth, and then a real focus on driving utilization – depth in it for me – in the product launches, depth of utilization is so important and we're going to really focus on that. And I'll come back to it in a minute. And then third, for Orbera, as I just mentioned, we've had really, really good results. And so, we are working in – which ones of those may be transient and related to COVID and which ones can be more sustainable to put Orbera on a – on a growth pathway. And we think there's possibility there. So more work to do, but we're excited about that. Excuse me, to answer your question about the commercial team. The change really started with my desire to separate out the marketing and sales functions and have – dedicated expertise at a leadership level with both of them. Excuse me – I'll give you an example. So for X-Tack, the team has done a nice job and it's focused primarily on our OverStitch customers, which is a great place to start. They're natural users of X-Tack. And we've gotten some good traction. But already, I've been working with some folks that I know on expanding, how we think about the launch. They see purchasing additional procedural data really being a little more sophisticated about exactly where the procedures are, and then we'll be targeting our launch based of that information, and it'll help us really get a deeper understanding of what our launch priorities will be overtime, and how we're going to expand it. And Steve Bosrock, who's coming in to lead marketing is well aware of that approach. He's done it before and I think we'll add another level of leadership there. And then on the sales side, very happy to have Kirk Ellis coming on board, a very strong leader with experience in GI, he's been in two different startups, with a lot of GI experience both of them are now part of established leaders in the field. So you've got an existing customer relationships and I think we'll be well placed. We'll work together then to decide what else we're going to do from a – building out the team element to that. We have a healthy tension within Apollo between driving growth, but also still keeping a very tight lid on costs. I can tell you, I've already approved less than a handful of some additional sales rep positions in key markets and we're going to fill those. And then we're going to be very smart in terms of how we continue to think about adding. But we've got great growth opportunities. We got to be smart about it and keep investing in the future.
Unidentified Analyst: Okay. Yes, that's obviously great to hear. And then as far as the guidance goes, I understand there's still a lot of uncertainty out there. But obviously, the guidance does look a little bit conservative from the normalized growth basis, just with a really strong Q1 here. So maybe you could kind of just help us understand what you're assuming as far as contribution from X-Tack and that number maybe what you're assuming for COVID US versus OUS? And then any other inputs we should really be thinking about there?
Stefanie Cavanaugh : So, it's a good question and it's fair and accurate to say that we are being careful in our guidance, for sure. X-Tack is in its early stages, and for competitive reasons, we're not going to break out X-Tack separately. And what we can share Chas has already spoken to from the previous questions. So today, we are remaining careful about what we are estimating for our organization, and as more information becomes available to us about X-Tack and utilization and account additions. We'll let that – as well as the other things we've talked about COVID recovery related items impact on OverStitch growth OUS in the areas where we're experiencing some disruptions. As well as, what might be transit with respect to our IGB revenue, once we pull all of that together, and as the recovery continues then we will look to improve upon what we are estimating today. But for today, we think that the prudent, wise position to be in is a more careful number.
Unidentified Analyst: Okay. Understand. And then last one for me just as far as MERIT goes, just wondering if you could speak to – assuming the data is positive, how quickly you expect the payer behavior to change? How compelling do you expect it to be to payers and then where would you expect pushback to be if at all?
Charles McKhann: Sure. No, good question. First of all, we don't know the data is still being run independently by the investigators. We are optimistic, as it's been described on prior calls. Given the history of how much data has been already developed on X-Tack – I'm sorry on ESG. And so for those who you're new on the call to Apollo and we've got multiple studies encompassing thousands of patients, demonstrating the procedure. So, we're optimistic. So, in the data, once we get that -- reimbursement is a journey. I've lived that journey in other environments. We are working on specific strategies and it involves coding, coverage, and payment around both government CMS reimbursement, as well as with commercial payers. We are aware of already some examples of some of our customers who have coverage relationships with individual payers. And that's really good news. It's really exciting. So, some of the field is starting to be laid there. But to answer your question, I would expect some impact beginning of next year, but then I see that taking then a number of years after that to continue to build exactly what that pace will be. We're working through those plans and at some point, we will get to the point of doing things like reporting on number of covered lives and how fast that ramp is, but we're not there yet.
Unidentified Analyst: Thank you.
Stefanie Cavanaugh: Thanks Drew.
Operator: I would now like to turn the floor back to Charles for closing remarks.
Charles McKhann: Great. Thank you very much. It's been a busy and energizing first couple of months. And I do anticipate maintaining our positive momentum throughout 2021 and as we work across the many opportunities in front of us. I'm excited to see OverStitch emerging as a standard-of-care in multiple GI applications that call for full fitness suturing and in addition, we believe that physicians see the enormous potential of ESG as a primary weight loss procedure. X-Tack is off to a solid start and is receiving very positive feedback from physician users. And we are very enthusiastic about this new product, and the opportunity to expand our market with another truly innovative and flexible tool for various GI needs. And with Orbera breakthrough designation, the new CPT codes, and a recent AGA practice guidelines, the franchise is once again emerging as a strategic growth opportunity for Apollo. And so as we look forward, I said it before, I'll say it again. We look forward to leveraging all three of these exciting products to energize the business, then accelerate growth over time, and ultimately, lead the field of therapeutic endoscopy. If you have any questions or would like to arrange a call with us, please contact Matt Kreps from Darrow Associates. Matt’s contact information is on our website and in today's press release. And thank you and have a great evening.
Operator: Thank you, ladies and gentlemen. This does conclude today's event. You may disconnect at this time and have a wonderful day. Thank you for your participation.
