Apollo Endosurgery, Inc. (APEN) on Q3 2021 Results - Earnings Call Transcript
Operator: Good afternoon, ladies and gentlemen and welcome to Apollo Endosurgery’s Third Quarter 2021 Results. It is now my pleasure to turn the floor over to your host, Matt Kreps. Sir, the floor is yours.
Matt Kreps: Thank you and thanks everyone for participating in today’s call to discuss Apollo’s third quarter 2021 financial and operating results. Joining me on the call are Charles McKhann, Chief Executive Officer and Jeff Black, our Chief Financial Officer. Today’s call will include slides to accompany the audio presentation. For those of you joining us by telephone, you can download a copy of the slides at our Investor Relations site, ir.apolloendo.com in choosing Events and Presentations. Before we begin, I would 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. In addition, there is uncertainty about the continued spread of the COVID-19 virus and the ongoing impact it may have on our operations, the demand for our products, global supply chains and economic activity in general. These forward-looking statements involve material risks and uncertainties and Apollo’s actual results may differ materially. For a discussion of risk factors, I encourage you to review the company’s annual report on Form 10-K for the year ending December 31, 2020 filed previously with the Securities and Exchange Commission and our most recent Form 10-Q. The content of this conference call contains time-sensitive information that is accurate only as of the date of this live broadcast, November 1, 2021. Except as required by law Apollo undertakes no obligation to revise or update any statements to reflect events or circumstances after the date of this call. Additionally, today’s discussion will include certain non-GAAP financial measures, which we believe provide an additional tool for evaluating the company’s core performance. Management uses these metrics in its own evaluation and continued operating performance and a baseline for assessing the future earnings potential of the company. Included in the press release issued today with our financial results and corresponding 8-K filing are supplemental tables reconciling non-GAAP figures to their closest GAAP comparable. Now, I’d like to turn the call over to Charles.
Charles McKhann: Thanks, Matt and thank you everyone for joining us this afternoon to discuss our results for the third quarter and participating in the webcast format as well. Today marks my 8-month anniversary since joining as CEO of Apollo. And so in addition to covering the quarter, I also want to give an update on what we have accomplished in the first 8 months and perspectives on where we are heading going forward. On the first call that I did after Q1, I laid out a strategy that we have been implementing over three phases to energize the business, put us in a position to then accelerate and then lead over time. And that has involved really forming a new leadership team that it takes the best of Apollo and great people that we had on board and then supplementing that with some key additions as we focus and go after some really large market opportunities. And so I am very pleased to then report today the progress that we have made. In that energized phase, the first phase of our growth strategy, we really talked about three main areas of focus: strengthening and revitalizing the team, delivering on near-term growth and building a foundation for future success. And as you can see on the slide, we are very pleased with the progress we have made across all three of them. On the team, we have made some additions to the leadership team, including Jeff Black, our CFO, who is with me here today, as well as additions to our sales and marketing organization. We also have been building out the team on the ground. We started – in the U.S. we had 16 sales reps, which was not enough frankly to adequately cover the large country that we have here. And so by the end of the year, we are projecting to have as many as 30 reps. And so a nice addition, including bringing back some experienced reps from Apollo as well as hiring others who are very experienced in the GI space. We have also made other targeted additions into key functions around the organization as we build to scale the business. And then we have also been very outwardly facing with our customers, spending time, meeting with them, talking about our plans for the future and really engaging and enrolling them in where we want to go with the business. Secondly, we have delivered on the near-term growth. We are very pleased with the results for the quarter, but also, if you look year-to-date, we have got 60% growth spread equally across our endoscopic suturing business and our intragasic balloons and also quite equally across U.S. and outside the U.S. So, the word I use, as I look at our growth so far this year it’s balance, really nice balance across products and across geographies. And then the X-Tack launch has been a big component of that as well. And we are very pleased with the success of the X-Tack launch and the progress we are making and I will provide some updates there as well. And then all the while, we are building a foundation for future opportunities. Just about 10 days ago, we announced the results from the MERIT study at the IPSO meeting and I am going to touch on those. We also just this morning announced the first clinical publication for X-Tack. We have submitted the FDA a de novo 510(k) submission for Apollo ESG and Apollo revise, a critical step for us in developing a new indication for endoscopic weight loss for the OverStitch device. Early in the year, we got our breakthrough designation for the Orbera balloon for the treatment of NASH, and we continue to make progress on designing the path forward for a huge opportunity in front of us with NASH potentially. And then we also have the X-Tack approval that we’ve received in Australia, which we’ve already gotten the approval in some of the other markets around the world, but this is another important one and sets us up, we think, well, for more approvals outside the U.S. in the coming months. And then last, but certainly not least, we completed the fund base here in just a few weeks ago, which helped strengthen our balance sheet and positions us for future growth. So, some key metrics. As we look through the quarter, I mentioned already 60% year-on-year growth. Clearly, 2020 was a difficult and challenging year and also a strange comparison. So you can see 33% growth compared to 2019, equally spread across our ESS and IGB businesses and an issuing metric also that our top 10 accounts, direct accounts in both U.S. and outside the U.S. have grown 100% year-on-year, so really building nice depth while also expanding the breadth of our business in new accounts as well X-Tack, as I mentioned, is progressing well. And a key metric there is that in the third quarter, 72% of our sales came from utilization from reorders. And that’s important because that’s showing real usage, real utilization, while we also, in addition, continue to open additional accounts as well. We are very pleased with the publication for X-Tack that just came out. It’s a multi-center trial, 93 patients, excellent centers involved, including the Meo, Johns Hopkins, New York University. So this is the first clinical publication for X-Tack. Remember, it’s a very new product for us. And as you – if you had a chance to see the press release we issued today, demonstrated excellent efficacy and results in that publication. And then the MERIT trial, a big milestone for us, as I mentioned, was presented, and I will touch on that here in just a minute. So the MERIT study, I think many on the call are familiar with it, but if you’re new to Apollo and are not, it is a randomized controlled trial of our ESG procedure, which utilizes the OverStitch device. So, ESG is an endoscopic sleeve gastroplasty. And this was a trial that was randomized to patients who receive ESG versus a standard of care of medically monitored diet and exercise. It enrolled 208 subjects with a BMI between 30 and 40. We have – are very thankful to the principal investigators, Dr. Barmabadeo from Ameo Clinic, a leading GI in the field; and Dr. Eric Wilson from the University of Texas or Houston, a leading surgeon. And so we have had a close partnership throughout the study on GI and surgeons. You can see the primary end points of the study on the page, excess body weight loss of at least 25% and safety, having a serious adverse event rate of less than 5%. We also importantly enrolled patients, a pre-specified number of patients with hypertension and patients with type 2 diabetes. Some of the highlights of the presentation that was made by Dr. Abada, again, at a virtual session from IFSO are presented here on this slide. We achieved a 49% excess body weight loss at 12 months or patients did who underwent ESG. That was compared to a target of 25%. And importantly, the targets were developed based off of a 2011 white paper that was developed by the ASGE, which is a gastroenterology society and the ASMBS, which is a surgical society. And they set out guidelines for endoscopic weight loss therapies and a target of at least a 25% excess body weight loss was used to set the primary end point. Importantly, there was a 45% difference in excess body weight loss compared to control versus a target of 15%. 77% of patients achieved at least a 25% excess body weight loss and the SAE rate as defined by the investigators was 2% and all patients recovered from those events. The – importantly, as you see on the right side of the page, we also exhibited very good durability in the study. So after 2 years, patients maintained the majority of the weight loss out to 2 years as well as the crossover patients who received ESG had excellent results. As I mentioned, one of the other key metrics or areas that we looked at in the study was the impact on comorbidities. And as you can see on the slide, we’re very pleased with the results on comorbidities. Metabolic syndrome, significant improvements, 82%, 83% improvement in metabolic syndrome, Type 2 diabetes, and hypertension also showed significant differences compared to control. Same was true with quality of life as measured by a standard questionnaire called the SF36. Another interesting finding is around GERD. The ESG procedure preserves the function of the stomach. And one of the evidence of that, that we saw was actually a reduction in GERD symptoms and no new or worsening GERD, which is an interesting finding because traditional bariatric surgeries actually often result in an increase in GERD symptoms. So this is important clinically and a nice finding from the MERIT study. And so these results, along with other data in support of ESG have formed the basis for the de novo submission, and we will look to continue dialogue with FDA about that in the coming months. So with that update on the quarter, let me take a step back and provide a little bit of an update on where we view the company going over the coming years and vision for where we’re heading. To start with, we are serving large market opportunities. We have three products, the X-Tack, OverStitch and Revera products across two large business opportunities, what we call advanced GI and our endoscopic weight loss opportunities. In addition, in the future, we have a third potential opportunity in the area of NASH, which is non-alcoholic fatty liver disease. So, three product lines, big opportunities that we are already being able to build some really nice momentum in. And one of the things I really like as I look across each of the 3 product lines is that we’ve got really nice opportunities for growth and value creation over the near term, medium term and over time. With OverStitch, we continue to increase the number of users and the range of applications for the product, again, across both of those two main areas and are building a foundation for growth in the weight loss area. As I mentioned, we’ve submitted to the FDA for a new indication and if that submission is successful, we would be in a position to then launch ESG, Apollo ESG and Apollo Revised in the coming months. In addition, over time, we can see that establishing endoscopic weight loss as a standard of care. For X-Tack, we are pleased with the development here in the U.S., primarily right now in terms of building utilization and experience. Over time, we will be able to move that into a global product line as evidenced by some of the near-term approvals. But likely a CE mark, which is the European approval, is more of a 2022 event. And over time, we see the combination of X-Tack and OverStitch, putting us in a position to create a leadership position in defect closure. And then the Orbera Agograstic balloon has been performing very well, as you can see in our results. There are new AGA guidelines, AGA, the American Gastroenterology Association issued clinical practice guidelines earlier this year and the market conditions have been favorable. Over time, we see the balloon as a key component of an integrated endobariatric weight loss practice that can incorporate both balloons and suturing options. And then in addition, we are working on the trial design for a new indication for NASH, which will create a brand-new pathway to have the balloon potentially be reimbursed for those patients. So, moving through each of the products, OverStitch in that advanced GI therapies, it really is the flagship product for the company. It is – creates a unique offering of being able to do what are called full thickness futures through the stomach. Primarily, we’ve been growing through training, through medical education, new users, different applications, developing additional procedures and data. And you can see the procedure mix, right, about 60% of our business in the U.S. for OverStitch, are these advanced GI applications. Outside the U.S., it’s more heavily weighted to the endobariatric procedures, both ESG and bariatric provisions, which I’ll come back to in a minute. For X-Tack, it’s an important new addition to our portfolio. It creates – it fills an important clinical need between OverStitch that is used for full thickness, large defects typically in the upper GI and through the scope clips, which often are used for quite small defects. X-Tack can be used in the upper and lower GI and has a good clinical and value proposition, especially in cases where you might need more than 3 or 4 through the scope clips. We are in the process of targeting high-volume accounts here in the U.S. and building utilization, building experience with the product and are pleased with the progress we’re making. And I just emphasize we’re still in quite early days of account penetration of experience with the product and with just the first clinical data being published today. So, lots of room and opportunity to continue to grow. Moving to the endobariatric side of things, it’s a really, really significant and large opportunity. Obesity is clearly an epidemic that is continuing virtually unabated. You can see some numbers of 650 million people globally who suffer from obesity, in the U.S., 42% of adults. That translates to more than 100 million adults in the U.S., have a BMI over 30. And yet despite that, there are only about 200,000 primary surgical procedures currently in the U.S. In addition to primary procedures, revisions of prior surgeries, is a very meaningful opportunity for us. It’s the fastest growing segment of the bariatric surgery market, increasing almost 5x in the last decade. And we believe to be a potentially $1 billion opportunity based off of the volume of procedures that have taken place. Building on that, to be clear, what we’re talking about are patients who have previously undergone the two leading procedures for bariatric surgeries. One is a gastric bypass procedure and the other is a laparoscopic sleeve gastrectomy. The data showed that there were 1.4 million of those procedures in the last decade. And there is a lot of clinical evidence that suggests that at least a third to a half of patients will, in fact, regain weight often and within about a 5-year period. And there were 43,000 revision procedures, surgical revision procedures that were already done in 2019. But we believe that there is potentially an important role for OverStitch in endoscopic revisions. And in fact, 70% of our top 100 accounts in the U.S. are already performing at least some of these procedures. And the reason why or at least some evidence for it is on the right-hand side. This is from a study that was published over the summer. It was conducted at Brigham in Women’s Hospital, and it’s a 5-year study that compares endoscopic revisions to surgical revisions of gastric bypass patients. And what you see in the data are essentially equivalent weight loss were very close to it and then – but a much better safety profile, a lower rate of adverse events and especially serious adverse events. So we’re encouraged by that. And it’s one of the main reasons why, in addition to submitting for ESG for de novo into cushion, we also submitted for revisions as well. For the ESG procedure, again, endoscopic sleeve gastroplasty, it has performed completely using the OverStitch device. And interestingly, it’s been in development for a number of years now. And there are over 200 publications or abstracts that have already been developed more than 6,500 patients in addition to the MERIT study that I referenced earlier. And consistently, those results have shown a procedure that has a very good efficacy profile. The data on the right side of the page show a pooled analysis of eight studies and nearly 2,000 patients that showed very promising both excess body weight loss and total body weight loss. There is another part of the same pooled analysis showed an SAE rate of 2%, which is exactly what we saw in the MERIT study. And then there are other inherent benefits to the ESG procedure as well. It can be reversible if need be. It’s anatomy sparing because we’re not taking out any tissue. There is no scarring. It can be done as an outpatient procedure, and there is a relatively quick return to work. So there are a number of potential benefits. And one of the reasons why we are already seeing some practitioners embrace the procedure, but we are also very conscious of not marketing explicitly for it. And so we are going to work through the approval processes with the FDA and look forward to the potential of a new indication. We would estimate in a period on average de novo 510(k) take about 12 months. And so we will be flatting around that kind of a time line for a new launch. So hopefully, that gives you an update on the quarter-to-date from an overall business standpoint and a vision for where we’re going forward. But to dive more into the financials, let me turn it to Jeff.
Jeff Black: Thank you, Chad and good afternoon everybody. I’d spend a couple of minutes here just reviewing the financials review for today and then give some brief commentary on our operating spend profile and cash profile. So, starting with revenue, we ended the quarter with strong growth across all product – all of our products, the third consecutive quarter of double-digit growth. As Chad mentioned, we saw a nice balance in that growth. In the U.S., we saw a 66% growth outside the U.S., 55%. Our endoscopic suturing was up 30%, and that’s just highlighting continued demand for our products, OverStitch and X-Tack across a number of patient indications. Orbera grew more than 20%, and that was against what we would consider a stronger-than-expected rebound in elective procedures a year ago in Q3 2020. On a year-to-date basis, suturing and balloon product lines both grew 63% over 2022. In terms of the full year outlook, we expect $63 million to $64 million in revenue for 2021. And this represents more than 50% growth over 2022, which we acknowledge was heavily impacted – I’m sorry, over 2020, which we acknowledge was heavily impacted by COVID, but it also represents 40% growth in endobariatric revenue over 2019. Moving to gross margin, in the third quarter, we saw gross margin improve by 190 basis points over Q3 2020. We saw an improved 360 basis points on a year-to-date basis. We also saw gross margin improve sequentially over the second quarter by 150 basis points. As we continue to talk about, we remain very focused on continued gross margin improvements, particularly with OverStitch, which has a lower margin profile than Orbera and X-Tack. Major drivers of overall margin expansion will be product mix, improved absorption of overhead and direct COGS improvement programs, particularly focused on OverStitch. We’re still very early innings, but we’re beginning to see the impact from all of these factors. And we remain confident that we will see a blended gross margin in the mid-60s over the next 3 to 5 years. Moving on to the operating expenses, we look at our operating expense spend profile, and we think it’s important to exclude non-cash stock-based compensation to get a clearer picture of what our non-GAAP core operating expense run rate looks like. And today, our non-GAAP OpEx is running at about 72% of revenue, of which 36% is sales and marketing, and that’s a combination of variable and fixed compensation and investments in overall channel development, much like we’ve been talking about. We do plan to invest for top line growth over the midterm and focus areas there will be sales channel expansion, marketing, medical education, clinical reimbursement, product development and COGS improvement programs. So we do expect to see operating expenses, increase in both absolute dollars and percentage of sales, particularly in 2022, and we should start to see some operating expense leverage in ‘23 and beyond. But I think importantly, we have the ability to modulate spend as we need to, and we’re well positioned from a balance sheet perspective to make these investments. And that brings me to Slide 21 on cash usage. You’ll see that over the first 9 months of this year, our average gross – our gross quarterly cash burn was $3.7 million, net burn was under $3 million. We ended the quarter with pro forma cash of $98 million. That includes the net proceeds from the $75 million follow-on we executed a few weeks ago. So we’re now very well positioned to execute on our growth initiatives. But not only do this financing provide us with substantial cash runway, it added a number of very high-quality fundamental healthcare investors to a solid and growing shareholder base. And so we thank our investors both existing and new for the continued support and confidence. And then finally, before I turn it back to Chad, just a few comments on Slide 22 here regarding our cap table, we think it’s important to paint a complete picture here, given that there are a couple of elements that don’t show up in our issued and outstanding share count. So today, we have just under 40 million in issued and outstanding common shares. In addition, there are just under 14 million shares in prepaid funded warrants. So this would equate to 54 million shares in outstanding common and common equivalents. We also have about 6.3 million shares underlying our $19 million in convertible debt. So all in, as we think about our cap table is we represent just over 60 million common shares outstanding on a pro forma fully diluted basis. And we think it’s important to provide this clarity on the call, just given the recent raise and historical funding mechanics for Apollo. And with that, I will turn the call back over to Chad.
Charles McKhann: Thanks, Jeff. And let me echo Jeff’s comments of thank you to our investors, both existing who’s been with the company for a long time as well as those who joined us in the recent fund raise. We very much appreciate it. So looking forward and kind of wrapping up, we absolutely view a number of very significant catalysts across each of our product lines in the coming months and years. And I’ve touched on these already, but with OverStitch the submission for the 510(k) is a big step for us, looking for a potential approval, right? We still need to work through the process with the FDA, but if successful, a potential approval potentially in the next year, which could form the basis of developing endoscopic rate loss practices and procedures and then also the basis of expanding reimbursement over time. With X-Tack, good progress with the U.S. launch, our first clinical evidence published and just recently here, and we announced it today. We are aware of others that are also in development and so more studies that will be coming out about the product in coming meetings over the course of the next year. And as I mentioned, looking towards a broader launch outside the U.S. potentially in 2022 as well and we also have our engineers working with the early clinicians who use X-Tack on R&D initiatives and what we’re calling product line extensions for X-Tack. There is some great ideas there and hold the future potential of new developments of using X-Tack essentially as a platform for new developments. And we will have more updates as we move forward with that. And then they have balloon, which has been doing very well globally. In the coming year, we would expect to start a trial for NASH and the new indication. As we’ve announced previously, there are new CPT codes that will be implemented starting in January 1, 2023. And then we also see the balloon as a critical component of an integrated practice for endoscopic weight loss as a key driver for the product line globally. And so to finish with our overall growth outlook, we’re very pleased with the growth we’ve seen this year, essentially 50% growth over 2020 as you look at the guidance of $63 million to $64 million. And all of that underlying this energized phase. So top line growth, really building the team and energizing the organization as well as our customers, continuing to grow the commercial organizations globally, both within the U.S. and outside the U.S., enhancing our position in that advanced GI category, overstated product and then adding X-Tack to it, developing the next new things from an R&D standpoint and then very importantly, fortifying our balance sheet. And all of that creates the foundation, we believe, for the next phase of acceleration and then ultimately, leadership. And so with that, we thank you for your interest. Thank you for joining the call, and we will open it up for questions.
Operator: Your first question is coming from Frank Takkinen from Lake Street Capital Markets. Your line is live.
Frank Takkinen: Thanks for taking my questions guys and congrats on the great results. Want to start with X-Tack, curious if you could tease out just how much revenue was generated from X-Tack in the third quarter? And then as a follow-up to that, can we just take a step back and we’ve spoken about market sizes a couple of times as far as total account opportunity. How large the clip market is and those types of things? But I wanted to take a step back and just now that you’ve had a couple of quarters under your belt, if you could frame up how large of a product line you feel like X-Tack can be for Apollo?
Charles McKhann: Yes. So thanks, Frank. Appreciate your comments. So for competitive reasons, we’re still not separating X-Tack out individually. It’s continued to do well. As you know, in the first half of the year on our Q2 call, we mentioned that we passed the $1 million mark, which was an important milestone for us. And we’ve been able to continue to grow from there. We see X-Tack as an important contributor to growth, especially as it becomes a global product line for us. It’s – we’re pleased with the utilization across both upper and lower GI. There are a lot of potential cases, inclusive of a big opportunity that we’ve talked about colonoscopies. 20 million colonoscopies that are performed each year, a significant portion of those that do require – should be closed, right? There is a lot of clinical data that they should be closed. Otherwise, there is a risk of delayed bleeding. That’s at least 8% to 10% based off of a number of studies. And that aspect predates X-Tack, right, that the pivotal study that studied that was actually sponsored by some of the equipment manufacturers but it’s growing. I just recently at the ACG meeting, and there was a discussion of the need to close. And we think X-Tack is very much well positioned for that market, among others. So we see it being an important growth driver for us as well as along with OverStitch as well as the balloon. And so it can play a very important role going forward.
Frank Takkinen: Got it. Okay. And then I just wanted to maybe back up to a little bit broader question. I think I saw in your slides a 20% plus midterm target revenue CAGR on a go-forward basis. Am I understanding this correctly that you’re thinking on a regular basis, you can be growing top line about 20% as a whole?
Charles McKhann: Yes. I mean that’s a – we went through a strategic planning process over the summer as a team and really looked at our opportunities across product lines and across markets. And so that is, in our view, sort of a medium to longer term target that we’re aiming for and that we believe that we can potentially achieve. It’s – we’re not guiding to next year yet. But it is what we are kind of aiming for from an overall – we want to be a consistent growth company, and we believe that that’s at the right level that we can achieve.
Frank Takkinen: Okay. That’s helpful. And then the last one for me, I just wanted to touch on the revision market a little bit more, specifically as it relates to reimbursement, I know there is some things working, you’re working through as it relates to ESG reimbursement. But my sense is there is some reimbursement that’s in place and it’s a little bit easier for the reimbursement in place to be revisions with OverStitch product. One, am I understanding this correctly? And two, can you maybe just give us a little background around reimbursement as it specifically relates to revisions?
Charles McKhann: Yes. So revisions are interesting in that you’re right, because the patients have had a prior procedure and have experienced the benefits of weight loss. When they have like regain, they often also have a lot of additional comorbidities as well. And the alternative is a surgical procedure, right, and which is often an inpatient procedure. So what we find or at least as I talk to many of our customers, is that they are able to pursue case-by-case prior authorizations for revision procedures. They are using typically an unlisted code. There is no dedicated code for revisions. But what we hear quite frequently is a lot of success in being able to make the case that an endoscope revision is the right way to go and be able to get those procedures reimbursed. And so we think that’s a good foundation to build on. That’s our customers are pursuing that individually. Again, we don’t have the indication. So we are not actively supporting that. We’re learning from our customers, and we’re thinking about the team we might want to have in place if we are, in fact, successful with an indication to help support other customers and having similar success.
Frank Takkinen: Got it. Perfect. Thanks. I will stop there.
Operator: Thank you. Your next question is coming from Chris Cooley from Stephens. Your line is live.
Chris Cooley: Good afternoon and congratulations on the stellar quarter. Maybe just two quick operational questions for me, could you help us think a little bit just when we look at the growth in the U.S. and internationally, I guess, two components there. One, do you attribute the decline in the IGB franchise outside the United States to – is this more COVID-related? Do you think these were competitive concerns during the quarterly period? Just would appreciate some color there and then how we might extrapolate that to the United States now that the stats balloon is approved here as well. And then similarly, though, if I could just think about the U.S. growth, which was really strong in the ESS franchise up about 130%, I’m looking at this correctly. Could you maybe just help us think a little bit about the contribution there from X-Tack? I know you’re not willing to give the dollar revenue piece out. In the past, you’ve talked about a number of accounts. I’m curious if that’s a statistic you’d still be willing to help us with? And then I have got one quick follow-up.
Charles McKhann: Sure. Chris, let me make sure I’m clear on your question on IGB when you talked about the decline. What – I just want to make sure I’m addressing the line question.
Chris Cooley: I picked up the wrong number. It’s only – it’s actually up there. I’m looking at the queue here quickly. I apologize. So if you could just maybe speak more to the U.S. growth?
Charles McKhann: Sure. Yes. So, just wanted to make sure I was clear in answering the right question. Actually, on the IGB, we are very pleased with the growth. Important to recall last year, was actually kind of a rebound quarter at least in the U.S. for gastric balloons. And so seeing growth on top of that, we were very pleased with. On the U.S. growth for endoscopic suturing, again, the growth, I think has been nicely balanced, both core growth with OverStitch, if we look – especially, if we look year-on-year, pretty comparable quarter-on-quarter. And that’s not surprising as you think about summer months and as well as – and we have talked about previously the navigating through COVID and OverStitch depending on the setting of care can be impacted as a lot of procedures still are, and we are all still navigating that. But we did see with X-Tack a growth in the number of accounts utilizing in the quarter of kind of a double-digit growth in that. Our strategy is much more focused on utilization than just growing accounts. So, we do continue to see growth in accounts, but we are actually, frankly, incentivizing our team and focusing our team on growth within the targeted accounts that we are already in while continuing to add the account base.
Chris Cooley: That’s helpful. And if I could just as well quickly and I will get back in queue, just looking through here as well, see that distributor sales increased pretty significantly as a percentage of revenue versus the prior year. But when I look at least at first pass here in terms of kind of the standard metrics like DSO and the like cash conversion cycle. It doesn’t seem like that impacted things if, in fact, you improved on those ratios. So one, I was hoping you could just expand on maybe the increase in distributor efforts outside of the U.S. And two, if you are doing anything different there such that just when we look at those kind of metrics, we are not seeing any kind of expansion in the short run with that kind of step up in distributor sales? Thanks so much.
Charles McKhann: Sure. I will hit the sales side of it, and then Jeff can elaborate. Distributor sales can be somewhat lumpy, sometimes, right. They can be large orders. And then I would say the historical comparison is important in that. The U.S. did recover faster last year than the distributor markets. And so it is important to kind of take a longer term view of kind of quarter-to-quarter. But we feel good about where we are in terms of with the distributor orders and then solid orders across geographies. So, there wasn’t one big order that affected the results here. It was pretty balanced again across our different distributor markets. My lumpy comment was really just sort of a reference to the comparison for last year where the distributor market was much slower to come back. And so that comparison is probably important as to year-on-year. Jeff, as you look about the other metrics?
Jeff Black: Yes, Chris, on DSOs, I can tell you that I am almost 90 days in now, I guess, 90 days in today. I have actually been really – was that – thank you, I have been really impressed with the company’s ability to collect. And I think it’s a function, both OUS and in the U.S. of the team really knowing the customer, particularly in OUS distribution. Mike and his team has just done a phenomenal job at building a customer base or whether you call them a direct distributor or otherwise and really understand their customer. And so we have been really pleased. We have not had collection issues to-date. And as we bring on new distributors, they are very well vetted. And so I think we continue to really push on collections and we have had a lot of success there.
Chris Cooley: Super. Thanks so much.
Operator: Thank you. Your next question is coming from Matt Hewitt from Craig-Hallum Capital. Your line is live.
Matt Hewitt: Good afternoon. Thank you for taking the questions. Maybe first one and I realize it’s only been a week, but I am just curious what the initial feedback or interest or inbound calls that you receive from following the final release of the MERIT data. This is something that I know the investment committee has been waiting for several years, but so has I would think, the practitioners, the people that are doing these procedures on a daily basis have likely been waiting too. So, I am just curious what you have heard in the past week.
Charles McKhann: Thanks, Matt. Yes, there has been a lot of excitement. It was fun to be at the ACG meeting, which was immediately after that, if so, a virtual meeting and so to talk to a lot of customers there. It was as you follow the space and know the data were very much confirmatory to a lot of data that have already been collected, but it’s still really nice to see, right, in terms of randomized control data that supports the value proposition. And so we have had good conversations with leaders from both the GI and the surgical side of things. People are obviously looking forward to the indication as well because that will certainly also play a role in things like reimbursement and other activities. But the general feedback is a lot of excitement and very positive.
Matt Hewitt: That’s great. Thank you. And then on the – we really appreciate the slide kind of going through what’s next, the near-term and kind of mid-term catalysts. But one that I didn’t see on there, how should we be thinking about CPT codes for OverStitch? Do you need to get the labels in place first, or is it possible that in the January meeting, you could see even if it’s just more of a generic label CPT code, what’s the cadence there?
Charles McKhann: Yes. No. So, the CPT process really is led by the societies. And so the GI societies are very aware of and are thinking about CPT codes, both around revisions and primary ESGs. And so they are actively working on that. We are just getting into the new cycle that would be for the next three meetings that take place over the next year would point towards a CPT code being in effect January 1, 2024. That’s just the way those cycles work. And so they know those deadlines and are thinking about it. It’s a combination of primarily making sure all the ducks are aligned with the actual publication and then the submission process. In fact, we are working together across other societies to ensure there is support. And so that activity is ongoing. We are optimistic that it happen within one of these next three meetings to be in that January 2024 cycle. But there is more work to do. And ultimately, the societies are going to drive that timeline. We will do our best to make sure they have got the information they need to be able to do that.
Matt Hewitt: Got it. Yes. Just like you had with ORBERA where the societies were kind of led that charge to, I understand that. And then maybe last one for me and then I will hop back in. Regarding the ORBERA NASH study, has there been any update as far as the specifics on the trial? Where do those stand, because I think it starts early next year, but if you could provide an update on that, it would be appreciated? Thank you.
Charles McKhann: Yes. Matt, previously, we had communicated start potentially at the beginning of next year. We are still in the design phase, quite frankly, of that as we work through both with the FDA and with CMS and working it through. We have also with the information around the comorbidity effects with ESG are also having some interesting discussions as exclusively an ORBERA balloon trial. Is it potentially an ORBERA balloon as well as an ESG trial, maybe a multi-arm trial. So, we want to make sure that whatever study we design and get approved by the agencies does lead us to a pathway towards positive reimbursement. So, we are taking the time with our advisers to make sure we get that right. And so we won’t be starting a study early next year, but we are working on the design of that that would still allow us to move forward from there.
Matt Hewitt: Got it. Thank you.
Operator: Thank you. Your next question is coming from Adam Maeder from Piper Sandler. Your line is live.
Adam Maeder: Hi Charles. Hi Jeff. Congrats on all the success here and I appreciate you guys taking the questions. Two for me, one near-term and then one on the mid to longer term. So first and foremost, just on the guidance, revenue guide, you took that up to $63 million to $64 million. I think that implies $16.8 million or so at the midpoint for Q4. Clearly, some good underlying momentum in the business exiting Q3 and by my math, that’s about 4% quarter-over-quarter sequential growth. So, it seems pretty reasonable and I guess prudent, given the environment, but I wanted to dig in a little bit just on the construction of the guidance. So, maybe what’s embedded in the guide for various things like COVID-19, potential staffing issues or other capacity constraints. And then we have heard some other medtech companies talk about a backlog accumulating during Q3. So, just wondering if you have a backlog that needs to be worked through as well? And then I have a follow-up.
Jeff Black: Yes. Adam, this is Jeff. I appreciate the question. Look, I think as we have talked about Q3 was – there was definitely COVID impact. And we are maybe less exposed to it than others that are more dependent upon inpatient hospital procedures. We do have a fair amount of our business is outpatient and even in surgery centers. So, I think we are probably less impacted, but we certainly saw the impact. And it’s lumpy. And to the extent that we see concentrations of impact in geographies where we have greater amounts of business and will certainly be impacted. But I think we have got the benefit of being an outpatient. We have got the benefit of having being geographically dispersed, not just within U.S. geography, but globally. But that said, we are still seeing some pressure and we expect to continue seeing pressure. So, we are being cautiously optimistic and feel good about the guidance we put set forth. I would like to say that there is a huge backlog. We would love the backlog. That’s not been our experience. And we are pretty certain that the business that we are seeing represents run rate demand. And going into the fourth quarter, it would have been great to start with the backlog, but that’s not the case for us.
Adam Maeder: Okay. Very helpful, Jeff. Thank you for that. And then just for the second question, the MERIT data now in hand, results look really compelling. Just curious if I could push a little bit on the mid to longer term outlook for OverStitch. How are you guys thinking about growth going forward? You have grown that product very nicely, 20% to 25% range or even above that with the exception of last year, which is impacted by the pandemic. So, does the future ESG label potential broader reimbursement steep in that curve? Does it sustain the durability? Just how do we think about the dynamics there? And I will hop back in the queue. Thanks so much guys.
Charles McKhann: Yes, Adam. The – so the three phases I laid out going back to originally sort of defining the strategy, we have never put an exact timeline against those. But in my mind, the critical trigger of moving from that energized to the accelerate phase is the indication for ESG and for revisions, right. And so I do see them as a potential accelerator even while we are working on the broader reimbursement pathways that we just discussed. But even in that sort of medium-term of with an indication, being able to again, learn from physicians and institutions that have already started to connect the dots, we do think that there is a significant opportunity here. And so we are in that learning phase. We are going to be very careful and appropriate from a promotional standpoint. But if we are successful in getting the new indication, then absolutely, we see that as a potential of an accelerator from a growth standpoint for OverStitch.
Adam Maeder: That’s helpful, Charles. Thanks so much.
Operator: Thank you. Your next question is coming from Josh Jennings from Cowen. Your line is live.
Josh Jennings: Hi. Good evening and thanks for taking the questions. It’s great to see the positive MERIT results and the strong quarterly results. I wanted to ask about the MERIT study and just what you saw with the durability of the outcome for ESG and just thinking about the body that is crude in front of Marriott, what do you think or what does your team think that durability will wind up? I mean this seems like 2-year sustained weight loss was demonstrated effectively in the MERIT study, and I was just curious in terms of how we should be thinking about the durability of the procedure going forward.
Charles McKhann: Thanks, Josh for the question. Yes, the MERIT study had a 2-year endpoint. And you are right. As you saw in the data that we summarized today, there really was a nice durability and maintenance of weight loss out to 2 years. And there have been a number of other studies that have demonstrated that as well, including the pool analysis that’s in the slide set. That does show nice consistent results out of that time period. There is also one study on ESG out to 5 years that was published just a few years ago. That has also showed a really nice maintenance of effect out to 5 years. And so we will encourage our investigators to keep collecting longer term data, because durability will certainly be an open question, especially for payers, for example. But we are pleased with what we are seeing. And so we think it – I think the investigators presenting the MERIT study talked about ESG potentially filling a really nice important gap between whether it’s the bloom that typically has a shorter term time horizon as well as medications, right. There are some really interesting new medications, but compliance and costs have often been an issue for medications between those and then the surgeries, which do have some very good durability data for both laparoscopic sleeve and gastric bypasses. We think ESG can fill an important gap or very good durability and then an overall really good value proposition. And so we were pleased with the outcomes.
Josh Jennings: Excellent. Just one quick follow-up on the – I understand the societies will be submitting for CPT code issuances. But thinking about payer decisions on coverage and payments, is there anything that Apollo can do while the FDA is reviewing the de novo application to just get this data in front of payers and start that process or do you need to have approval first before those discussions start? Thanks for taking the questions.
Charles McKhann: Yes. No, we are going to tread pretty carefully there just because we don’t want to get ahead of ourselves from a – but we can absolutely get all of our ducks in line, right. Now, with the benefit of the multiple studies I referenced and then the MERIT study on top of that, things like putting together all the economic value dossiers that you would need, continuing to encourage our investigators to publish on their results with comorbidities, for example, really reinforcing the different aspects of the value proposition. So, we have got a really good story to tell. So, I think it’s a matter of, again, sort of planning and preparation now, making sure we have got the right team in place to do that, and we have been working on filling out that group. But the actual activities will depend on, first, the publication, but importantly, the indication as well.
Josh Jennings: Great. Thanks again.
Operator: Thank you. There are no further questions in the queue.
Charles McKhann: Listen, thank you all very much for joining us this evening. We very much appreciate your support and have a good evening.
Operator: Thank you, ladies and gentlemen. This concludes today’s event. You may disconnect at this time and have a wonderful day. Thank you for your participation.
