Gelesis Holdings, Inc. (GLS) on Q3 2022 Results - Earnings Call Transcript
Operator: Hello, and welcome to the Gelesis Third Quarter 2022 Earnings Conference Call. My name is Elliot, and I'll be coordinating your call today. I would now like to hand over to our host, Anna Kate Heller, Investor Relations. The floor is yours. Please go ahead.
Anna Kate Heller: Good morning, everyone, and thank you for participating in today's conference call to discuss Gelesis' financial results for the third quarter ended September 30, 2022. Joining us today are Yishai Zohar, Founder and CEO of Gelesis; and Elliot Maltz, CFO of Gelesis. They will be discussing the fiscal 2022 third quarter and providing business updates on the company's commercial product, Plenity. Before we begin today, I want to remind everyone this conference call may contain forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995, including statements relating to Gelesis' estimates of its future business outlook, prospects or financial results, including projected sales and EBITDA. Forward-looking statements generally can be identified by words such as anticipates, believes, estimates, expects, intends, plans, predicts, projects, will be, will continue, will likely result and similar expressions. These forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties, which could cause our actual results to differ materially from those reflected in the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in our amended 8-K and Form 10-K for the year ended December 31, 2021, and those discussed in other documents we file with the Securities and Exchange Commission. All subsequent written and oral forward-looking statements attributable to Gelesis or persons acting on Gelesis' behalf are expressly qualified in their entirety by the cautionary statements included in this conference call. We undertake no obligation to revise or publicly release the results of any revision to these forward-looking statements, except as required by law. Given these risks and uncertainties, listeners are cautioned not to place undue reliance on such forward-looking statements. Also, the following discussion may contain non-GAAP financial measures. For a discussion and reconciliation of these non-GAAP financial measures, please see our earnings release for third quarter 2022. A webcast replay of this call will be available via the Events & Presentations section of the company's Investor Relations website at ir.gelesis.com. Now I would like to turn the call over to the Founder and CEO of Gelesis, Yishai Zohar. Yishai?
Yishai Zohar: Thank you, Anna Kate, and good morning, everyone. I will start by providing updates on our business and then turn the call over to Elliot to walk you through our third quarter 2022 financial results and full year outlook. As a reminder, Plenity is a novel, orally administered, FDA-cleared weight management therapy that helps people to feel satisfied with smaller portions so they can eat less and lose weight while still enjoying the foods they love. Plenity is the only approved weight management treatment for people with a BMI as low as 25 and all the way up to a BMI of 40. And as a result, we believe we have the largest addressable market of any prescription weight management approach on the market today. We are seeing strong uptake in Plenity across the BMI spectrum with roughly 35% of members with a BMI between 25 to 30, demonstrating that we are successful in reaching consumers that are not currently served by other prescribed solutions. Since the launch of the first wave of our national broad awareness media campaign in February, demand for Plenity has reached record high with 114% top line growth in this quarter compared to the prior year period as well as 36% of additional gross margin. Despite a significant reduction in marketing spend, we acquired over 23,500 new members and sold over 92,000 units during the third quarter of 2022, more than twice as many units as we sold in the prior year quarter. We clearly were successful with launching a new product and creating initial consumer awareness and demand, but doing so is capital-intensive. Due to challenging market conditions, the level of capital we raised was not enough to continue to invest in the same way so marketing investment during the third quarter was reduced to preserve our cash resources. As expected and in line with our previous guidance, the reduced level of investment in marketing had an impact on revenues this quarter. We are moved and excited by the feedback we are getting from our members, some directly to us and many others in extremely active private communities online. Plenity is changing people's lives as it is an important scientifically proven product for managing overweight and obesity. An important part of our mission continues to be empowering the patients to take greater control of their health and wellness. We believe the best place for Plenity is to be widely available and easily accessible. And for that reason, I'm excited to announce that we are pursuing an application with the FDA to change the classification of Plenity to over-the-counter, which would make it available without the need for prescription. Plenity has proven itself as an effective, affordable and trusted personal weight management product. Plenity's best-in-class safety data, demonstrated in over 185,000 patients, and its over 4 out of 5 star rating in Trustpilot gives us confidence that this is the right time to pursue an OTC pathway with the FDA. Making Plenity available OTC will be a game-changer for individuals struggling with overweight or obesity. And Plenity would become only one of two FDA-regulated oral treatments for weight management that's available OTC. Importantly, for Gelesis, the change to OTC could significantly simplify the consumer buying process, thereby vastly lowering our cost of acquiring new members. This reduces our reliance on capital markets to reach profitability. For example, we already see strong interest from people seeking out Plenity prescription, but there are significant drop-offs during the online physician visit. We believe that simplifying the buying process will give us a much larger portion of these already interested customers. In addition, people who were hesitant to consider prescription alternatives or who are at the earlier part of the weight loss journey now could become part of our target addressable market. This shift also enables us to work with many more distribution partners and channels that simply aren't possible for a prescription product. We believe we will be able to grow sales more efficiently as we potentially open up new sales channels and build towards the long-term potential of Plenity to become a foundational therapy for weight management. We intend to submit our application to the FDA in the first quarter of the next year and could receive market clearance by the middle of next year. Additionally, the LIGHT-UP study we presented in several scientific meetings during this quarter evaluated the safety and efficacy of our pipeline asset, GS200, our new oral hydrogel, which has very similar properties of Plenity. The LIGHT-UP study met its primary endpoints and has shown an impressive efficacy and safety profile in a population that typically has a harder time to lose weight. Paradoxically, the study demonstrated even greater effect in people that have prediabetes or type 2 diabetes. We are now evaluating the best regulatory and commercial strategy for GS200. As the obesity market shifts preliminary to treatment of obesity before downstream consequences, the long-term potential of Plenity and Gelesis is stronger than ever. And we are working hard to bring this important solution to many millions of people struggling with the beginning or advanced stages of obesity and deliver value for our shareholders. Now I would like to turn the call over to our CFO, Elliot Maltz, to walk through our financial discussion.
Elliot Maltz: Thank you, Yishai. I will take you through our financial results for the third quarter of 2022. For the three months ended September 30, 2022, we acquired 23,500 new members, a 50% increase to the 15,700 new members acquired in the same quarter in the prior year. Product revenue during the third quarter of 2022 was $6.4 million driven by over 92,000 units sold, which is more than double the units sold in the same quarter in the prior year. The strong growth this quarter was driven primarily by the mix of new, returning members as well as the mix of monthly and quarterly treatments being ordered by members. We also achieved this growth despite significantly reduced levels of investment in sales and marketing during the third quarter of 2022 to preserve liquidity. We incurred expense of $7.3 million specific to sales and marketing during the third quarter of 2022 compared to $21.2 million and $22.2 million during the first and second quarter of 2022, respectively. We have realized significant improvement in the cost of manufacturing the product since we commissioned our commercial manufacturing facility at the end of last year and streamlined our packaging supply chain. Our gross margin increased to 44% during the third quarter of 2022 compared to 8% during the same quarter in the prior year. With the increase in sales volume, this resulted in gross profit of $2.8 million for the three months ended September 30, 2022, and $9.6 million year-to-date compared to $251,000 in the third quarter of 2021 and $709,000 for the nine months then ended. We're very encouraged by the - our success in controlling costs while drastically scaling up production levels to meet growing demand. Net loss for the three months ended September 30, 2022, was $14.1 million compared to a net loss of $30.7 million in the same quarter in the prior year. Adjusted EBITDA for the third quarter of 2022 was a loss of $12.3 million compared to a loss of $26.2 million in the third quarter in the prior year. The improvement in adjusted EBITDA between the comparative periods is due to several factors. While we reduced investments in selling and marketing during the third quarter of 2022 to preserve liquidity, we saw continued demand for Plenity created by the broad consumer awareness marketing activities during the first half of this year. We incurred expense of $7.3 million specific to sales and marketing during the third quarter of 2022 compared to $21.6 million during the same quarter of the prior year. Additionally, our improving cost in manufacturing Plenity resulted in further efficiency in our P&L relative to the third quarter of 2021. Moving on to the balance sheet. At September 30, we had $24.8 million in cash and $5.6 million in receivables with $18.4 million of inventory in our supply chain and just $8 million in accounts payable. Regarding our outlook for the full year 2022, we expect product revenue, gross profit and adjusted EBITDA to be in the range of previously provided guidance. During the third quarter and subsequently, we have further reduced expenditures in selling, general and administrative, manufacturing and research and development to extend the company's operational runway into at least the second quarter of next year. Now I'll hand it back to Yishai to provide closing remarks. Yishai?
Yishai Zohar: Thank you, Elliot. There has been incredible momentum in the obesity care industry, and we are well positioned with our uniquely differentiated product to play an important role in this growing category as a foundational therapy. As we are focused on the path to OTC classification for Plenity, we will no longer have the barrier of prescription if we achieve OTC approval, opening the door for new customers we otherwise would not have reached and which other FDA-approved breakthrough therapies cannot access. We are uniquely positioned to continue to penetrate this category of new users, which should provide a long runway of growth for us over the next several years. We are particularly excited about our plans to have a self-sustaining, profitable and capital-efficient business over time, one that will not rely on the capital markets for its growth. As we complete this transformation, we believe that the exciting story will become clearer to the market. In the meantime, we are focused on the fundamentals of our business and on the patients we serve. An important part of our mission continues to be empowering the patient to take greater control of their health and wellness while lowering the barrier access. And we are thrilled about the doors that OTC approval could open for Gelesis and for patients.
Operator: Our first question comes from Daniel Grosslight from Citi. Your line is open.
Daniel Grosslight: Thanks for taking the question. I'd like to start really with kind of the - a shift in strategy to OTC. Given you just launched Plenity really kind of in a widespread way in 1Q of this year, curious if something shifted in the market that led you to see OTC as the most efficient? Because it is quite a substantial shift in how you're going to sell this if you're approved. So just curious what changed in your mindset in the market for you to make this shift.
Yishai Zohar: Thank you. Thank you, Dan, for the question. In fact, because of the unique profile of Plenity, both efficacy and safety, but mainly, of course, the wide label that we have that really allows it to be a product for anyone with BMI above 25 even without comorbidities, we always thought that make this product widely available and easily accessible like an OTC product, even if we are usually - even if we are using heavily e-commerce channels would be the right way. We know that the target market and the people that are interested in products that are without prescription is a very big market. And we know that the - going through the process of prescription actually create a friction, and we lose many potential patients through this process. Of course, there is the additional cost, which is another issue. There is no way you can start as a medical device to be an OTC product. You have to start as a prescription, and that's a very typical way to do things. But in order to do so, you need to have the experience in the market because the number of people exposed to the treatment in clinical studies are hundreds. So in our case, even close to 1,000 in all the studies. However, we acquired through the last year experience with more than 185,000 people with a very consistent safety and tolerability data. So that's why we think now there are new windows open for us, which will make our marketing much more efficient together with much larger targeted market.
Daniel Grosslight: Got it. That makes a lot of sense. So I assume if you get OTC approval, this is going to be the channel through which Plenity is sold. You're not going to utilize Ro anymore. You're not going to have a sales force that's out there pitching to doctors anymore. It's going to be 100% OTC for Plenity?
Yishai Zohar: I think that we will use a lot of the same channels we use now. We will - I don't think we are ready to exactly give the strategy as far as all the channels. But you can imagine, based on other OTC products, of course, it will open for us many additional channels in addition to Ro. We still, of course, think that Ro is going to be an important partner, but that is going to open for us a lot of other opportunities.
Daniel Grosslight: Got it. Okay. So would it be a prescription formulation sold through Ro and perhaps other providers? Or would it just be OTC through Ro and through other distribution channels?
Yishai Zohar: So I can just refer to what's going to happen until we are becoming OTC, if we are going to be approved. And that's continued as it is right now through prescription mainly through Ro. And after that, there are going to be a lot of other options. And of course, physicians will be able to recommend it and prescribe it like they do with other OTC products.
Daniel Grosslight: Yes, makes sense. Okay. And then just turning to your cash burn. You burned about $25 million in free cash flow this quarter. You have about $25 million of cash on the balance sheet. No change in your guidance for fiscal '22, which implies a slight degradation in EBITDA for 4Q. I'm curious how you intend to fund yourself in the near term, given these cash needs and no change in your profitability guidance for fiscal '22?
Yishai Zohar: Thank you, Dan, for the question. I will ask Elliot, our CFO, to answer.
Elliot Maltz: Yes. So we're continuing to speak with investors, both our existing investors who have a lot of interest and continue to support the company as well as new investors who would be interested in the potential shift in strategy as well as our overall business model. So we're continuing to pursue those avenues. In the meantime, we've already implemented changes to reduce our cost in our monthly burn. And that should enable us to have sufficient liquidity with the cash we have on hand today to extend operations into the second quarter of next year without considering any additional funding that may come from various opportunities that we're trying to pursue. Whether that's debt, equity or some kind of partnership arrangement that brings additional liquidity, we're working on these areas, and we hope to have more information to share soon.
Daniel Grosslight: Okay. That's great. And I know you have that equity line of credit outstanding. It doesn't look like you drew down on that at all this quarter. Could you give some broad strokes of how you think about using kind of that equity line of credit just given where your stock price is and how that factors into your funding need?
Elliot Maltz: Yes. So the equity line of credit has not been used to a material degree. We had some very small issuances during the third quarter, but none of them were significant or material. Going forward, with our share price where it is today, we don't anticipate using that line of credit in the near term until the share prices that - recovers, and it is a much more stable and higher baseline, that's only when we'll begin utilizing that but really, will only be done opportunistically and with the best interest of our shareholders and the market value at heart. So we would expect that it would be very modest in the near term.
Daniel Grosslight: Understood. Okay. I've got a few more, but I'll hop back in the queue in case others have questions to ask. Thank you.
Elliot Maltz: Thank you very much.
Operator: This concludes our Q&A. I'll now hand over to Yishai Zohar, CEO for final remarks.
Yishai Zohar: Thank you, everyone, for participating in our earnings call today. We hope you are going to join us for our Q4 earnings call next year. Thank you, and goodbye.
Operator: Today's call has now concluded. We'd like to thank you for your participation. You may now disconnect your lines.
