Apollo Endosurgery Inc (APEN) 2019 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to your Apollo Endosurgery Fourth Quarter and Full Year 2019 Results Call. (Operator Instructions)

At this time, it is my pleasure to turn the floor over to Matt Kreps. Sir, the floor is yours.

Thanks, Christie, and thanks, everyone for participating in today's call to discuss Apollo's fourth quarter and year-end 2019 financial and operating results. Joining me on the call are Todd Newton, 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. In addition, there is uncertainty about the spread of the COVID-19 virus and the ultimate 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, 2019, filed today with the Securities and Exchange Commission. The content of this conference call contains time-sensitive information that is accurate only as of the date of the live broadcast, March 26, 2020. 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.

During this call, we will interchangeably use the term ESS for OverStitch and the term IGB for Orbera and vice versa. In this call, we will also refer to the term continuing product revenue, which excludes revenues associated with our surgical products, which we divested on December 17, 2018. Continuing product revenue will differ from our GAAP revenue as we will still report historical and transitional surgical product sales as part of our GAAP revenues. A reconciliation of this and any other adjustments to the company's GAAP operating results can be found on our Form 10-K filed today.

With that, now I'd like to turn the call over to Todd.

Thank you, Matt. Good afternoon, everyone, and thank you for joining today's call to discuss our fourth quarter and full year 2019 results. In just a very short period of time, the importance of fourth quarter and full year 2019 reporting has diminished as much of the world is physically on lockdown due to the COVID-19 pandemic. And all indicators over the last 2 weeks have been pointing to a historic disruption of the general economy in the health care world as we have known it. Disruption from COVID-19 is now a reality and the great uncertainty we are facing is how long until our world will return back to normal.

We are seeing a hibernation of what we have always considered to be normal human interaction, as society takes unprecedented steps in an attempt to control the spread of the virus. So we will discuss this afternoon the 2019 results we released today, which include a solid fourth quarter performance. But we will also dedicate time to discuss the impact of COVID-19 on our company, which will be undeniably negative.

Looking at the fourth quarter, revenue was $12 million. On a constant currency basis, that reflects 10% growth in Endoscopy product sales compared to Q4 of 2018. In particular, the U.S. finished well, with OverStitch sales up 33% and Orbera revenue up 23% in Q4. Outside the United States, results were also generally good, although comparing our quarterly results will be impacted by the timing of distributor orders and shipments since we have a larger proportion of our annual distributor sales occur in the fourth quarter during 2018, which affected comparability.

For the whole year, sales in 2019 to distributor markets were 23% higher than in 2018. The exceptions to our overall solid outside the United States performance was Brazil and Spain, 2 markets where we had previously discussed challenges and are actively engaged in programs to improve results. Due to those markets and the timing of distributor orders, OverStitch sales outside the United States declined 13% in constant currency compared to Q4 2018. But excluding Spain and Brazil results, OverStitch direct market growth was 24% in Q4 and 28% in constant currency. In aggregate, outside the United States, our Orbera sales increased 9% in constant currency in the fourth quarter.

Since the fourth quarter, we have made changes in both Brazil and in Spain. The most significant change was in Brazil, where earlier this month, we completed a transition from a direct sales organization to a third-party distributor. Our new distributor in Brazil has a greater market presence, which should expand the opportunities for our products in this market and also allow us to reduce costs.

I'll turn the call over to Stefanie now to cover our financial results in greater detail. Stef?

Thank you, Todd, and good afternoon, everyone. Fourth quarter consolidated Endoscopy product sales increased 9% as reported and 10% in constant currency. In particular, U.S. Endoscopy sales increased 31% to $5.6 million. In the fourth quarter, 64% of Endoscopy product sales related to ESS and the remaining 36%, of course, related to IGB product sales.

Beginning with ESS. Worldwide, ESS product sales increased 8% as reported and 9% in constant currency. U.S. ESS product sales increased 33% to $4.4 million in the fourth quarter of 2019. Outside the U.S., ESS product sales decreased 15% as reported and 13% in constant currency to $3 million due to declines in Spain and Brazil, as Todd mentioned. In addition, the fourth quarter of 2018 had higher distributor sales due to the timing of orders during 2018, as a larger proportion of our annual distributor sales occurred in the fourth quarter of 2018 compared to 2019. Consistent with our results throughout the year, ESS growth continued to be driven by both expanded procedure use by existing customers and the addition of new users.

Intragastric Balloon or IGB sales and volumes were up in both our OUS and U.S. markets in the fourth quarter. Worldwide IGB sales increased 11% as reported and 13% on a constant currency basis for the quarter. U.S. IGB sales increased 23% to $1.2 million in the fourth quarter of 2019; and OUS IGB product sales increased 7% as reported and 9% on a constant currency basis to $3.1 million.

On a full year basis, total Endoscopy revenue grew 10% as reported and 12% on a constant currency basis. ESS sales increased 21% as reported and 23% in constant currency to $28.3 million, comprised of a 36% increase in U.S. ESS and a 13% constant currency increase, OUS. IGB sales for the year decreased 5% as reported and 3% in constant currency, comprised of a 4% decrease in U.S. IGB and a 2% constant currency decrease OUS.

As everyone on this call knows, we sold our Surgical product line in December of 2018, which directly affects the side-by-side comparability of our total GAAP revenues in the fourth quarter and year of 2019 with the same periods in 2018. This comparability issue will diminish throughout 2020 as residual LAP-BAND revenue we continue to report in 2019 declined throughout the year as we completed our OUS distribution services obligation.

We are actively engaged in multiple gross margin improvement projects that will lower our ESS unit costs and we achieved success on multiple aspects of these efforts in 2019. In Q1 of 2019, we began to sell suture anchors in Europe for the OverStitch system from an alternative supplier with a lower cost. In September 2019, the FDA cleared our 510(k) for polypropylene Suture-Anchor Assembly, what we also call Apollo Suture, which allows us to bring a lower cost suture anchor component to the U.S. market. The suture component cost reduction projects we completed in 2019 are expected to reduce our product costs by $1 million on an annual basis. The Apollo Suture is also expected to enable further international market expansion for ESS in 2020 and beyond.

The impact of this improvement was partially masked in the 2019 to 2018 gross margin comparison as a result of a greater proportion of our overall product sales coming from our ESS products, which presently realized a lower gross margin than either the IGB or the surgical product line. In addition, the gross margin we realized on residual Surgical product sales was lower in 2019 compared to 2018 due to the pricing terms of the manufacturing and distribution services agreements we entered into with the buyer of the Surgical product line. Nonetheless, in total, these and other efforts drove close to a 600 basis point improvement in the gross margin for our Endoscopy products to 50% for 2019 compared with 44% for 2018. On a consolidated basis, which includes the gross margin from Surgical product sales, gross margin for the fourth quarter of 2019 increased to 49% compared to 47% for the fourth quarter of 2018, while gross margin for the year 2019 decreased to 51% compared to 55% in 2018.

Total operating expenses in the fourth quarter of 2018 included a $7.8 million loss on the divestiture of our surgical product line. Surgical product-related intangible assets were written off as part of this divestiture, which also reduced intangible amortization expense during 2019 compared to 2018. Excluding the loss on divestiture and the reduction in amortization expense, our fourth quarter operating expenses decreased $2.3 million.

Operating expense for the full year 2019 includes a settlement gain we reported in the first quarter, while operating expense for the full year of 2018 includes the loss on the surgical divestiture that I just referenced. However, after adjusting out both of these onetime operating expense items, our 2019 operating expense decreased $5.7 million compared to 2018. The decrease in both Q4 and the 2019 year is primarily due to lower U.S. direct consumer advertising and lower clinical expense following the completion of enrollment in the trials we are funding. Our net loss for the fourth quarter of 2019 was $7.2 million compared to $18.4 million for the fourth quarter of 2018. For the year, net loss was $27.4 million in 2019 compared to $45.8 million in 2018. Cash at the end of the year was $30.9 million.

A few more comments before I wrap up. First, as you will see in our Form 10-K filed this afternoon, we recently completed an amendment to our credit agreement that established our 2020 revenue covenant requirements and provide for an additional $10 million of loan proceeds in July if we meet the requirements of our credit agreement through the end of June. It also contained a lender waiver for the going concern opinion issued by our independent registered public accounting firm due to the unprecedented uncertainty resulting from the COVID-19 pandemic on our near-term business outlook and the probability that we could fail to stay in compliance with our current financial covenants sometime within the next 12 months.

We are currently in compliance and believe our relationship with our secured lender is good, but undoubtedly the future, if it ever were predictable, is unpredictable right now. The 2020 revenue minimums in the amendment are based on pre-COVID conditions but we agreed with our lenders that we should take a wait-and-see approach to COVID-19, given the difficulty in estimating its effects.

Second, I want to let you know we will not be providing 2020 guidance today. We saw good product demand exiting 2019 and in the first 2 months of the year. However, as you can probably understand, we will place any guidance on hold for now and remain hopeful that the climate at our next call will have less uncertainty.

With that, I'll turn it back to Todd.

Thank you, Stefanie. The fourth quarter continued our 2019 trend of strong growth in our OverStitch or ESS products, as our U.S. commercial organization delivered an impressive 33% increase year-over-year in the U.S. ESS sales for the quarter and 36% growth for the full year of 2019. Outside the U.S. in constant currency, sales of our ESS products were up 13% for the year.

But the hallmark of our ESS success is the excellent medical education we're able to deliver in the technical proficiency of our sales force. During the fourth quarter, we added 25 new accounts in the U.S. and 33 new accounts outside the U.S. We see cases every day that would not be done endoluminally without the physician confidence supported by OverStitch and our incredible talented team.

Our strategy to remove capital equipment scope barrier to adoption is showing success, particularly in Europe, with increased OverStitch Sx volumes in France, Germany and the U.K., all of which were growing markets for ESS in the fourth quarter of 2019. As we commercialize Sx and introduce the benefits of endoluminal suturing to a wider user base, our product development team is in parallel, developing a colonoscope link suturing solution with an improved gross margin profile. The lower GI tract represents a very large endoscopy market in which OverStitch has limited access because of a scope compatibility barrier with the colonoscope. Just like we did with Sx, we believe that we can remove this next scope compatibility barrier and substantially expand our addressable market opportunity in doing so. And we hope to report more about this new product effort later in 2020.

Medical affairs has been another key contributor to our OverStitch success. In 2019, more than 115 professional journal articles were published on OverStitch-enabled procedures and research. These articles ranged widely from a paper in the Journal of Gastrointestinal Endoscopy that showed an average reduction in health care costs of $860 per procedure when esophageal stents are sutured in place using OverStitch to a new meta-analysis that pulled the safety and efficacy data of more than 1,700 ESG procedure patients from various investigator-led studies of the ESG procedure.

In January 2020, the Journal of Gastrointestinal Endoscopy Clinics in North America dedicated their entire issue to endoscopic closure techniques and advancements, with 8 of the issues' 16 articles specific to the OverStitch endoscopic suturing system, which discussed the history of the training and most importantly, applications that are possible because of full thickness suturing enabled by OverStitch.

For our Intragastric Balloon products throughout 2019, our focus was to reposition Orbera to meet medical needs of patients suffering from diseases where obesity is a key factor and to assist patients in preparing for much needed surgical procedures, where excessive weight either limits the patient's access or their success rates. Thus, we are focused on obvious areas such as NASH or fatty liver disease, weight loss in advance of solid organ transplantation and weight loss prior to either joint replacement or general surgery. Our NASH efforts, for example, are directed towards building physician awareness of the opportunities in Orbera's effectiveness, especially in our European markets.

In the fourth quarter, we sponsored a first Center of Excellence event with Dr. Jude Oben, a practicing clinician at Guy's & St Thomas' Hospital in London, an associate professor of hepatology at University College in London. The event was full capacity, reflecting interest in Dr. Oben's experience with Orbera to treat his patients with liver disease. More such programs are planned with Dr. Oben and others to continue to create awareness through physician-to-physician conversations around their real-world clinical needs and outcomes.

All of these efforts, in normal times would give us good momentum going into 2020, plus an improving gross margin profile, a controlled and improving operating expense line. But our preoccupation today and undoubtedly, in the weeks ahead, is the threat posed by the COVID-19 epidemic. All indicators we were able to see suggest that a difficult second quarter lies ahead. And the possibility of market disruptions from the coronavirus could extend beyond the second quarter. Orders have closed. Our sales personnel have restricted access to hospitals and customers. Many of our key accounts are subject to restrictions in place or pending that will limit or eliminate elective procedures in order to create more capacity to address the community health burden of the current COVID-19 threat. Capital markets, as everyone on this call is experiencing, are unsettled and volatile. As a result, we have implemented several measures to reduce our expenses in the near term.

First, we have suspended all of our advertising programs and canceled all education programs through the end of June. This includes parking our Mobile Learning Center and pulling out -- pulling our participation or support of any physician society conferences planned for the second quarter, to the extent that the society itself had not already canceled their programs. We have also implemented a worldwide salary reduction program across the entire company and suspended or reduced most of our 2019 bonus program awards. We have evaluated our gross margin, product development and regulatory projects and are deferring any new project-related commitments at this time. We have lowered our production plans and deferred raw material and finished good purchases. We have closed our California-based device analysis lab and co-located this critical function into our Austin, Texas facilities. We have also restructured our Australian back-office activity to further reduce costs.

On the clinical side, we expect there could be disruption to our many studies. But to date, the MERIT trial has not been impacted since patients enrolled in a clinical study are being treated under a clinical protocol and have a certain priority for patient follow-up. Also, crossovers are continuing. These measures are -- will reduce our second quarter cash requirements by more than $4 million as we calculate it today. We believe these actions will allow us to withstand what we hope to be the short-term impact of COVID-19. Our primary goal is to protect our business while keeping the core of our team intact and supported the best we possibly can during the uncertain days, weeks or even months ahead.

As you all know, this is a fluid situation. I'm proud of our team's response to the evolving challenges. We remain hopeful that the impact will be brief and the uncertainty will go away quickly. But in the meantime, our team is preparing to stay ahead of the disruption and continue to provide support to our customers when called upon.

In closing, I don't want our solid finish to 2019 to get lost. It was a very strong fourth quarter and full year across our endoscopy products with the OverStitch train continuing to move forward. We made substantial progress on a number of initiatives to address our business outside the United States, position the business for steady margin improvement and reduced our operating expenses as we scaled the business in 2019. In normal times, I would tell you that we are excited for the year ahead but the immediate future is unpredictable, and we must prepare for a disruption in the short term. Instead, I will tell you that we have taken decisive steps to prepare for this disruption, while working hard to take care of our customers and our employees through these times. We look forward to emerging on the other side of this coronavirus curve and moving back to more normal operations again.

So with that, we'll now open the lines for questions. Christie, could you please open up the lines?

(Operator Instructions) And we do have a question from Adam Maeder with Piper Sandler.

Congrats on the solid finish to the year. First question for me is just on the OverStitch performance. Can you talk a little bit more about kind of what -- I guess what drove the strong U.S. performance in the quarter? Was it increased utilization? Or new clinician adds? And can you maybe give us some color on what volumes look like by procedure type, whether it was ESG or other procedures? Then I have a follow-up or 2.

Thank you, Adam. Actually, the mix of procedures is probably, by itself, one of the key contributors to U.S. performance in the fourth quarter. U.S. OverStitch utilization has become less dependent on any one procedure and is fairly well spread between both the bariatric uses and also core GI uses. And as a result, that has been a key to success in the U.S. as we see utilization increasing across all those, let's call it, uses for the device today. Obviously, new users contributed. But I would say, by and large, the most important factor is increased utilization of pre-existing users across that more broad mix of procedures that use OverStitch.

Okay. Appreciate that color. And then a follow-up on Sx, it sounds like you're making good progress there outside the U.S. Are you able to comment on the mix between dual and single channel products in Q4? How do you envision that playing out this year? And then one more follow-up from me, guys.

Sure. On the dual versus Sx, I think our anticipation is that, by and large, existing users who have become comfortable with the dual-channel device, will continue to want to use that. New customers will likely find the Sx particularly compelling because, again, it removes that scope, capital purchase decision. And so that would be our anticipation going forward, a lot of continuation of dual channel with existing pre-existing users who are very comfortable with it. And then the Sx primarily in a number of new accounts who have yet to make that capital equipment purchase decision, who are also not necessarily already familiar with how the dual-channel device works. And so for them, it doesn't represent any kind of change in just what they've become used to.

Okay. Got it. That's very clear. And just lastly, recognize you're not providing guidance with the COVID-19 situation. But maybe you could talk through kind of how you view your business from a procedure deferrability standpoint, both with OverStitch and Orbera? Just trying to get a better sense for the percentage of procedures that could potentially be deferred a few months before coming back to the operating table or clinic. Just any color you could provide there would be great.

Yes. And then the last question of yours, Adam, is really difficult for us to put a thumb on as we sit here today. What we are experiencing is in a number of hospitals. The definition of elective procedure includes just about any endoscopy scoping or diagnostic procedure. And if the underlying diagnostic procedure is being considered elective, that obviously is going to impact our business a great deal. It's hard, though, for us to give you much more color than that. We hope again that this impact will be short-lived.

And next, we'll move to Matt Hewitt with Craig-Hallum.

Maybe to follow on a couple of those questions regarding -- not so much visibility. But as you look at the fourth quarter, how much of the ESS revenues would you say could be attributed to revisions or repairs where -- because I would think that would be a relatively consistent piece of the business.

Yes. And we don't have perfect information about the underlying procedure. But we have decent information about it. And in the United States, it's probably more than 50% of our business would be what we would call core GI. And so that's, I think the, if you will, the piece of the business that probably has less dependency on factors that are -- that drive the cash pay marketplace. So definitely more durability, I would say, on the core GI side than compared to the bariatric side.

Outside the United States, it's -- core GI is a smaller percentage. So while in the U.S., we have this nice healthy 60% or so number being core GI, outside the United States, it's probably more flipped to where it's no more than 20% would be core GI. And again, these are imprecise numbers that we have but decent numbers. And that's one reason why the core GI focus outside the United States over the past year has been really important to us. And we've made progress in terms of making core GI a larger portion of the OUS business. Nonetheless, today, as we sit here right now, our OUS business does not have the same degree for GI base within it as we have in the United States.

Okay. That's really helpful. And then, I guess, given -- I realize it's not perfect visibility, but as you look at the last couple of weeks, particularly here in the U.S. as states have essentially shut down, hospitals are restricting access, has that business, that core GI, more of the revision-type business, has that held up fairly well under the circumstances?

Well, Matt, I'd tell you this, that over the last couple of weeks, we definitely have seen a slowdown in our business. I can't say that it's slowed down as expected because, frankly, I don't know that we had really a solid expectation one way or the other. I mean we felt it was going to be down, and it has been down. So I don't really want to get into measuring the results that we're seeing as a business on a daily or weekly basis, of course. But nonetheless, we have seen -- after a really good first couple of months of 2020, we have seen a very notable slowdown here in the month of March.

Okay. And then maybe one last one for me. As we look past this, I mean, we don't know how long it's going to last. But as we look maybe to the summer, maybe it's fall, once we start to come out of this, given some of the moves that you've taken on the OpEx side to preserve cash, yet you've still got some pretty big opportunities coming out with the MERIT study potentially, maybe even getting some interim data, but regardless, as we come out how quickly can you get the pieces back in place kind of start reinvesting again and get that business ramping back up?

Thanks, Matt. Another difficult question to give a lot of clarity on. But I do feel optimistic and the main reason why is because we have, with our technology, something that's very unique. And as a result of that uniqueness, we also have something that creates just an enormous amount of user loyalty. So I think it's really a question of when can our user base really be allowed to do their thing again. And when that starts to happen, I have a strong sense that our business will bounce back very quickly as well.

And that does conclude our question-and-answer session for today. So I'll turn it back over to management for any closing remarks.

Well, thank you, Christie, and thank you, everyone, for joining us today on the call. As usual, if you have any questions or would like to arrange a meeting with us, please contact Matt Kreps of Darrow Associates, whose contact details are listed on our press release today. Stay safe, everyone, and thank you again for joining us today.

Thank you. This does conclude today's teleconference. We appreciate your participation. You may disconnect your lines at this time and have a great day.