Vyome Holdings Inc (HIND) 2018 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to Obalon Therapeutics Third Quarter 2018 Financial Results Conference Call. (Operator Instructions) As a reminder, this conference call is being recorded.

I would now like to turn the conference over to Bill Plovanic, Chief Financial Officer for Obalon. You may begin.

Thank you. Good morning, and welcome to Obalon Therapeutics Third Quarter 2018 Financial Results Conference Call. With me on today's call is Andy Rasdal, Chief Executive Officer; and Kelly Huang, President and Chief Operating Officer of Obalon. This morning, the company issued a press release detailing our financial results for the 3 and 9 months ended September 30, 2018. This release can be accessed through the Investor Relations section of the Obalon website at obalon.com. You can also access the website (sic) [webcast] of this call from there.

Before we get started, I would like to remind everyone that any statements made on today's conference call that expresses a belief, expectation, projection, forecast, anticipation or intent regarding future events and the company's future performance may be considered forward-looking statements as defined by the Private Securities Litigation Reform Act. Forward-looking statements in this release include Obalon's financial guidance for the full year 2018 and its expectations regarding the near- and long-term growth potential of its business. These forward-looking statements are based on information available to Obalon management as of today and involve risks and uncertainties, which include, but are not limited to, the risk factors disclosed in the periodic and current reports by the company filed with the SEC from time to time, including the Form 10-Q for the quarter ended September 30, 2018.

Such forward-looking statements are not guarantees of future performance. Actual results may differ materially from those projected in the forward-looking statements. Listeners are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. Obalon specifically disclaims any intent or obligation to update these forward-looking statements, except as required by law. The archived webcast will be available for 1 year on the company's website, obalon.com.

For the benefit of those who may be listening to the archived webcast, this call was held and recorded on November 2, 2018. Since then, Obalon may have made announcements related to the topics discussed, so please reference the company's most recent press releases and SEC filings.

And with that, I'll turn the call over to Obalon's CEO, Andy Rasdal.

Thanks, Bill. Good morning, everyone. Thank you for joining us today. This morning, we announced as a part of a planned succession on January 2, 2019, the company will promote Kelly Huang to the role of Chief Executive Officer, and I will be moving to the role of Chairman of the Board. More than a year ago, we brought Kelly in as Chief Operating Officer to lead commercial operations, including sales, marketing, manufacturing and quality assurance. Based on his strong performance in that initial role, in August, we promoted Kelly to the President of Obalon and added the R&D and clinical regulatory functions to his responsibility. Kelly has continued to demonstrate that he is a strong and capable leader, and we believe he will be effective as CEO of Obalon.

After serving as CEO for over 10 years, I continue to be as optimistic as ever about Obalon's future. Most importantly, we have demonstrated that we have a differentiated solution that is functioning as intended to meaningfully address one of the largest global health care crises, obesity. I intend to stay actively involved as Chairman, primarily to serve as a resource to Kelly and will also focus on several key strategic projects to help build the intragastric balloon market and create sustainable value for Obalon. We will provide more specifics on the transition in roles when the change becomes effective in January.

I will now review the highlights of our commercial progress and our product and clinical performance in the third quarter. I will then hand the call over to Kelly to discuss his thoughts about the transition and future strategies. Following that, Bill will review our third quarter financial results and specifics about our underlying business. We will then briefly answer questions.

We were pleased to see Q3 '18 global revenue improve 9% as compared to Q2 '18, led by a growth in U.S. revenues of 17% versus the second quarter of 2018. Reorder sales continue to drive growth sequentially, rising 45% from Q2 '18 and accounting for 79% of U.S. revenues in Q3 '18.

We're very pleased that our customers are finding both clinical and economic value from using the Obalon Balloon System in their practices. The number of new accounts sold in Q3 '18 declined, as expected, giving our revised go-to-market strategy and our more selective targeting to sell into new accounts that we believe will become productive faster.

We continue to be encouraged by our initial results in and potential for the aesthetic retail medicine channel going forward. We now have initial experience with several such accounts of different sizes and practice configurations. The one common denominator we see in this retail medicine channel is a more efficient patient funnel that results in higher patient conversion rates and treatments. However, not all pilot programs are immediately successful out of the gate, but rather, in a new therapy category, require very cooperative and flexible partnership approach.

We have spoken previously about one of our largest potential retail medicine customers, Sono Bello. Although we have been impressed with their sophisticated patient acquisition and conversion capabilities, we have not been able to obtain alignment with them on the best clinical implementation for the Obalon Balloon System.

Sono Bello has not expanded into as many new sites as we would have expected when we signed a new agreement with them in Q2 '18. At this time, we have declined the request for purchases that fall outside the terms of our agreement, and as a result, they have indicated their intent to reduce or continue -- discontinue future purchases of our product.

We are progressing with other pilots in the retail medicine channel, and Kelly will speak in more detail later about our strategy for expanding our presence in this channel.

We've continued to work on the approval and potential commercialization of the Obalon Navigation System, which is intended to eliminate the need for x-ray imaging during balloon placement and to remove what we believe to be the largest barrier to getting a new account onboard and productive more quickly. We believe navigation has the potential to both increase adoption in our existing target channels, bariatric surgeons, GIs and aesthetics and could also potentially expand the use of Obalon into new channels of other specialties, such as OB/GYNs and bariatricians.

During Q3 '18, we submitted a new PMA supplement for the Obalon Navigation System, including human clinical data from a large multicenter clinical study. This PMA supplement also supports a modification to the Obalon Navigation system to be compatible with a touch dispenser.

In late October 2018, we received a major deficiency letter from the FDA in response to this filing, in which the agency requested additional information, analysis and clarification. Importantly, there was no specific request for additional human clinical data. We expect to submit a response to the deficiency letter in a timely manner, with a goal to meet our initial time line expectation and still obtain a decision from the FDA Navigation in the first quarter of 2019. However, we cannot accurately predict the FDA's timing for a decision or the outcome of their ultimate decision.

As we previously announced, we received FDA approval for our PMA supplement for the Touch Inflation Dispenser in Q3, although this time, we only intend to launch Touch in combination with the Navigation System, if approved.

In Q3 '18, we also improved our financial efficiencies, resulting in a lower cash use, increased gross margin and reduced OpEx spend through a more focused set of activities. These increased efficiencies, along with the $10 million equity raise in Q3 and access to an additional $10 million loan facility that we previously announced, are extended -- are intended to extend our financial runway.

Finally, and most importantly, our product performance continues to be strong in the commercial setting. As is observed with the liquid-filled balloons, FDA approval does not always mean products perform the same in commercial use as they have in controlled clinical trials, especially in the field of obesity. We believe we have a novel, clearly differentiated technology that is performing as intended in practice, and the clinical and scientific communities are increasingly taking note.

On November 14, the commercial registry of clinical outcomes data that was systematically collected on over 1,300 patients from 108 sites during our first year of commercial use will be presented at the American Society for Metabolic and Bariatric Surgery, or ASMBS, conference, the largest medical and scientific meeting focused on obesity. We believe these datas will provide further clarity surrounding performance of the Obalon Balloon System and will further differentiate our solution from other temporary weight-loss devices, including the liquid-filled balloons.

That completes my prepared remarks. And I would now like to turn the call over to Kelly.

Thanks, Andy. I joined Obalon in August 2017 as COO based on the opportunity I saw for the Obalon technology to impact obesity, one of the largest public health concerns globally. Addressing this problem is our primary mission, and we believe that our Obalon Balloon System offers a true solution for weight-loss practitioners and obese adults. In my view, this opportunity has the potential to create significant and sustainable value for patients, the health system and our shareholders.

I would like to thank Andy and the board for placing their confidence in me to lead Obalon as CEO beginning next year. Moreover, I'm pleased that Andy will stay on as active Chairman allowing me ready access to his vast knowledge and experience with Obalon and the obesity market.

During my tenure thus far at Obalon, I've been most impressed by the quality, commitment and passion of the team. I've retained many members of the original team, but I will also rebuild the sales, marketing and operations teams in order to take Obalon to the next level of performance. I'll provide more detail around our strategy and tactics for 2019 and beyond, when my transition to CEO becomes effective in January 2019.

In the meantime, I'll briefly highlight several key areas that are a focus for Obalon. First, patient safety, clinical outcomes and product quality will continue to be our highest priorities as we establish the differentiated benefits of our weight-loss solution.

Second, we look to accelerate our commercial penetration by creating a sustainable reorder demand with an emphasis on expanding in the aesthetic retail medicine channel and leveraging those capabilities to help the traditional providers become more productive.

Third, we will continue to advance the new product pipeline, especially the potential approval, and if approved, the launch of Navigation with the Touch Dispenser, which we believe is on path to obtain a decision from the FDA in the first quarter of 2019.

And finally, I'll be working closely with Bill Plovanic in an effort to improve our financial performance and financial strategies to ultimately make us more financially independent.

And with that, I'll now turn the call back over to Bill Plovanic to review the financial results for the third quarter. Bill?

Thanks, Kelly. Today, I'd like to share details on our financial results for the third quarter ended September 30, 2018. As a reminder, we began U.S. commercialization of the Obalon Balloon System in January 2017, and in the third quarter of 2017, we began shipping our current generation 6-month treatment product to our Middle East distributor. I'll compare Q3 '18 to Q2 '18 as I believe sequential growth is what a majority of investors are most interested in at this stage of our development.

Third quarter revenue was reported at $3 million compared to $2.7 million in the second quarter of 2018. U.S. revenues of $1.8 million were up over 17% compared with $1.5 million in the second quarter of '18, and that was driven by a 45% increase in reorder kit sales.

Reorder kit sales grew to $1.4 million in the Q3 '18 and represented about 79% of U.S. revenue. This was up sequentially from about $1 million of reorder kit sales in the second quarter of 2018, which represented approximately 64% of U.S. revenue. Furthermore, number of active accounts increased to 62 as of September 30, 2018 up from 50 as of June 30, 2018. And as a reminder, we define an active account as a practice site that has purchased reorder kit in the prior 6-month period.

In the third quarter of 2018, we sold 12 new start -- net new starter kits as compared to 26 in the second quarter and 17 in the first quarter of 2018. As a reminder, at the end of the second quarter of 2018, we made changes to the sales force, which included consolidating new account acquisition and existing account business development roles. We also made our new account targeting process more selective with the intent to have new accounts become more productive faster.

International sales were $1.2 million in both the third quarter 2018 and the second quarter 2018. As a reminder, we began shipping our current generation Gen 3 6-month duration product to our Middle East distributor in the third quarter 2017. We continue to believe our greatest opportunity for creating value is meaningfully executing in the U.S. We plan to continue to make the U.S. our highest priority.

Our contract with our Middle East distributor expires at the end of 2019. We expect to comment more about the future of that relationship later in 2019.

Cost of revenue was $1.4 million in the third quarter 2018 as compared to $1.7 million in the second quarter of 2018. Gross profit for the third quarter 2018 was $1.6 million and that compared to $1 million in the second quarter.

Gross margins were up sequentially to 53% in the third quarter versus 37% in the second quarter. Improvements in scrap and the increase in U.S. sales and the reduction in the impact from components of our value-added marketing programs contributed to the sequential improvements. But also note that overhead continues to be the largest component of cost of goods sold. And therefore, higher volumes would provide improved cost efficiencies.

R&D expense for the third quarter of 2018 totaled $2.4 million and that

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$3.4 million in the second quarter of 2018. The second quarter of 2018 included costs associated with gathering a significant amount of clinical data for support of our PMA's filing for the Navigation system with the Touch Dispenser.

We have continued to make investments to support development of our new product pipeline, primarily intended to make the Obalon Balloon System easier to use, more convenient and more economically attractive to help expand our overall market opportunity.

SG&A expense for the third quarter totaled $5.8 million and that's down from $7.3 million in the second quarter of 2018.

At the end of the second quarter 2018, we revised our go-to-market strategy, which included changes to our sales force structure. We also implemented a targeted plan of action that prioritizes our operational spend and more efficiently support our existing and future customers. This resulted in reduced spending across operational functions.

The operating loss for the third quarter was $6.6 million, that's a $3 million improvement from a loss of $9.6 million in the second quarter of 2018. Net loss for the third quarter of 2018 was $6.7 million or $0.35 per share based on diluted -- weighted diluted average common shares outstanding as compared to $9.8 million or $0.57 per share in the second quarter of 2018.

We ended September 30, 2018 with $29.7 million in cash, cash equivalents and short-term investments. We reduced our cash usage in Q3 '18 by 33% or $2.8 million to $5.5 million of cash usage in the third quarter 2018. This compared to $8.3 million in the second quarter 2018.

Combining our cash -- access to capital with our amended loan facility and the manner in which we're now managing our spend, we believe that we have extended our cash runway through Q4 '19, although we may still spend opportunistically to accelerate adoption and market development or raise additional capital.

We are tightening our global revenue guidance for 2018 to a range of $9.0 million to $9.9 million from a range of $9.0 million to $10.5 million. For the U.S., we're targeting revenue in a range of $4.6 million to $5.4 million, down from $5.5 million to $6.5 million. For international, we're targeting revenue of approximately $4.4 million, up from a range of $3.5 million to $4 million.

The updated U.S. revenue range includes the following assumptions: one, the impact from an expected reduction or discontinuation of sales from Sono Bello; two, no expansion of our U.S. sales force in the second half of 2018; three, the impact from fewer new accounts through the first 9 months of 2018, which also impacts overall follow-on reorder business associated with those accounts; and four, the impact from offering a starter kit configuration with a smaller upfront commitment from the physician, reducing the amount of initial revenue per new account.

As we think about Q4 '18 revenues, it is important to note that the revisions to our sales structure occurred at the end of the second quarter and feel they're still transitioning to this new structure. We also believe there will be a slowing of interest in weight loss and weight loss-related procedures over the end-of-the-year holiday period beginning with Thanksgiving.

And lastly, given the amount of information that we have publicly shared on our Navigation product and our expectation for an FDA decision in Q1 '19, we believe there could be accounts delaying purchasing decisions for both new starter kits and reorder kits.

At this time, I'd like to provide certain underlying business metrics for Q3 '18 that we use internally to analyze the business. One, percent of U.S. revenues to total revenues grew in Q3 '18 to 61% that compared to 57% in the second quarter and 37% in the first quarter. Two, the number of net new starter kit sales in Q3 '18 decreased to 12 that compared to 26 in Q2 '18 and 17 in Q1 '18. And lastly, the percent of total U.S. revenues for reorder kits increased to 79% in Q3 '18 and that compared to 64% in the second quarter and 60% in the first quarter.

And as a reminder, we will be presenting at 2 upcoming conferences in New York City: the Stifel Healthcare Conference on Wednesday, November 14, and the Canaccord Medical Technology Conference on Thursday, November 15.

And with that, my comments are complete. Operator, will you please now open the line for questions.

(Operator Instructions) And our first question comes from David Solomon from Roth Capital Partners.

Congrats Kelly on the promotion. So I just wanted to get started with Sono Bello quickly on do they have -- what are they going to be doing with their inventory? Are they planning on just treating the patients they have? Or what's -- can we get any more color on that? I understand that it could have some material impact on revenue in the next couple quarters, but I just want to understand how to think about this?

Yes. I think for Sono Bello adding an interventional weight-loss product to their service offering required a shift in their clinical logistics, just as moving the aesthetic retail medicine channel was new for Obalon. I don't think it's unexpected. There were challenges on both sides to optimize the results. We can't comment in specifics, but again, we've been impressed with their very sophisticated patient acquisition conversion capabilities, and we've learned a great deal that we continue to leverage into that and traditional provider channels. We couldn't agree to the purchase terms that they demanded that fell outside of the agreement at that time. We're continuing to expand our efforts to the retail medical channel. We're interested in working cooperatively in a partnership approach with all such accounts, including Sono Bello again to establish this as an important and viable channel for this weight-loss treatment. And so ultimately, how they continue forward will be up to them. We remain open, willing and able to work with them under the terms that we had established.

Great. It was my understanding that they were potentially increasing sites. So that's why I was just kind of surprised by this news this morning. And then, lastly, on this major deficiency letter for Navigation, can we get just a little bit more color on that? That would be really helpful.

Yes, sure. I think the major deficiency letters are not at all unusual. In this case, they've requested additional information, analysis and clarification. I think most importantly, there was no specific request for any additional human clinical data. We expect to submit or respond to the FDA in a very timely manner and get them back on the clock with a goal to meet our initial time line expectation and a decision in 2019. We believe that we provided the FDA with a very significant and extensive evidence of the safety and efficacy of the Navigation, both in terms of engineering tests and the clinical trial data. We previously said that we ran a trial with roughly 400 balloon placements at 15 sites with literally 100% success for both Touch and Navigation in that. And so we believe that Navigation and Touch are important to not only Obalon, the evolution of the category, physicians and patients to both improve the ease of use, reliability and potentially improve the economics for both of those, and we'll continue to vigorously pursue FDA approval in the most timely manner.

Great. So you think this would be more of a delay than -- is this more of a when than a if? Or is it hard to say at this point?

Well, I think we're still -- also I think we can comment on is that we're -- we believe that we're still on track for a decision in the first quarter. I'm always hesitant to more accurately predict the timing around that or their ultimate decision, but, as I said, the data set is very compelling.

Absolutely. And then, just lastly, Kelly, congrats, again, on the promotion. And I understand that there have been a number of tangible steps that you guys are trying to take to improve the patient lead to patient treated ratio, including a call center and a whole number of other things that you guys recently discussed on the call. And I was just wondering if any of the increase in reorder revenue recently has been driven from any of those initiatives? Or are we still waiting to take some of those tangible steps?

Yes. Thanks, David. You're right. We are working towards making that process more efficient. I think as we look at retail medicine, the idea of treating patients like consumers is something that we believe in, and we're trying to bring those capabilities to even the traditional private practice accounts. So we're early in those stages, David. I don't want to give any quantitative metrics on that, but yes, I do believe that our embracing of our top-performing and top potential accounts as well as adding value-added services to help make this a more retail-like experience for the patients is starting to take traction and will continue as we drive our pilots and formalize larger scale implementation.

And our next question comes from Kyle Rose from Canaccord.

I wanted to kind of circle back on Sono Bello. Maybe can you frame that out a little bit, the decision process and I guess, what happened over the course of the last 3 months since we last checked in? And then, I guess, help us understand, is it more of a commercial disagreement? Or was there something in the way that they were thinking about treating patients maybe 2 balloons versus 3 balloons? Is there something that was different in the treatment method that they were thinking about that led to the separation or was it purely 2 parties can't agree on commercial terms?

Yes. Look, I'd like to be real clear that first and foremost, there was no safety concerns from our aspect or I would hope Sono Bello's that led to anything. It is just -- this is a very different channel of business for retail medicine to adopt. And there is a number of complexities on both sides of that. And so, like I said, we remain extremely impressed with their capabilities in patient acquisition, their ability to convert that into treatments and then I think to provide the patient with a very sophisticated retail experience. But as we said, I think specifically, there were commercial disagreements on the commercial terms for this quarter. And so they have expressed that they may either slow or discontinue at this time.

But, Kyle, to be clear in terms of implementation, we have seen across the field implementation of 3 balloon therapy for significant majority of the patients. The product is being used by the field as indicated as a 3-balloon therapy.

Okay. I appreciate the additional color there. That makes it much clear. And then, Bill, when I think about OpEx, I know that you guys have made some burn changes as far as tighter allocating resources in this interim period before Navigation comes on. That said, some of the OpEx came in a bit lower than we were expecting. I guess, can you kind of frame this out for us, is this what we should think as a floor moving forward to kind of base our modeling off of? Or was there something onetime in terms of where expenses fell this quarter that we should think about when we're modeling?

Yes, Kyle. So at the end of the second quarter, we had said we made some changes -- the revised go-to-market strategy with the sales force combining the role of the acquisition and the business development into one role. So that component would be a permanent change. Some of the other things just tightened our belts a little on spending, it became more efficient. During the first 18 months of commercialization, we've learned a lot of things. We spent some money in some areas that we learned from and we learned not to reinvest in. And so we've become more frugal in our spending. That said, we are growing the market, and we're growing the business here. If we expand the sales force or if and when we expand the sales force or we continue to invest in new products or technologies, that would require investment on our part. So I don't think we can look at this and say that this is a sustainable for the foreseeable future. I mean, we will continue to invest in the business as we see fit.

And our next question comes from Rick Wise from Stifel.

This is Dylan Haas on for Rick. I just had a question on the pipeline. It's encouraging to see the Touch Inflation improve and next year, you're not expecting any impact on the timing for Navigation. But once you do get Navigation, can you provide some color on your expectations for the impact that -- any implications like that for new account opening, better utilization? And what the kind of rollout strategy might be if initially either again in new accounts or bringing that to some of your current accounts? Also, if that could have any impact on the Sono Bello relationship.

Yes. Thanks, Dylan. This is Kelly here. We certainly look at Navigation and Touch Dispenser being an easier-to-implement solution across multiple channels. So we believe that, that will certainly help physicians adopt the Obalon solution. Certainly, we look at customers that we go to today and potential new targets, potential new areas of territories that we do not cover. So we do look at Navigation as a significant catalyst for the company.

Yes, I think the impact obviously is of not having to purchase an x-ray and all of the logistics associated with getting that up, especially in like the retail medicine channel, where in the retail medicine channel, you wouldn't expect to have x-rays imaging equipment at this time. Eliminating that barrier, I think, is potentially very important. If you're a chain and you're looking to expand to multiple or more accounts, it makes it faster, less expensive, easier, and hopefully, ultimately, more profitable for those chains as well.

And our next question comes from Ben Haynor from Alliance Global Partners.

First off for me, just on, I know you kind of mentioned the retail medicine and how impressed you've been, at least with Sono Bello's kind of conversion funnel, and what you've learned and how you may be able to apply that to bariatric and some of the other channels? I guess, early on, is there any anecdotal information that you can give us on the receptiveness of some of these other channels that maybe aren't used to the retail medicine-type conversion funnels?

Yes, absolutely, Ben. I mean, a simple one is just a number of inquiries you'll get on the procedure and being able to call these patients back. Our experience with the social media channels, a lot of these patients, you need to call back within minutes, not days. So we've a lot of interest among private practice accounts for us to help them do that. So absolutely, converting those people that are interested in the treatment is something that we feel we can help accounts do better and there is a lot of reception to that.

And certainly, I think, Ben, the other thing it does is, you take Sono Bello or some of these other retail channels, we give good benchmarking in what the conversion rates are. They tend to be substantially above the more traditional channels. And once you share with them what other folks can do, we find that they at least want to rise to the challenge, in many cases are moving on a path to be as productive in converting 2 phases, right, that initial lead or interest into consultation and then increasing their ability once the patient is in consultation to convert that to actual treatments.

Okay. That's certainly helpful. And then, Bill, on the guidance update, does that effectively assume that Sono Bello discontinues entirely? Or does it assume kind of the run rate for October is the run rate for the remainder of the year? Or do you have any additional color on how that impacted the guidance for 2018?

Yes, Ben, at this point, we looked at the numbers, and frankly, we've discontinued them in our numbers 100%.

Okay. Perfect. And then, lastly, I don't know how much color you can give on this, Andy, but you mentioned the strategic projects you'll undertake once you transition over to Chairman. Any additional color that you can provide there?

I think we'll probably defer that, as we said, to the time of the actual transition where I would expect, most importantly, Kelly, can give more specific thoughts about what his plans are for 2019 and forward, especially as he'll be fully responsible for the day-to-day operations and decisions. And with that, we'll probably give a little bit more color around the general categories, the activities I pursue, but it's certainly been more than a decade here, remain committed and passionate and involved.

Okay. And then lastly from me, if I can sneak one more in here. Obviously, the 1,300 plus patients that we're going to see here at ASMBS, are there any other posters or presentations or papers that we should be on the lookout for at the conference here in a couple of weeks?

Ben, we will also be hosting a symposium. We'll put a press release out next week that on balloons will be hosted the day prior, so the data will be presented on November 15 and then on November 14, there will be a symposium that will be held that we will press release next week with more details.

Yes. I think this will be the primary data set. It's our belief this is the largest single data set ever prospectively could collect on the commercial use of an intragastric balloon, 1,300 patients, consecutive, sequential, not cherrypicked in any manner, is a very, very powerful data set. And so I think we'll keep the focus on that.

Thank you. And I'm showing no further questions at this time. I'll now like to turn the call back to Bill Plovanic, Chief Financial Officer, for any further remarks.

Great. Thank you for your continued interest in Obalon. Have a great day.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes today's program. You may all disconnect. Everyone, have a great day.