Q4 2019 Earnings Call
Good day, ladies and gentlemen, and welcome to your Apollo Endosurgery fourth quarter and full year 2019 results call.
All lines have been placed in the listen only mode and the floor will be open for questions. Following the presentation. If you should require assistance during the conference. Please press star zero on your telephone to reach alive operator.
At this time, it's my pleasure to turn the floor over come back.
Sir the floor is yours.
Thanks, Christy thanks, everyone for participating on today's call to discuss Apollo's fourth quarter yearend 2009, Chief financial and operating results. Joining me on the call are taught Newton Chief Executive Officer, There's definitely Cavanagh Chief Financial Officer.
Before we begin I'd like to caution listeners the comments made by management. During this conference call will include forward looking statements within the meaning of federal Securities laws.
Looking at all its financial outlook oppose plans autonomy product development sales.
In addition, there was uncertainty about the spread of the coding Nike virus and yields what impact you may have an operations the demand for products global supply chains economic activity in general.
These forward looking statements involve material risks and uncertainties.
And all those actual results may differ materially.
For discussion of risks factors I encourage you to review the company were poor form 10-K for the year ending December 31 2019.
Filed today with Securities Exchange Commission.
The content of this conference call contains time sensitive information 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 reflect events or circumstances. After the date of this call.
During this call we will air change when we use the term, yes asked for overstated and a term I'd be well Dara and vice versa, and it's called it will also referred to a term continuing product revenue.
Excos revenues associated with our surgical products, which we divested in on December 17 2018.
Continuing product revenue will differ from our GAAP revenue as we will still report historical and transitional surgical product. So it's part of our GAAP revenues.
Reconciliation exist and any other adjustments the company's GAAP operating results can be found art form 10-K filed today.
Now I'd like to turn the call over to talk.
Thank you Matt Good afternoon, everyone and thank you for joining todays call to discuss our fourth quarter and full year 2019 results.
And 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 locked down due to the cobot 19 pandemic.
And all indicators.
Over the last two weeks had been pointing to a historic disruption of the general economy in the health care World is we have known it.
Disruption from Cobot 19 is now a reality and the great uncertainty uncertainty we're facing is how long until our world will return back to normal.
We're seeing a hibernation of what we have always considered to be normal human interaction as society takes unprecedented stepsons attempt to control the spread of the virus.
So we will discuss this afternoon into 2019 results. We released today, which include a solid fourth quarter performance, but we will also dedicate time to discuss the impact of cobot 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 2018.
In particular, the U.S. finished well with overstep sales up 33% in or bear a revenue.
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 had 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 in Spain to markets, where we had previously discussed challenges in are actively engaged in programs to improve results.
Due to those markets and the timing of distributor orders overstated sales outside the United States declined 13% in constant currency compared to Q4 2018.
But excluding Spain in Brazil in Brazil results Overstates direct market growth was 24% in Q4 and 28% in constant currency.
In aggregate.
Outside the United States are Ribeira 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 the 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 Stephanie now to cover our financial results in greater detail stuff.
Thank you Todd and good afternoon, everyone.
Fourth quarter consolidated endoscopy product sales increased 9% as reported and 10% in constant currency.
In particular, you asked the endoscopy sales increased 31% to $5.6 million in the fourth quarter, 64% of endoscopy product sales related to Fs and the remaining 36% of course related to I'd be products out.
Beginning with DFS worldwide, Yes, that's product sales increased 8% as reported and 9% in constant currency.
You asked if that's product sales increased 33% to $4.4 million in the fourth quarter of 2019.
Outside the U.S., Yeah, that's product sales decreased 15% as reported and 13% in constant currency to $3 million due to declines in Spain in Brazil as Todd mentioned.
In addition, the fourth quarter 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 2018 compared to 2019.
Consistent with our results throughout the year, yes, that's growth continuing to be driven by both expanded procedure used by existing customers and the addition of new users.
[noise] inter gastric balloon or IGBT sales and volumes were up in both our other U.S. and U.S. markets in the fourth quarter worldwide RGB sales increased 11% as reported and 13% on a constant currency basis for the quarter.
You will actually be sales increased 23% to 1.2 million in the fourth quarter of 2019 and O U S. RGB 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.
Yes, so sales increased 21% as reported and 23% in constant currency to $28.3 million.
Price to have a 36% increase in U.S. assets, and a 13% constant currency increase Oh you.
I'd be sales for the year decreased 5% as reported and 3% in constant currency comprised of a 4% decrease in U.S. RGB and a 2% constant currency decrease our U.S.
[noise] as everyone on this call nice we sold our surgical product line in December 2018, which directly affects the side by side comparability of our total GAAP revenues in the fourth quarter and year 2019 with the same periods in 2018.
This comparability issue will diminish throughout 2000 throughout 2020 as residual lab and revenue. We continue to report in 2019 decline throughout the year as we completed our U.S. distribution services obligation.
We are actively engaged in multiple gross margin improvement projects that will lower our he asked unit costs, Yes, S. 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 overstate system from an alternative supplier with a lower cost.
In September 2019, the FDA cleared our five 10-K for polypropylene suture anchor suture anchor Assembly, what we also call Apollo feature.
Which allows us to bring a lower cost suture anchor component to the U.S. market.
This feature component cost reduction project, we completed in 2019 are expected to reduce our product cost by 1 million on an annual basis.
The Apollo suture is also expected to enable further international market expansion for assets 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 SaaS products, which pregnant, we realized a lower gross margin than either the RGB 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 price in terms of the manufacturing and distribution services agreements, we entered into with the buyer of the surgical product line.
Nonetheless in total these another efforts drove.
Close to a 600 basis point improvement and 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 2019 increased to 49% compared to 47% for the fourth quarter 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 dollar loss on the divestiture of our surgical product line.
Surgical product related intangible assets were written off its part of this divestiture, which also reduced intangible amortization expense during 2019 compared to 2018.
Including the loss on divestiture and the reduction in amortization expense, our 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 a surgical divestiture that I just referenced.
However, after adjusting out both of these one time operating expense items, our 2019 operating expense decreased 5.7 million compared to 2018.
The decrease in both Q4 and a 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 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.
Two more comments before I wrap up.
First as you will see in our form 10-K filed this afternoon. We recently completed an amendment for our credit agreement that established our 2020 revenue covenant requirements and provides 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 our independent registered public accounting firm due to the unprecedented uncertainty, resulting from the code in 19 pandemic on our near term business outlet outlook and the probability that we just felt to stay in compliance with our current financial covenants sometime within the.
The next 12 months.
We're 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.
2020 revenue minimums and the amendment are based on pre cobot condition.
But we agreed with our lender that we should take a wait and see approach to covert 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 and man exiting 2019 and in the first two months of the year. However, as you can probably I understand well placed any guidance on hold for now and remain hopeful that the climate at our next call we'll have less uncertainty.
With that I'll turn it back the Todd.
Thank you Stephanie.
The fourth quarter continued our 2019 trend of strong growth in our.
Oversteer trio says products as our US commercial organization delivered an impressive 33% increase year over year.
In the U.S., yes, as sales for the quarter in 36% growth for the full year of 2019.
Outside the U.S. in constant currency sales of Oreo sales products were up 13% for the year.
But the hallmark of our yes. This success is the excellent medical education were 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 everyday that would not be done into alumina leave without the physician confidence.
And supported by overseas, which in our.
Incredible talented team.
Our strategy to remove capital equipment school barrier to adoption is showing success, particularly in Europe with increased over stitch, Essex volumes in France, Germany in the UK, all of which were growing markets for us in the fourth quarter 2019.
As we commercialized NSX and introduced the benefits of into luminal suturing to a wider user base or product development team has in parallel developing oh.
Cool.
Colorada scope linked suturing solution with an improved gross margin profile the lower Gi track represents a very large endoscopy marketing, which over stitches limited access because of a scope compatibility barrier with the kaleidoscope just like we did with assets. We believe the weekend removed. This.
Next scope compatibility barrier and substantially expand our addressable market opportunity in doing so.
And we hope to report more belt this new product deferred later in 2020.
Medical Affairs has been another key contributor to our overstated success in 2019 more than 115 professional journal articles were published on Overstretch enabled procedures and research. These articles ranged widely from a paper in the journal gastrointestinal endoscopy that show.
At an average reduction in health care costs of $860 per procedure, when a softer she'll stance or sutured in place.
Using over stitch to a new mountain analyses that pool, the safety and efficacy data of more than 1700, DSG procedure patients from various investigator led studies of BSG procedure.
In January 2020 of the journal gastrointestinal endoscopy clinics in North America dedicated their entire issue to endoscopic closer techniques in advancements with eight of the issues 16 articles specific to the over stitch endoscopic suturing system, which discuss the history of the training and most importantly applications.
There are possible because of full thickness suturing enabled by over stitch.
For our entire gastric balloon products throughout 2019 or focus was to reposition or Vera to meet medical needs of patients suffering from diseases were obesity as a key factor and to assist patients in preparing for much needed surgical procedures were excessive weighed either limits the patients 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 and were bears effectiveness, especially in our European markets.
In the fourth quarter, we sponsored a first center of excellence event with Dr. Jude open a practicing clinicians at guys in Saint Thomas Hospital in London in Associate Professor of Hepatology at University College in London.
The again was full capacity, reflecting interest in dr. opens experienced with or bear to treat his patients with liver disease more such programs are planned with Dr. open and others to continue to create awareness through physician to physician conversations around there were 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 in a controlled and improving operating expense line.
Good on preoccupation today, and then definitely in the weeks ahead is the threat posed by the Kobin 19 epidemic. All indicators were able to see suggested a difficult second quarter lies ahead and the possibility of market disruptions from the Corona virus could extend beyond the second quarter.
While others are closed.
Our sales personnel have restricted access to hospitals and customers. Many of our key accounts are subject to restrictions in place store pending that will limit or eliminate elective procedures in order to create more capacity to address the community health burden of the current cobot 19 threat.
Capital markets as everyone on this call is experiencing.
Our 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 cancelled all education programs through the end of June this includes parking or mobile learning center and pulling out pooling our participation or support of any physician Society conference is planned for the second quarter to the extent that the society.
Itself and not already cancelled their programs.
We have also implemented a worldwide salary reduction program across the entire company is suspended or reduce 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 to commitments at this time.
We have lowered our production plants in deferred raw material and finished good purchases.
We have closed or California based device analysis lab and co located this critical function into our Austin, Texas facilities.
We have also restructure our Australian back office activity to further reduce costs on the clinical side, we expect there could be disruption to our mini studies, but to date. The Merritt trial has not been impacted since patients enrolled in a clinical study are being treated under a clinical protocol and have a certain price.
You're already 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 calculated today.
We believe these actions will allow us to withstand what we hope to be the short term impact to covert 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 teams 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 continued to provide some 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 soon strong fourth quarter and full year across our endoscopy products with the overstress stitch train continuing to move forward.
We made substantial progress on a number of initiatives to address our business outside the United States positioned 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 were excited for the year ahead.
But the immediate future is unpredictable and we must prepare for disruption in the short term instead I will tell you that we have taken decisive steps to prepared to prepare for this disruption while working hard take care of our customers area and our employees through these times.
We look forward to emerging on the other side of this corona virus curve and moving back to more normal operate operations again.
So with that we'll now open the lines for questions Christie.
Could you please open up the lines.
Thank you Sir the floor is now open for question. If you do have a question. Please press star one on your telephone keypad touch on that Q.
If you're using a speakerphone please pick up your handset to provide the best sound quality.
And we do have a question Adam major with Piper Jaffray. Please go ahead.
Hi, Todd and stuff. So thanks for taking the questions and congrats on the solid finish to the year.
First question for me is just on the overstate 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 ads and can you maybe give some color.
On what volumes look like by procedure type leather is SGR or other procedures on ita follow up or too. Thanks.
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.
US overstates utilization has become.
Less depended on any one procedure and is fairly.
Well spread between both the very accurate uses and also Fourg uses and as a result that has been a key to success in the us 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 enlarge the the most important factor is increased utilization of pre existing users across that debt more broad mix of.
Procedures that use over stitch.
Okay appreciate that color and then a.
A follow up on FX, 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 one more follow up from you guys.
Sure on the dual versus this x. I think our anticipation is bid 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.
Fine DSX, particularly compelling because again it removes that scope.
Capital purchase decision.
And so that'll be our anticipation going forward a lot of continuation of dual channel with existing pre existing users who were very comfortable with it.
And then DSX, primarily in a number of new accounts, who have yet to make that.
Capital equipment purchase decision.
Who are also not necessarily.
[noise] 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 co bit 19 situation, but.
Maybe you could talk through kind of how you view your business.
From a procedure to for ability standpoint, both went over stitch and.
Or bear out just trying to get our first 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 can provide there would be great and thanks again for taking the questions.
Yes, and then last question of years, Adam is really difficult for us to put it put us some 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 procedures.
And if the die underlying diagnostic procedures being considered elective.
Dead, obviously is going to impact our business are 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.
Okay.
That's understood. Thanks, so much Todd.
Thanks, Adam.
So.
[noise], having next will not come Matt Hewitt with Craig Hallum. Please go ahead.
Good afternoon. Thank you for taking the questions.
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 of the SMS revenues would you say could be attributed to revisions or.
Repairs were at work 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 G.
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 JCI side, then compared to two the bariatrics side.
Outside the United States.
It's a core GE is a smaller percentage so well in the U.S.. We have is this nice healthy 60% or so number being poor guy outside the United States, It's probably more flipped to where it's.
No more than 20% would be fourg.
And again these are in precise numbers that we have but but decent numbers and.
That's one reason why the core G. I focus outside the United States over the past years been really important to us and we've made progress in terms of making core G.
Larger portion of the owe us business. Nonetheless today as we sit here right now.
Our owe us business does not have the same degree Fourg base within it is we have in the United States.
Okay. That's that's really helpful and then I guess.
Given.
I realize it's it's not perfect visibility, but if the as you look at the last couple of weeks, particularly here in the U.S.
As you know states of essentially shut down hospitals are restricting access has that business that that court T.I. more of the revision type business has that held up.
Early well under the circumstances.
Well.
Matt I'd tell you this that that.
Over the last.
Couple of weeks, we definitely have seen.
A slowdown in our business.
I can't say that did.
It's slow 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.
It was going to be down it has been down so I don't really want to get into measuring.
The the results that were 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 slowed down.
Here in the month of March.
Okay, and then maybe one last one for me.
[music].
As we look past this I mean, we don't know how long it's going to last but as we look you know maybe to the summer maybe its fall once we start to come out of this given some of the moves that use you've taken on on the opex side to preserve cash.
And yet you still got some pretty big opportunities coming out with the merits 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 re start reinvesting again and get that business ramping back up thank.
Q.
Thanks, Matt.
Another.
Difficult question due to give a lot of clarity on but I do feel optimistic enough 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 that creates.
Justin 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.
Got it thank you.
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 Christine 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 those please contact Matt Cripps 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 at this does conclude today's teleconference. We appreciate your participation you may disconnect. Your lines at this time and have a great Dane.
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