Q3 2020 Apollo Endosurgery Inc Earnings Call

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Answer session you May Register to ask a question at any time by pressing the star and one on your Touchtone phone. It is now my pleasure to turn today's program over to Mac crabs. Please go ahead.

Thank you Gretchen and thanks to everyone for participating in today's call to discuss oppose third quarter 2020 financial and operating results Gona mailed the call or target and Chief Executive Officer, and Stuffy Cabinet Chief Financial Officer.

Before we begin I would like to caution listeners of comments made by management. During this conference call will include forward looking statements within the meaning of federal Securities laws nuclear Apollos financial outlook.

Those plans and tiny for product development sales.

In addition, there is uncertainty about the spread of COVID-19 virus and the ultimate impact and May have on our operations demand for our products global supply chains in economic activity in general these.

These forward looking statements involve material risks and uncertainties now as far as 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, because all of our most recent form 10-Q filed today with Securities and Exchange Commission.

Content of this conference call contained time sensitive information is accurate only as of the date of the slides broadcast November 5th 2020.

Required by law, Paul undertake no obligation to revise or update any statements reflect events or circumstances. After the date of this call.

The direct markets, where sales rebounded along with improved elective procedure volume, but slower distributor market recovery.

In addition, we still had some lab and sales back in the third quarter of last year, which affected comparability overall, our worldwide endoscopy product sales increased 21% in the third quarter compared to the third quarter of 2019.

With the recovery of procedure volumes in the third quarter, we brought our employee furlough program that began in April to an end in late September and 35 of the 57 initially furloughed positions were eliminated in order to produce a leaner operating structure.

Of course as business development business develops in future periods, we may need to expand our staffing levels, though we have no plans to do so at this time. In addition, we implemented a short term salary reduction program in April that affected all employees as part of the overall effort to offset the negative impact of COVID-19 on.

In our cash flows.

In August we began to restore employee compensation and as of November Onest compensation is now back to pre pandemic levels.

Finally, it was really important to us from the very beginning of the pandemic to keep moving forward on our most important future growth investments and I will give an update on these areas momentarily, but first I will turn the call over to Stephanie to cover the third quarter financial results in greater detail.

Thank you Todd and good afternoon, everyone.

As addressed in our press release and 10-Q filing from earlier today the dominant theme in the third quarter has been a rapid recovery from the COVID-19 disruption to elective procedure volumes in our direct markets.

As a result of this resurgence total revenues increased to $12.8 million again at 14% in the third quarter of 2020 from the third quarter of 2019.

Total endoscopy revenue increased 21% to $12.5 million worth us endoscopy sales, increasing 37%, while only two assets endoscopy sales increased 7%.

As Todd mentioned, we had divergent results and our Q O us sales channels.

And our direct markets these being the traditional major markets of Western Europe, and Australia, our product sales increased 46% from the third quarter 2019.

Demonstrating the return of elective procedure volumes.

This us direct market sales growth was offset however to a large degree by lower distributor purchases this quarter.

Third quarter. He asked to ask product revenue increased 15% from 2019, primarily due to a 28% increase in us FSS revenue, while you at NSS revenue was essentially unchanged from the third quarter of 2019.

SS product revenue in our us direct markets increased 35% from the third quarter, 2019, which was offset by lower distributor purchases.

Third quarter I GB product revenue increased 31% from 2019, primarily due to an increase of 70% in the U.S.. While you asked I'd be revenue increased 15% from the third quarter of last year.

Hi, JV product revenue in our us direct markets increased 58% from the third quarter of 2019.

In the U.S. debt DSS sales growth in Q3 was due to increased activity at accounts that are either new since Q3 of 2019.

Or accounts that were not among our top 15 us over six accounts last year.

This speaks to the effectiveness of our medical education programs, which Todd will address further in a moment.

Of our historically largest us over stage counts.

Many of these are larger hospitals in the northeast.

Which was a region that was slower to restart elective procedures in the third quarter.

For the US IGBT sales growth in Q3 again, the majority of the growth came from new accounts or relatively small our pre existing customers.

I'd be sales to our top accounts from the third quarter 2019, as a group were mostly flat.

And our direct markets outside the us for overstates, the majority of our third quarter sales increase came from new accounts.

Oh us direct market and GB sales growth was from both procedure volume increases at pre existing accounts as well as market share gains from new account wins or win backs.

Gross margin for the third quarter with 55% compared with 48% for the third quarter of 2019.

The increase in gross margin percentage is primarily the result of three factors first the effectiveness of previously completed gross margin improvement projects that reduce the per unit cost of our products.

Second the increase in direct market sales mix this quarter and then finally the increase in GB product sales this quarter.

Total operating expenses were $8.6 million down more than $3.7 million compared to the third quarter of 2019.

This 30% reduction is due to cost savings initiatives. The management team implemented in response to the Kobe 19 pandemic.

Some of the cost savings were temporary such as the salary reductions introduced in April which are being restored but.

But other cost savings are due to structural changes we've implemented.

As Todd mentioned in his introductory remarks at the end of the quarter, we eliminated 35 positions, which we estimate will reduce our operating expenses by approximately $5 million per year compared to pre cobot spending levels.

We also eliminated another roughly $5 million of additional annual operating expenses associated with activities that no longer aligned to our current priorities.

As a result of all the financial elements I just described our operating loss in the third quarter of 2020 decreased to $1.6 million from $6.9 million in the third quarter of 2019.

Cash at the end of the third quarter was $38.2 million and we were in compliance with our credit agreement.

We expect that our liquidity will be sufficient to get us through 2021 and pass cobot disruptions through the completion of the merit trial and the ex Tac launch.

I will now turn it back to Todd.

Thanks Bill.

We were very pleased with the rebound of the procedures that use our products in the affirmation of the value proposition that our technologies delivered to our customers today.

Our products allow conflicts treatments to be performed less invasively and typically without the same level of hospital admissions as alternatives interventional therapies, and I believe both physicians and patients as especially appreciated this outpatient value proposition during the pandemic.

To build on what Steve just presented the iOS GE procedure for the treatment of obesity was an important driver of our third quarter overseas sales increase.

CSG procedure has tremendous future growth opportunity for us, especially once procedures reimbursed in 2019, there were over 200000 bariatrics surgeries in the United States in closer to 400000. If we include our direct markets outside the United States.

Just opposing this in 2019, we estimate approximately 7500 years cheap procedures were performed worldwide primarily in cash pay environments.

Where the coverage SG should gain significant market share and could also grow the overall 400000 procedure per year market.

Another underlying driver of oversight if sales growth. This quarter was medical education as Steph indicated new accounts were important contributors to our sales growth in the third quarter and the seeds planted by our medical education program in the past visibly bore fruit for us this quarter for a long time now we have defined medal.

Well education as an essential core competency that we need to have within Apollo.

But unfortunately this was one of the activities we had to suspend due to code.

We mothballed our mobile learning center in head to furlough some of our valued medical education staff.

We are seeing indicators of improvement early in the fourth quarter and these distributor markets, but we still expect purchasing from our distributor markets will remain below 2019 fourth quarter levels.

But during the third quarter, we obtained overstitch clearance into new distributor countries, Thailand, and Taiwan, both of which will be sx markets.

In addition to leading medical centers in Japan have received IRB approval to begin ESG procedures, and we expect the first cases in Japan to occur this quarter <unk>.

Japan is one of the major therapeutic endoscopy markets in the world.

And there have been many inquiries from Japanese indoxyl endoscopist about how to gain access to overstitch.

Currently we are actively pursuing regulatory clearance for overstitch with the PM da.

Let me take a few moments to touch on a couple of other items before we open the lines up for questions.

We continue to be on track with the five 10-K for the X Tech and discuss the helix tacking system since our five 10-K submission in late June we have received around with comments from FDA, most of which centered on technical product testing.

We have completed this work nest needed to respond fully to these comments in our best estimate of when we might see the five 10-K clearance remains by the end of 2020.

X Tech will bring the benefits of into luminal suturing to the lower Gi track.

One of the clearest immediate addressable markets Xxxx tax is the large complex pullups.

Removal of these polyps creates for the Endoscopist larger regular closure challenge to avoid delayed bleeding or even delayed perforation of the cold.

A challenge, which is serve optimally met by today's standards of care.

<unk> is ideal for this application based on a review of clinical literature. There is at least 1 million larger complex pollux encountered each year that are being removed and discuss equally.

One's cleared X tech will be a very good fit for our sales organization in our current overstitch customer base because of X tax design Endoscopist should find its learning curve materially shorter when compared with overstitch.

Also importantly, the range abuse wrecks Tech includes a number of commonly described gastro intestinal procedures with existing coding and coverage.

For both these reasons easier adoption an existing procedure definition, we expect the X tech sales ramp will be steeper than over stitches internally, we are readying, our manufacturing facility and supply change change to support the imminent limited launch after Clarence as well as the broader you.

Launch and the first half of 2021.

In our third quarter results, we realized benefits from previously completed gross margin improvement projects as Steph indicated. Unfortunately, we had to put the next wave of gross margin improvement projects temporarily on hold at the outbreak of Covid.

We have now we initiated these projects and total we're targeting a mid sixties gross margin by 2023.

As to what to expect for the fourth quarter.

It really comes down to external influences.

If elective procedures are able to proceed and healthcare delivery as normal.

Our business will continue to do well clear.

Clearly there are concerns and we share these concerns about a second wave of COVID-19.

While many of our accounts have learned how to manage patient flows in the pandemic Ah severe second wave could trigger actions to temporary close or reduce procedure capacity healthy.

Healthcare professionals are not are also not immune to COVID-19, and there have been instances of procedure cancellation as specific accounts when members of hospital staff have tested positive.

In addition, the third quarter benefited at least partially from a procedure backlog in.

Limited survey, we conducted with R. U S customers about 30% of the responders indicated that at least to some degree they are third quarter volume benefited from a backlog.

The overall economy, unemployment and insurance coverage or additional key variables that could impact the fourth quarter.

And as I mentioned earlier distributor purchases are likely to continue to be lower than pre covid.

On the other hand, the majority of physicians responding to our survey indicated that they are into luminal suturing volume is likely to continue to be strong in the fourth quarter.

Currently.

Fourth quarter sales are challenging the forecast.

Suddenly a great quarter.

I guess, starting not starting his stuff you know given the disruptions last spring there was clearly some backlog that had to be worked through during the summer months do you feel like all of that has flowed through now and how are physicians doing in terms of refilling the case pipeline.

Yes, Lukas its good to talk to you.

First of all it's a great question, but it's one that is very challenging I think right now for us to answer I can tell you repeating again, the we did a survey of our customers. Those who responded indicated about 30% of them indicated that backlog was a factor in the third quarter.

But at the same time when asked to respond to that same question for the fourth quarter.

It was nowhere close to as prevalent as 30%, indicating that the backlog would still be a.

A factor in Q4, now that doesn't necessarily mean that it won't be.

But at the same time, that's the information we received as a result of serving our customers.

Okay. Yeah, that's definitely helpful. And then I guess I you know turning to E. G. We actually believe some of you guys Gi procedures are being reimbursed even without the merits study being complete could you give us a sense like how common that is and maybe what.

Types of situations you're seeing it.

Yes, we are seeing reimbursement is more at an account level. So I would not call. It coverage per se, but for example, I have been in touch with.

Several of our customers who indicate that they are now commonly risk.

Receiving reimbursement for SG and I think that has a lot to do with their practice. Their particular hospital. These that I'm hearing this sprint from tend to be University hospital settings. So they have a tremendous reputation and they have a tremendous among.

Amount of credibility with the payer community Center.

I don't doubt that that helps tremendously because of their reputation, but no doubt about it there are SG accounts across the United States today, who are success.

Successful, having their patients insurance pay for the procedure.

Well, it's definitely encouraging to see hospitals of that stat, cherry getting reimbursement far right.

And then I guess, they kind of transitions us to my last question about a year ago, you announced like Kaiser was running a pilot study with or Barrow were decided to set right now.

That is still ongoing as for my last update but I don't have any results at this point.

Okay, not a problem I think thats all I had.

Thank you Lucas.

Well take our next question from Peter Your line is open. Please go ahead.

Hey, Todd and stuff congrats on a great quarter and thanks, so much for taking the questions.

I have a handful of if that's okay and maybe just.

Kicking it off with some questions on Q3, I just wanted to confirm that I heard correctly in the prepared remarks, it sounded like the.

Stability and to what degree does that affect the delivery of healthcare is yet to be seen.

Okay. Thanks for the incremental color there Todd.

The next question is on.

It'd be looking at right now.

Totally understand Todd and thanks for the extra color there.

Maybe just two more if I can squeeze and then you know I.

Think I think I heard just on the merits studied data publication likely in Q2 of.

21, you know if positive and it sounds like you certainly have optimists.

Optimism that it will be a positive outcome based on the legacy data from other studies like my question is how quickly does that translate into potentially.

On you know and then I also heard the commentary about maybe operating with a.

Oh leaner operating structure.

Going forward, but you know I.

I guess I just want to better understand.

His contact mat crypts of Darrow associates.

We will also plan to participate in several virtual investor conferences later this month and welcome a chance to meet with you as far as one of those events. Please also contact Matt if you'd like to request a meeting thanks.

Thank you and have a good evening.