Q4 2020 Apollo Endosurgery Inc Earnings Call
[music].
Good afternoon, ladies and gentlemen, and welcome to the Apollo and dosage REIT fourth quarter 2020 results conference call. At this time, all participants have been placed on a listen only mode and we will open the floor for your questions and comments. After the presentation. It's now my pleasure to turn the floor over to your host.
Matt Kreps, Sir the floor is yours.
Thank you John and thanks, everyone for participating on today's call to discuss Apollo's fourth quarter 2020 financial and operating results.
Joining me on the call are Todd Newton, Chief Executive Officer, Stefanie Cavanaugh, Chief Financial Officer.
Before we begin I would 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 around the spread of the COVID-19 virus and the ultimate impact. It may have on our operations to demand for our products global supply chains and economic activity in general.
These forward looking statements involve material risks and uncertainties that cause actual results may differ materially.
For a discussion of risk factors I encourage you to review the Companys annual report on form 10-K for the year ending December 31, 2020 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 day of this live broadcast February 25 2021.
Except as required by law Apollo undertakes no obligation to revise or update any statement to reflect events or circumstances. After the day of this call.
During this call we will interchangeably use the term esf's for overstitch.
<unk>, I, JV forbearance and vice versa.
And now with that completed I'd like to turn the call over to Tom.
Thank you Matt Good afternoon, everyone. Thank you for joining today's call to discuss our fourth quarter 2020 results.
Our expectation coming into the fourth quarter was for Covid disruption to persist.
But to be less severe than certainly we experienced in the first half of 2020 and that overall procedure volume is using our products would return to levels similar to the fourth quarter of last year.
This expectation was more or less what occurred in our business during the fourth quarter with the U S market being up 15% versus Q4 of 2019, which made up for the more noticeable COVID-19 procedure weakness, which lingered in our international markets, particularly in our European direct markets during.
In December.
Taken together our worldwide endoscopy product sales increased 4% in the fourth quarter year over year.
I am really pleased with our ability to reduce and maintain control over on a cash burn in the fourth quarter expense reduction programs that were born from necessity due to the Corona virus, along with gradual gross margin progress resulted in a 53% reduction in our net operating loss in Q4.
Compared to the same period in 2019, and a 58% improvement in our cash used in operations. The improvement in these two important financial metrics should be not just sustainable but can improve from here as our markets stabilize healthcare utilization gets back on track.
<unk> and product revenues grow.
I'm also pleased to tell you we have completed the ex TAC limited launch I will give you more detail shortly.
But I will tell you now.
Great.
And with that I'll turn the call over to Stephanie to cover the fourth quarter financial results in greater detail step.
Thank you Todd and good afternoon, everyone.
As Todd mentioned, the fourth quarter of 2020 overall with a stabilizing period for our revenue even amid regional COVID-19 disruption fluctuation.
On the top line total revenues increased to $12 9 million a gain of 7% in the fourth quarter of 2020 from the fourth quarter of 2019.
Total endoscopy revenue increased 4% to $12 $2 million with U S endoscopy sales, increasing 15%, while our U S endoscopy sales decreased 6%.
Similar to the third quarter results reflect continuing U S rebound from COVID-19, and differing trend lines in our two O U S sales channel.
And our <unk> direct market endoscopy product sales declined 10% due to ongoing COVID-19 case volatility in the fourth quarter.
Product sales to distributors began to rebound somewhat and we're back to the fourth quarter of 2019 level.
Byproduct fourth quarter <unk> sales increased 2% from 2019 with U S debt sales, increasing 10% to offset the weaker U S asset sales, which were impacted by the lingering COVID-19 disruption that I just noted.
Fourth quarter IGD product revenue increased 7% from 2019 as U S. <unk> sales increased 33% and <unk> RGB revenue remained largely stable and consistent compared with the fourth quarter of 2019.
Gross margin for the fourth quarter with 56% compared with 49% for the fourth quarter of 2019, increasing from the benefits of our growth margin improvement project as well as the increase in direct market <unk> sales this quarter.
Increased inventory production also improved for the fourth quarter gross margin results through higher overhead absorption.
During the fourth quarter, we restarted select growth margin improvement projects that were put on hold during the pandemic.
The next two of these projects will address our FX material costs and we expect both projects to be completed in the first half of this year.
The FX product represented over a third of our own on our Es sales outside the U S. As of the end of 2020 on is the product of choice for most of our new on distributor markets.
At current FX volume. These two projects will reduce material costs by approximately $200000 per year.
Total operating expenses were $10 $4 million down more than $2 3 million compared to the fourth quarter of 2019.
The 18% reduction in operating costs due to the permanent cost savings initially implemented in response to the COVID-19 pandemic.
As we referenced last quarter, we eliminated approximately $10 million of annual cost compared to pre COVID-19 spending levels as a result of restructuring efforts and the realignment of our business priority.
Following on this together our operating loss in the fourth quarter of 2020 decreased to $3 2 million from $6 9 million in the fourth quarter of 2019.
Cash at the end of the fourth quarter was $37 2 million.
Compared with $38 2 million at the end of the third quarter.
We received our second 2 million installment payment from the sale of the surgical product line in December as required.
Excluding this payment our cash used in the fourth quarter was approximately $3 million.
Yes.
As we announced in December we further enhanced our 2021 liquidity by $12 million through extension of the interest only period and maturity day of our term loans by 12 months to March 2022, and September 2024, respectively.
In addition, the <unk>.
Net will automatically extend the interest only period and maturity day by an additional six months.
Specific revenue milestones during 2021.
Our cash position along with this amendment provides a solid foundation as we focus on reaching positive operating cash flow over the next four or five quarters.
With that I'll turn it back to Tom.
Thanks Steph.
I want to update you on two important topics. This afternoon be ex tech use limited launch and the reimbursement effort underway to bring coding and coverage to our products.
We completed the limited launch earlier this week and the results were tremendous.
During the limited launch we completed 24 cases, consisting of 13, lower Gi cases, and 11 cases in the upper Gi tract.
These cases were performed by 10 doctors across nine different accounts.
The limited launch suggested a physician learning curve after only one device several of the limited launch cases have been done without our presence after that first use it is proving to be a one do one teach one kind of product.
Our very first ex Tac case was it was to close a large dissection at the hepatic flexure of the colon.
Close to six centimeters in size and irregularly shaped the dissection itself to remove the large flat policy of this size was a significant and time consuming procedure.
Perhaps we would have liked a little bit more of a conservative case right out of the gate as our procedure number one but the challenge challenging cases represent the big unmet need and the reason why we designed ex tech to begin with and the device worked great in this highly challenging clinical environment.
Each case and the limited launches on its own story.
<unk> represents a life changing procedure for the patient.
For those 24 limited launch cases completed.
The closure sites range from a relatively standard 18 millimeter sized all the way to 80 millimeters, which is getting to be a really large site.
During the limited launch ex Tech has been used to close a large ESD site all the way across the coal and <unk> valve close to the end of the ascending colon, where the small intestine turns into the large intestine, a location where overstitch could not reach.
And the ex Tech was also used to successfully closed large and irregularly shaped sites, where through the scope clips even in multiple numbers could not span and would've been ineffective.
Closures have been completed using one ex tech device into more straightforward cases, all the way up to four ex tech devices and the larger and complex cases, such as the one at the Helios equal valve. The average number of ex Tac devices per case and the limited launch was too.
After each case, we are positioned to rate the functionality and ease of use of the device across a number of performance attributes on a scale of one being poor and five being excellent in the device has shown consistently high ratings across all performance measures with an overall average rating of four seven.
With confirmation of ex Tac stellar clinical performance and the closeout of our limited launch protocol, we have a very high degree of confidence as we direct our attention to scaling up our manufacturing capacity for the product the.
The most important capacity enhancing step in front of our manufacturing team is to convert from prototype molds to production molds and this conversion is on track.
The closeout of our limited launch with such high marks gives our sales team confidence as they pursue our highest priority target accounts and get in front of customer new product evaluation committees.
In summary.
As we end the limited launch we are exactly where we hope to be and if anything our expectations have been exceeded.
We have confirmed device function across a broad diversity of cases and array of closure needs throughout the Gi track.
User ratings have been excellent feedback is the ex Tac is easy to learn and easy to use.
We are moving into the next launch stage right on schedule with an acceleration of our ex tech commercial programs yesterday, we went live with the ex tech product websites and began a campaign to harvest our medical education training records to introduce this new technology to physicians, who have come through our medical education programs in the past.
Yes.
Right now outstanding quotes in front of new customers pending their new product committee approval aggregate to a high six figure dollar amount.
Everything learned so far suggests that ex tech has a real opportunity to significantly disrupt the Gi closure market.
Shifting to reimbursement there are activities underway.
For all products.
First for Overstitch. This is where most of our management team's efforts are directed with specific focus on the ESG procedure and bariatric revisions.
We are closing in on the time, when we expect the merit investigators to publish their study results, which we then plan to use as the cornerstone data piece for ESG reimbursement strategy.
All indications remain that we will see the merit study data accepted for publication sometime.
Before the middle point of 2021.
We do not have access to this independent studies data, but we have high confidence that the study will achieve its primary outcome objectives based on more than 80 studies and articles published in peer reviewed literature, describing and analyzing the ESG procedure since 2015.
This worldwide data has been remarkably consistent in reporting favorable efficacy and safety results.
As merit data nears release, we've turned to other groundwork that as part of the ESG reimbursement plan.
In the fourth quarter, we submitted applications to begin the process for both ICD 10 coding and hick pick coding for all overstitch applications, including the ESG procedure and for Bariatric revisions. The reviews of these code applications are in process and the earliest date for <unk>.
Decision on either code application is probably October the.
The CPT coding effort will become better known following the publication of Merit data, but it would be our goal for ESG coding to be considered by the CPT panel hopefully before the end of the year.
The mirror data will also be of interest to the payer communities in the U S and several other key countries and we intend to engage these communities and coverage and payment discussions with the primary endpoint results once they're published the.
There were an estimated 350000 bariatrics procedures performed in our direct markets during 2019.
Only 7500 Esg's were performed largely without coverage each 1% increase in ESG as market share that comes with coverage is an incremental $5 6 million of revenue at today's average selling prices and of course, a 10% market share is therefore equivalent.
To $56 million of revenue.
In addition to reimbursement we have plans to expand the overstitch labeling to include both the ESG procedure and very Ettrick revisions. The marrow data again is very critical along with other prospectively collected ESG and revision data for this label expansion effort label expansion adds value because it will allow us to improve our medical edge.
Patient content that we provide to physicians today and also improve patient awareness.
Second there appears to be some progress with respect to U S coating that could be beneficial to both <unk> and ex Tac first floor Vera.
In the fourth quarter ICD ICD 10 codes for the endoscopic insertion and removal of devices were approved by CMS, which are applicable to a bearer. These became effective in October.
And in the fourth quarter, we sold at an application for a CPT code for interest gastric balloons was on the agenda for the CPT editorial panel meeting which occurred earlier this month.
Separately, we submitted for a hick pick code for <unk> during the fourth quarter.
And we continue to be on various society and regular regulator discussions for the consideration of <unk> as a treatment for <unk>.
Pre cirrhotic Nash patients with fibrosis ever since the publication of the Mayo Clinic study on this in early 2020. This data along with previously published data outside the United States in our opinion shows debt or Vera has a reasonable likelihood of both technical success and clinical success in providing a more.
Effective Nash treatment than today's standard of care.
These discussions are successful all these coatings developments could be very meaningful for our U S or bear product line.
But the consideration of an HEB code wasn't the only CPT panel agenda item of interest to US also on the same agenda was consideration for a CPT code for in discuss ex submucosal dissection or what is referred to as ESD.
<unk> is an end aluminum procedure for the <unk> block resection of larger flat gastrointestinal tumors, especially colorectal tumors.
The approval of this CPT code, along with the coverage and payments down the road would expand the already attractive addressable market for ex Tac.
<unk> website indicates that the CPT panel results will be released by March the APE.
Lastly, our team also file with ICD 10, and hick pick applications for ex Tac back in December upon its five 10-K clearance.
For the past few years, we have made medical education, the cornerstone of our overstitch strategy. There were two important elements to this first because in aluminum suturing was so novel it was very important to capture physician mind share through peer reviewed publications to describe the clinical value that into aluminum suturing can deliver in <unk>.
We needed World class training capability teach physicians of the mechanics of using overstitch, which can be technically challenging to get through a learning curve and get started with.
Since we implemented this strategy in 2015 Overstitch revenue CAGR has been 38% up until the 2020 Corona virus disruption.
In 2020, the literature side of the strategy, though continued to deliver results as 73 publications in medical journals mentioned Overstitch and 35 publications mentioned, our inter gastric balloons.
18 of these inter gastric balloon publications referenced the potential as part of a treatment for Nash.
Other element of our medical education strategy, which is physician product training.
It did get disrupted by Covid physician Society meetings went virtual and travel and group gatherings, where restricted but nonetheless at the beginning of the fourth quarter, we restarted the mobile lab in the United States and conducted handles hands on training for 75 physicians in 14 different U S cities we.
This effort will refill, both our new account and expanding user pipelines for overstitch in 2021 as well as support the launch of ex Tac.
Before I open the call to questions I want to say that we will not be providing 2021 guidance today I think it's best for Apollo's next CEO to speak to that without me setting expectations for <unk>.
Hope you all understand debt I will say, however that we are off to a good start in the first quarter and tracking to produce at least 10% sales growth over the first quarter of 2020, even before considering any ex Tac contribution. We are still we have still been experiencing through the first two months of <unk>.
The first quarter, some intermittent pockets of Covid weakness, which suggests the March results could surprised in either direction, but we are doing well so far in the first quarter and demand from our international markets, particularly from distributor markets is improving and of course the U S is continuing to progress very well.
As I've said before as long as elective procedures are allowed in health care delivery as normal our business will do well.
So after a questions and answers I'm going to have a couple of closing comments, but on that note. We will now open the lines for questions. John. Please proceed with questions.
Thank you ladies and gentlemen, the floor is open for questions. If you have any questions or comments. Please indicate so now by pressing star one we have a question coming from Matt Hewitt from Craig Hallum Capital Group, Matt Your line is live.
Thank you for taking the questions and I guess before I get to those I just wanted to say Todd.
It's been a pleasure working with you and best of luck and obviously all of your endeavors going forward.
We look forward to check on your progress here, where you land next but congratulations on all the progress that you've made here at Apollo.
Thank you Matt.
Our first question and then you hit some really key topics, but the first one on ex Tac congratulations on the soft launch how quickly can we start to think about from a commercial standpoint, I think you mentioned that you've already got six figure orders outstanding.
How quickly will that translate into the income statement and where can that go maybe over the course of the year.
Yes, Matt. Unfortunately, I did mentioned I don't feel like I should give 2021 guidance and that would include ramp rates and the like I just feel like that's better for the next CEO to come but I can tell you that I feel like we have a really good level of activity going on right now as I indicated.
Those quotes or that are in front of accounts, where we are going through the new product committee process, sometimes called the back process that is that is going well and the limited launch results certainly give us.
Great deal of confidence as we as we pursue those opportunities.
Okay, and then maybe a different way of asking the question without getting to necessarily guidance, but.
Help us think about a six figure.
Order how quickly will an account work through something of that size. I mean is that over a couple of months is that a couple of <unk>.
Orders.
To help us size that up.
Yes, so our view if you base it off of the limited launch results we are going.
We're using about two ex Tac devices per case, and those cases generally our debt to mill.
Let's say two centimeter size that we have indicated is really the ideal target for ex Tac or higher.
And so I think it will just depend a little bit upon each individual account and how often they are encountering those but I can I can.
Can feel confident in saying that our view is that the frequency at which doctors are going to have those cases will be at a greater rate than than overstitch use with a within a relatively short period of time relatively short period being over the next let's say.
Few years couple of years.
Okay. That's helpful. Thank you and then.
As far as overstitch is concerned.
Everyone's excited and waiting on the merit data, but walk through so that the data comes out is it your hope and expectation that Apollo would have some albeit maybe minor but have some reimbursement in place even by the end of the year or is that more of a 'twenty two type event before the reimbursed.
One starts to layer on.
Yes, and just to.
Remind you Matt I think you certainly you know this from our other conversations.
We have in some places reimbursement today for ESG.
It's just not broad coverage it's more.
Individual accounts working with.
Specific let's call it insurance providers private payers, where they are getting reimbursed for overstitch, when it's being used for ESG and certainly that's the case today for Berry Hetrick revisions periodic revisions are nearly always paid for it's exceedingly rare situations today when we.
Don't have a very atrip revision using overstitch that as being just normally paid for so what we're really looking at is trying to expand debt and using the merit data to expand debt and two to really broaden this to being more of a national coverage and part of the national coverage policies.
That's probably still though going to involve coding and coverage and timing around all of those things such that it's unlikely to affect us in 2021, hopefully there could even be some benefits in 2022, but the way that most of these coding processes Les.
[noise] out their calendars, it's probably more of a 2023 events and our future.
Okay understood alright.
And then shifting to a bearer, obviously the CPT code news.
What's positive when we saw that it was on the calendar, we're still waiting for that news, but.
Maybe.
That business has is starting to recover even without.
Reimbursement per se and as we start to think about areas or where reimbursement is possible or likely I think some of the areas you talked about.
Having interest or Nash.
As a treatment for Nash for surgical procedures, where maybe a high BMI patients getting them down to a fighting weight beforehand, I know that theres trials ongoing for that and for orthopedic procedures, but how do you help us understand from a size perspective, like how big of a market or what kind of an opportunity does that represent.
Per barrel.
Yes.
Our Investor Relations.
Slide deck, which is on our website.
I don't have these numbers right in front of me right now, but on debt in that deck. We have a number of demographic data points did talk about those top three if you will priority areas that we've been pursuing it talks about the population for example.
That is in our BMI range of 30 to 40, who also are going to be those those nash patients and so I'd just refer you there, but the size of these markets are significant I think youll see that the number for Nash for example, where the fibrosis levels or two or three in their BMI is over <unk>.
<unk>, but lower than <unk>. So it makes it consistent with yours.
Label, that's that's.
Roughly a 10 million U S population, if you go down to the.
To those that would be eligible for for using more bear again BMI of 30 to 40 on the number of just total joint replacement is done per year.
Thats. Another 300000 procedures that are done for those patients that are within that range of BMI and so on and so on so these are significant markets that can make a difference for our <unk> business here in the United States.
Okay, maybe one last one for me and I'll hop back into queue.
On a nice improvement in gross margin in the quarter.
You've taken some steps you mentioned that you are in the process of starting the next phase of gross margin improvement projects, but as we think about fiscal 'twenty one not so much a guidance, but that should continue the gross margins should continue to trend higher along with your revenues is still continued to grow is that accurate.
Yes, it is and our biggest continued EBITDA growth.
Gross margin improvement this year will be ex Tac.
It has a high variable gross margin and so that will be contributing to our gross margin improvement. This year as will the two projects I talked about in my prepared remarks.
Got it great. Thank you very much.
Thanks, Matt Thanks, Matt.
I would now like to turn the floor back to Todd Newton for some additional remarks.
Well, thank you operator, and thank you everyone for joining us today.
This will be my last call as CEO of Apollo earlier. This month, we announced the appointment of Chaz Mccann as CEO effective on March the first and this is a good time for a transition as great things are on the horizon.
Today, we sit with a high growth product portfolio in each of our products are directed at high value large addressable markets.
As I reflect back about overstitch. This was a product originally designed for notes or natural orifice, Trans luminal and discuss ex surgery, which is a leading edge than maybe you would even say, it's a bleeding edge surgical concept, but no one is doing or looking to do oral <unk>.
<unk> <unk>.
Six years ago, when we would engage physicians about overstitch their reactions would be well Gee, that's a cool technology when will I ever use it.
Since that time, we have answered that question today overstitch is emerging as the standard of care for Bariatric revisions in force office Youll Stent fixation. In addition to various other core Gi applications that call for full thickness tissue approximation.
Physicians see the enormous value potential and potential of ESG for the obese as a primary obesity procedure and in the months ahead, I expect us to hear more from physicians developing on overstitch endoscopic anti reflux procedure, which is today being called rep as a possible alternatives as surgical wound up.
Patient.
We have taken down other overstitch adoption barriers by building World class Medical education capabilities, we developed the FX for those eight locations are in markets, who do not have access to a dual channel scopes.
And now we are expanding the incredible versatility of suturing into the large lower Gi market with ex Tac.
<unk> two is under revival with a medical use strategy that leverages its unique patient value proposition. Thank you to Matt Hewitt for that question of what those things look like today.
Along the way we have made some tough decisions to shed lower performing products and programs to reach the point, where we're at today.
A company with a clear identity.
The future looks good and we have specific plans for further improving the structural self sufficiency of the business with very specific well conceived and executed both gross margin improvement projects.
We have dramatically reduced our cash burn and we have probably the best ever balance sheet as a company.
The business is certainly not on cruise control on I would never say that it is but we have a solid plan.
And the human and financial resources to execute it.
So it's time to close the repositioning chapter.
And began to write a great commercial execution chapter.
Supporting my transition and have every confidence in chez along with our executive team to lead Apollo Endo surgery forward.
<unk> has an impressive track record with a resume that includes successful commercial roles at Boston Scientific Johnson, and Johnson, <unk> medical and intersect E&P.
And lastly to all the men and women of Apollo Endo surgery past and present over the past six and a half years. Thank you.
We've come a long way baby.
Apollo into a surgery has truly changed interventional gastro intestinal endoscopy as well as the treatment options for the many afflicted by the various metabolic diseases caused by obesity.
And the company is poised to burn it's mark even deeper.
So should you have any questions or would like to arrange a call with US. Please contact Matt Kreps of Darrow Associates. The company also plans to participate in several virtual investor conferences coming up ahead in the month of March. Please also contact Matt if you'd like to request a meeting as part of one of those events.
Thank you and have a good evening.
Thank you ladies and gentlemen, this does conclude today's conference call. You may disconnect. Your phone lines at this time and have a wonderful day.
You for your participation.