Q2 2022 Apollo Endosurgery Inc Earnings Call
One.
Good afternoon ladies and gentlemen and welcome to Apollo Endo Surgery 2nd quarter 2022 results. After this time all participants have been placed on a listen only mode and we will open the floor for your questions and comments. Let's go ahead and take a look at the presentation.
It is now my turn to turn the floor over to your host, Matt Krebs. Here are the floor doors.
Thank you Matthew, and I thank everyone for participating in today's call to discuss the Paula's Becken Quarter, 2022 financial and operating.
Jordan me on the call at Chasem College, he's executive officer and Jeff Black, chief financial officer. I'm the chief financial officer. I'm the chief financial officer. I'm the chief financial officer. I'm the chief financial officer. I'm the chief financial officer. I'm the chief financial officer. I'm the chief financial officer. I'm the chief financial officer. I'm the chief financial officer.
Today's call will include slides to accompany the idea of presentation. For those joining us by telephone, you can download a copy of the slides that are of us to relations site, ir.apoloindower.com, under events and presentation.
Before we begin, I'd like to caution listeners that comments made by management during this conference call will include forwarded statements within the meeting of federal security clause, including a policy major outlook, and a policy plan for timing of full product development and self.
In addition, there is uncertainty about the continued spread of the COVID-19 virus and the ongoing impact it may have on our operations. The demand for our products, global supply chains, and economic activity in general. Before looking state, we've involved material risks and uncertainties, and I suppose actual results may differ materially. For discussion of risk factors, I encourage you to review the company's most recent annual port on form 10K and most recent form 10K. The most recent form 10K.
The conference conference called contains time-sensitive information. It is accurate only as of the day-to-day broadcast of August 2, 2022. It is accurate only as of the day-to-day broadcast of August 2, 2022.
Excessive requirements allow it to undertake no obligation to revise or update any statement to reflect events or circumstances after the day of this call.
Additionally, today's discussion will include certain non- GAAP financial measures, which we believe provides an additional tool for evaluating the company's core performance. Management uses these metrics on its own, in its own evaluation of continuing operating performance, and as a baseline for assessing the future earnings potential of the company. Included in the press release today with our financial results and corresponding 8K filing are supplemental tables, reconciling non-gap figures to the closest gap comparable. Now I'd like to turn a call over to Jeff.
Thanks Matt. And good afternoon. Thank you everyone for joining us. On today's call, I'll cover highlights of our Q2 performance.
Jeff will then cover our financial results.
And I'll come back and talk to you in more detail about our recent milestones and launch plans for the Apollo ESG and the Apollo Revise Devices. The Apollo Revise Devices.
So starting on page three of our deck, our strategy has been to pursue large market opportunities and build an organization that is prime to capitalize on them.
And I'm pleased to say that our recent performance has been good validation of this approach.
Q2 was a solid quarter for us. We demonstrated revenue of 19.3 million in reported sales and just under 20 million in constant currency. Q2 was a solid quarter for us.
This performance represents a really nice step up compared to our recent sales levels. And the growth has come ahead of two very recent and important catalyst that we've just announced in the last month.
The FDA of Market Authorization for the Apollo ESG and Apollo Revised Devices and publication just last week of the Merit Study in the Lancet.
So turning to page five, where we've listed both constant currency growth on the left and then gap growth on the right.
In Q2, we achieved 20% growth in constant currency and 16% year on your growth on a gap basis.
Once again, our growth has been well-balanced across both products and geographies. 3.
On a gap basis, ESS grew 23% with strong growth in the US of 22% and international growth of 24%.
Our IGB franchise grew 6% on a reported basis, 7% in the US, 5% outside the US.
So again, nice balance across the business and across geographies.
As with any US-based company that has a significant presence in Europe , foreign exchange has presented a headwind.
It's important to note that Apollo, unusual for a Medtech company of our size, has just under 45% of our sales from outside the US, and more than half of that is in Europe .
Many of you will know that a year ago, the EUROS at $1.20, it's now at $1.2. And so it is a significant impact. But again, we're pleased with the reported 16% and the 20% year on year growth from a constant currency standpoint.
So again, I'll come back to you with an update from a business and strategic standpoint, but let's allow Jeff to walk through the financial.
Jeff?
Thank you, Chaz, and thank everybody for joining us today. I'll spend a few minutes with the financial update. Give a little commentary on.
The rest of your guidance and some...
discussion about the medium-term targets.
First off on slide seven, just starting off a revenue today. Again, as Chas said, we reported another quarter of strong year of year growth.
across the whole product portfolio. It's our fifth consecutive quarter double digit growth.
This is the largest revenue quarter on record for Apollo, on Book of Gap and a concert currency basis.
We agree, 10% in the US, we're continuing to see the impact of our plane investments.
Growth is led by adoption in our end of theiatric accounts, which Chaz will dive into later. We're seeing the benefits of Salesforce expansion, increased Salesforce productivity.
continued strength on the or bear on the heels of enhanced marketing efforts.
We saw procedural volumes approved throughout the second quarter. There have been some lingering COVID effects, but nowhere near to the extent that we saw at the beginning of Q1. We're still seeing some staffing surges and some hospitals, particularly in academic hospitals where the G.I. core GI business is typically very strong.
We grew 9% OUS on a constant currency basis, again strong demand in both direct and distributed markets, and some competitive wins for both over-staging or bear in some key accounts.
We also saw a foreign currency had wins as Chaz mentioned, particularly for the euro which
which had a nearly $600,000 impact on our year of year Q2 growth.
And as Chaz mentioned, he comes international sales represent more than 40% of our overall sales.
or disproportionate impact by negative foreign currency impacts compared to similarly sized medtech companies that typically do not have such a large OUS footprint.
And other revenue will mount the material was impacted by a planned wind down of our Apollo Care program for Obera, which was out there. Which was out there. Which was out there.
to third party beginning in 2022.
Overall, we're, again, pleased with our revenue performance in the second quarter and our ability to continue to expand adoption across the portfolio.
Moving to revenue guidance on slide eight, we continue to expect 2022 revenue in the 73 million to 75 million dollar range. Cognizant of potential global recessionary impacts, lingering pandemic headwind.
And most significantly foreign currency pressures from the strengthen dollar, particularly for the euro, which currently represents nearly half of our OUS revenue.
Our guidance implies fiscal year 2022 growth of 16% and second half year-by-year growth of about 17%, which is essentially flat sequential growth against first half on a gap basis.
Some of this can be attributed to Keys' Reseasonality, which is typical in our business, and we've seen some of it play out in July .
But the biggest impact is foreign currency headwinds. To put this in perspective, the Euro-Foreign currency rate is down 11% since the beginning of 2022, and we've seen similar pressures in most of our OUS geographies. So on a full-year basis, we expect foreign currency headwinds of up to 2.1 million in the second half of the year, and free-knowing on a full-year basis.
And guidance then on a constant currency basis now implies fiscal year 22 growth and second half 22 growth in the low to mid 20% range.
Moving to slide 10 on non-gap act up acts as we look at our operate.
My apologies. Gross margin on slide nine. As you can see, we're on track with our margin expansion targets.
Gross margin improved by 190 basis points versus the first quarter of the second quarter of last year on a constant currency basis or gross margin improved by 320 basis points to just over 58%. Sequentially gross margin improved by 50 basis points over the first quarter.
We saw a gross margin expansion on our ESS product line from the impact of 2021 overstitch COS improvement projects. We saw improved overhead efficiencies. We also saw some price increase impact for both overstitch and x-stack.
Major drivers of overall gross margin expansion will continue to be product mix, improve overhead absorption and direct cause improvement programs focused primarily on overstitch.
We continue to navigate supply chain and manufacturing scale up complexities, but we remain confident in our ability to dry blend and gross margin to the mid 60% range.
In the medium term.
Now moving to slide 10 on OPEX.
As we look at operating spend profile, we think it's important to exclude non-cash stock based compensation to get a clearer picture of our non-gap core operating expense run rate.
As we previously said, 2022 is an investment year. In the near term, we're focused on building capabilities following historical underinvestment in the business. The most significant area being sales and marketing in the US.
For example, in the second quarter, our non-gap sales and marketing op-X ran about 45% of revenue, which reflects our plan investments and growth initiatives, primarily in building out our sales channel as we prepare for the launch of Apollo ESG and revised products.
Our other focused areas of plan investment are in R&D, medical education, clinical reimbursement, and pro-development and again college improvement.
And on the G&A side, we'll continue to thought we'd invest in infrastructure and staff to properly support the business.
As we've stated in 2022, an investment year for us with a primary focus on building out our commercial infrastructure in the US to support growing interest and demand for our technology, especially Apollo ESG and Revise. Lift.
But that said, we are modulating spend in light of the changing environment.
The more future focus initiatives are now a lower priority. We're setting a very high bar for these kind of investments. For example, we're taking a much more conservative view of investments in longer term clinical and R&D pipeline initiatives that may not be necessary to support our core business today. That may not be necessary to support our core business today.
While these are all elements that are ultimately critical for longer term prospects, we have significant flexibility as to how much and when we fund these initiatives. So far in 2022, we've not made any long-term commitments to fund these types of initiatives. In fact, in the first half of 2022, we are well below our op-EX and CAPEX spend plans while still on target with a revenue plan.
Importantly, we have the ability to modulate, spend as appropriate, and we're well positioned from a balance sheet perspective to make these investments.
With that on slide 11 addressing our balance sheet.
In the fourth quarter.
Of last year, we reinforced our balance sheet with $75 million in equity issuance and a new credit facility that will provide up to an additional $65 million in available capital over the next few years.
At the end of Q2, we had $140 million in cash and committed cash, including 75 million in cash and equivalents, and access to another 40 million over 2023 and 24 based on revenue milestones, which are well below our base case expectations.
We saw total cash use in the second quarter down by more than 2 million compared to the first quarter which is indicative of our discipline use of capital even as we continue to make growth investments.
We have a multi year run rate at Rectgit our plan with an eye toward investments that take advantage of near term opportunities in front of us.
In terms of 2022 outlook, we expect to end the year with 125 million in cash and committed cash, including more than 60 million in cash and cash equivalents. This implies 2022 cash use of around 30 million, which we anticipate is our high water mark for annual burn based upon our base case model.
And that brings us to our medium-term business targets and commentary on our path to break even.
Moving to slide 12.
As we've highlighted today in the past quarters, we have the OPEX and CAPEX flexibility to greatly enhance our EBITDA on cash, and burn profile once we've built our organization the scale. Burn profile once we've built our organization the scale.
And as you can see from these illustrated targets, based upon our current base case model, we have a line of sight to positive EBITDA and cash flow break even business by the time we reach $150 million in annual revenue.
We'll be in a position to make strategic decisions as to whether we enhance investments for accelerating top-line growth, or more future-focused non-core initiatives, or to more aggressively position the company for probability. But most importantly, based on our current base case model, we have the balance sheet and committed capital today to get us there.
Without it, I'll turn the call over to Chaz for a business and strategic update.
Thank you, Af.
So in 2022, we have four overall strategic priorities.
I'm going to spend the majority of our time today talking about the launch of Apollo ESG and Apollo Revise given our recent announcements. But before I do that, let me comment on the other three. First, around expanding our core GI and defect closure and taxation business, that's our overstitch and our X-TAC products in that area.
We've had a good quarter and good progress. Many of you know that in May, we had a very productive digestive disease week meeting and that I think it included, you know, more than 100 different presentations about our products.
And that the extract device was featured very prominently in that and some of the first data that's come out on the next act after just one study was published last year.
And so building on that, we saw 16% sequential growth in the quarter with X-TAC. And we do anticipate that the awareness generated at DW and those presentations are then published that that will continue to help support continued interest and adoption of X-TAC. And then furthermore that there are lots of opportunities still for overstitch across a whole range of applications.
in defect closure and fixation.
On Arbara, Arbara continues to perform well and has been a meaningful growth driver in our business for the last 18 months.
We have successfully implemented co-marketing programs for Rivera in a number of our target accounts, and these have provided significant and incremental growth for Rivera. And we also view these as essentially pilot programs where learnings from what's worked and what's been most successful can be applied to Apollo ESG and Apollo Revise. And I'll come back to that. And we've also observed that Orbera has done particularly well in integrated practices.
that are offering a range of both Orbera, ESG and revision procedures. We believe that has a sustainable element to it.
And then on advancing the organization, and Jeff already talked about this, right, we are building the right capabilities that we think we need to really take advantage of these opportunities. We're doing it in a very targeted way. We're reviewing, you know, every addition and head count, you know, line item detail, and only investing in the ones that we think are critical. But we are making great progress and building out key capabilities in the organization. And building out key capabilities in the organization.
I am very pleased also to welcome Sharon O'Keefe to the Apollo Board of Directors, which we announced just about a month ago. Sharon has extensive experience in leading large medical centers, and for nine years served as the president of the University of Chicago Medical Center. She is a thoughtful, experienced, health care executive, and she will bring a new perspective to your Apollo Board, and we are very excited to have her. And we are very excited to have her.
So moving now to the launch of Apollo ESG and Apollo Revise.
First, let's start with the news that we've announced over the last month.
two important milestones that literally have been years in the making.
On July 12th, Apollo received marketing authorization from the FDA for the Apollo ESG and Apollo Revised products.
It was via the Denobo process.
A couple of things to highlight. One is the BMI range of the further clearance of 30 to 50. That is a wide range and helps us allow us to treat potentially many, many patients who suffer from obesity.
And so we're very pleased with that. Also, this Denova decision came even faster than we anticipated, and we are very grateful to our reviewers at the FDA for their responsiveness and interact your process throughout the process. And interact your process throughout the process.
And then on Thursday, just this past week, the Merit Study, a randomized control trial of the S.G. procedure was published in the Lancet. The S.G. procedure was published in the Lancet.
And I think the quote on the right side of the page, which comes directly from the publication, is an excellent summary.
For those who don't have the slides in front of you, I'll read it.
and the implications of all the available evidence.
The Merit Study proves that ESG is scalable and can be offered in outpatient endoscopy practices by surgeons or gastroenterologist with an excellent safety profile without mortality and with predictable conservative managed adverse events. and with predictable conservative managed adverse events.
And so the publication in Lancet is a big deal. And one that we're very excited about. Many of you may know that recently, the Lancet was basically took over the leadership position as the highest impact factor journal in the world. And so it's an honor to be published in it. And all do credit to the investigators in the study. As you see on this page, there's some quotes from Dr. Abidaya from the Mayo Clinic and Dr. Wilson from UTI in Houston.
Really highlighting some of the overall benefits that were observed in the study of the ESG procedure.
Dr. Abhidaya highlights not only the weight loss benefits, but the study also highlighted meaningful improvements in comorbidities such as diabetes, hypertension and metabolic syndrome.
And Dr. Wilson highlights the fact that we now have a safe, effective, and durable procedure that can be performed by both EIs and surgeons.
We are very grateful to both Dr. Abadaya and Dr. Wilson and the entire clinical investigative group who worked on merit. This was not an easy study to complete. Most of it was performed during the height of the COVID pandemic just a few years ago. And we congratulate them on the publication and we are very, very thankful for the work that went into it.
So I'd like to take a step back and put in the context now these two announcements.
for more than two decades.
Engineers, researchers, venture capitalists have been working on developing new endoscopic approaches for weight loss.
It's not an exaggeration to say that hundreds of millions of dollars
have been invested in pursuit of a less invasive, safe, effective, and durable treatment for weight loss.
And as you can see on slide 18, ESG is the first and only procedure that fully delivers on this promise. That fully delivers on this promise.
Let me say a word about the War Bear Intergaistic Balloon because it's an outstanding product and it continues to play a growing role in the treatment of weight loss. In the treatment of weight loss.
And our various roles are increasingly important in an integrated setting of care within an integrated end-of-air-adject practice.
But that being said, when you think about a full package of value and value proposition, only ESG offers what you see on the page. What you see on the page.
That being an FDA authorization, in this case for both primary and revision procedures, level one evidence with a merit study in the Lancet, an endoscopic approach that same day, no incisions, and with a fast recovery period.
proven effectiveness with 49% excess body weight loss in merit, and 15 to 20% total body weight loss in a global publish literature, which by the way now has more than 10,000 patients that have been studied in ESG procedures. So sinking,
A very good track record of safety with consistently around a 2% rate of adverse events. Theory of adverse events.
And as.
highlighted in the Lancet publication, these events typically can be managed very conservatively, and endurability, two years in merit and up to five years in the public's literature.
And so again, that's why there's so much excitement now about the authorizations and the study back to back. And in addition to been working this, as I said, for literally a decade or more, are incredibly excited to fly these two developments.
So for anyone on the call isn't familiar with ESG, it is a suturing procedure of the stomach, reducing the stomach volume, as well as delaying gastric emptying, which results in the benefits I just mentioned.
We're going after and addressing a large patient population, more than 100 million people in the US have a BMI over 30. But importantly, there are only about 200,000 primary bariatric procedures, traditional bariatric procedures, performed in the US each.
year that result that that translates sorry into a.2% treatment rate.
We recently conducted market research with more than 1,100 people and confirmed something that would seem intuitively pretty obvious. The biggest reason people don't consider bariatric surgeries is because they're not going to be able to get the surgery done.
Fear of side effects, fear of complications.
But the value proposition of ESU is fundamentally different.
In the same survey, we presented information about the ESG procedure, and approximately two-thirds of patients are interested in the procedure, and you can see the reasons why in terms of no surgical cuts, significant weight loss, durability.
57% would likely see a doctor to talk more about it.
I am in the
Preference and overall participants expressed a clear preference for ESG over traditional surgeries.
These surveys findings are consistent with the experience of physicians who are already early adopters. On developing our studies, the Start VPNs who use a VIP application can face a variety
And what they tell us is that when patients are treated with both options, ESG or traditional surgeries,
There is a true benefit for the SG procedure.
But furthermore, and probably even more importantly, many patients who would not even consider a traditional surgery are now contacting these practices and wanting to learn more about ESG.
And so with ESG, there's a substantial opportunity to grow the size of the pie of people who seek intervention.
I'd like to directly address recent questions about the potential impact of weight loss medications on our end-to-air bariatric business. I'd like to thank you all for your time. I'm going to invite you to join us on our end-to-air bariatric business.
Recently, there have been important developments in new weight loss medications.
including first semaglutide from Novo Nordisk, which has the brand name of Wachowibo.
as well as Trezepidside from Eli Lilly.
which is currently only approved for diabetes, but we do expect that in the coming months it will be cleared for weight loss as well.
These new medications are a substantial step up compared to traditional.
Late-Mostrogs.
and they are widely anticipated to become Blockbuster.
But as with any treatment, there are some downsides.
The new drugs are expensive at well more than $1,000 per month, and they often are not covered by insurance.
They can have tolerability issues and side effects.
And we know from decades of experience that compliance on long-term medications is often very challenging for patients.
But again, we do expect them to have a major impact, but recall the size of the problem. More than 100 million people and 40% of the adult population in the US have a BMI over 30, having new treatment options, including these medications as well as ESG.
is a big step forward. And we also anticipate that the increased focus on obesity provided by companies like Nova Nordisk and EOI Lilly will prompt many people to consider whether to take action. And we will prompt many people to consider whether to take action.
and to evaluate their treatment options. And what you do, they're going to learn more about ESG as well. And what you do, they're going to learn more about ESG as well.
The potential of combination therapy of ESG plus one of these new medications is very exciting.
The study shown on slide 21 was presented at DDW 2021, so a little more than a year ago, and was just recently published. It was a randomized control trial where one arm received ESG and the second arm received a combination of ESG and a short course of semaglutide.
The ESG arm alone performed very well with 18.7% total body weight loss.
in combination
the total body weight loss was 25.2%.
That's comparable to what is achieved typically with a traditional bariatric surgery.
without all of the downsides of undergoing a full surgical, traditional surgical procedure.
We are already aware of other physicians who are conducting similar studies of combination therapy for both ESG and revision procedures. And so we'd expect to see more data in the future. And so we'd expect to see more data in the future.
And also some of our customers are already incorporating GOP1 medications into their treatment paradigms A patient who receive an ESG
Turning now to revision procedures.
This also represents a big opportunity for us.
Over a 10-year period, 1.4 million people in the US just underwent a primary bariatric surgery in the US.
And over time, the body accommodates.
and studies have shown that up to a third of people who receive a bariatric surgery may be candidates for revision procedure.
Traditionally, this has involved another invasive surgical procedure with all of the costs and risks associated with a primary procedure.
But despite this, revision surgical procedures are the fastest growing segment of the traditional laparoscopic surgical market.
Now with the Apollo Revised Device
Physicians will be able to alter the anatomy using a suturing technique.
and be able to regain many of the original benefits in an incision-less and typically same-day procedure.
In a study part of us last year at a Brigham and Women's Hospital in Boston. In a study part of us last year at a Brigham and Women's Hospital in Boston. In a study part of us last year at a Brigham and Women's Hospital in Boston. then.
An endoscopic approach to revision procedures demonstrated similar effectiveness
to a surgical procedures. And this was studied by the way out to five years, but showed substantially improvement on adverse events and especially serious adverse events. And especially serious adverse events.
So the potential value proposition is very clear.
So turning now to slide 23. So we've just recently received the FDA market authorizations.
But early adopting physicians have already started to embrace the procedure.
and prove their viability in real-world clinical settings.
What you see on slide 24, the top 10 private practices in the US that are focused on endobariatrics.
and the top 10 academic centers where the majority or the entirety of their procedures are endobariatic.
As you can see, the growth in these practices in the past 18 months has been substantial, as both surgeons and GIs begin to incorporate endobariatic procedures into their clinical practice.
The academic centers have grown by 28% in the last year. The private practices have grown their volumes by 60%.
And furthermore, if you look at the average annualized sales across these 20 accounts in the first half of 2022,
The annual I-Sales is about $600,000.
As we look at this group, we see that there are numerous recipes for success.
private practice, and academic.
surgeon or GI or a combination of both. Some are primarily cash pay. Some are using prior authorizations, which I'll come back to as we talk about market access in a minute. So there are multiple potential models for success going forward.
I will say replicating these successors will take some time.
Many factors need to come together to create a successful practice.
A skilled and well-trained physician, staff who can provide excellent patient care both before and after the procedure, and a practice infrastructure that is effective in identifying and managing patients in all of the key requirements for success.
These 20 institutions and others like them in our key international markets already provide an excellent starting point and give us the confidence as we move forward.
Showed visual examples of some of the accounts that are already beginning to educate patients about end-of-air-ach procedures, including ESG and revisions. The results of the results of the results are not just the results of the end-of-air-ach procedure, but the results of the end-of-air-ach procedure are not just the results of the end-of-air-ach procedure,
These are publicly available screenshots from their websites.
But many of these practices are already using sophisticated marketing efforts, using channels like Facebook, Instagram, Twitter, TikTok, YouTube, as well as traditional radio and print ads.
Through these collective efforts, as well as co-marketing programs from Apollo, patients will have an opportunity to learn and increase awareness of ESG and endoscopic procedures, and awareness and understanding will continue to grow.
Flight 26 shows a summary of the different activities associated with our launch plans, including our Marketing and Medical Education initiatives.
Fly 26 shows a summary of the different activities associated with our launch plans, including our Marketing and Medical Education initiatives, training for physicians,
Reading our sales team and targeting them from a sales effort and then a range of reimbursement and market access initiatives that we are ongoing.
These activities are well underway and we do anticipate them contributing to our growth both later this year and into 2023 and beyond.
Highlighting some of the key activities among our sales organization, one of the big changes that we've made is we've now added a new role into our sales team that we call regional endobariatic managers.
This is a group that now compliments our existing market development managers, sorry traditional sales reps. And the REM role really compliments the traditional sales rep role by focusing on supporting new and emerging practices. And by focusing on supporting new and emerging practices.
and incorporate an incorporate or bear E.S.G. and revision procedures. And they're really focused on all of the different aspects of market development of identifying patients, how to share best practices, and...
helping grow and develop, which is a different set of skill sets, but one that's incredibly important in terms of how we will develop this over time.
And then we're also enhancing our self-deem effectiveness through enhanced training, customer relationship management, and marketing support.
Moving on to reimbursement and just market access, incredibly important to sustaining growth. Importantly, we have already had existing models that are working, as you see in the growth on the prior slide. Among the top 20 accounts, some exclusively use a cash pay model, and their substantial growth is very good evidence of the high interest level and willingness to pay among patients.
And we've been making channel checks with these accounts, especially in light of the broader macroeconomic environment. And we continue to hear reports of strong interest and demand, even in today's uncertain economic environment. Something we're watching closely, but we're getting good feedback from the people who are talking to patients every single day. And we're talking to patients every single day.
Other accounts also pursue prior authorizations with insurance companies for both ESG and revisions and often are getting coverage on a case-by-case basis.
Achieving broader coding coverage and payment will take time. We have three primary areas of engagement, especially now with the Gov Merit Study and the FDA Authorization and TAM.
First is the facility coding and payment. There are potential opportunities for new technology codes with Medicare, and we will be pursuing those. We will provide an update as we move forward.
CPT codes or how physicians get paid and we are engaging the leading GI and surgical societies in the CBT coding process.
Our objective is to have a successful Category 1 CPT code during the upcoming annual cycle, which will result in a new Category 1 CPT code being effective January 1, 2025. But again, still work to do with the societies because I think we've mentioned this before, the AMA CPT panel and the surgical and GI societies will really drive that process.
and then thirdly engaging payers.
Coverage will build over time. As I mentioned, we already have seen success in some cases on a case-by-case basis. With the new market authorizations, as well as with the Lancet publication, we will engage in efforts now to improve the coverage of both ESG and revisions.
In the meantime, moving on to slide 21, we do still have a very viable cash pay model. And we just tried showing on this slide that it really is a win-win for both patients and physicians.
Patients have very good treatment options that can be tailored to their needs with Orbera, with ESG or with revision procedures. And again, these can be in the context of both a dedicated GI-based endobariatric practice or an integrated program that's offered by surgeons.
For physicians, it is a chance to differentiate their practice, a chance to grow their practice, and the practice economics can be very attractive as well. The practice economics can be very attractive as well.
So in summary, with the recent market authorization and the Lancet publication, we are reiterating our medium term growth outlook and adding an alignness site to cash flow positive business in the years ahead.
And we are very excited about the impact that our products can have in improving patient care going forward.
So with that, let me turn it back to Matthew and we'll open the call to Q&A.
Certainly, ladies and gentlemen, the floor is now open for questions. If you have any questions or comments, please press star one on your phone at this time. We do ask that while posting a question, please pick up your handset if you're listening on speakerphone at Optimum Quality. We do ask that while posting a question, please pick up your handset if you're listening on speakerphone at Optimum Quality.
Once again, if you have any questions or comments, please press star 1 on your phone. Please note that we do ask that all Q&A participants please limit to one question and one follow-up question, then re-enter the queue.
Your first question is coming from Chris Cooley from Stevens. Your line is live.
Good afternoon, gentlemen and congratulations on the solid quarter. Just a couple quick ones for me.
First, Chaz, I'm just curious if you could help us maybe look into your crystal ball. As we think about, in particular, the Lilly results, how do you see this affecting the market from a channel perspective?
I guess not only from a provider, but also if we just think about the patient funnel. Does this bring more patients into the patient funnel than over time? Basically, you know, source from that for the surgical procedure. Does this...
I'm just kind of curious how you're thinking about that because in that study, the main percentage weight loss was approximately 15% at six months. The weight loss was approximately 15% at six months.
Just to kind of curious how you think that may or may not play out. And then secondly maybe just I'll ask both my questions up front for Jeff. You know I appreciate the focus on achieving profitability and the plan that you've outlined here on today's call. Just curious though if you've kind of changed your views on the rep ads I think at TDW you talked about getting upwards of 45 by a calendar year in. And then I noticed on the slide 27.
On the weight loss medications, both sonagletide and then the lily results with transepetide.
You know, I think we're all speculating a little bit in terms of conversations of how this will play out. But as we talk to physicians who, again are treating a lot of patients already.
I think from a channel standpoint it can play out at a couple of different time points.
As I mentioned, I do think you're going to see more people who are overweight to obese
are going to revisit should I do something, right? And you're going to have the weight of very large pharmaceutical companies talking about that. And someone will get medications, but someone will also learn about their options overall. And we've already seen some examples of that our customers have.
The second part that I did mention in my comments is patient compliance. Staying on a long-term injectable medication isn't easy, and we've just seen that across categories for decades. So we absolutely expect they're going to have an impact, no question. But on a relative scale of the number of patients, right now our fraction of procedures is such a small fraction of the overall market.
It's just being very critical about every dollar of spend and every head count that we add. But on the sales channel and the commercial organization, it's really less about expense control to be honest with you and more about the strategy around what is the right mix in the sales force, right? So we're really, in many areas, we're really doubling down on this REM role.
highlighting some REM roles and how they best interplay with the sales reps. And so that may differ on a geography by a geography basis. We may have situations where a sales rep has a broader coverage territory because they have an REM to support them. We may have situations where because of geographic distance, we may have to add more sales rep to cover a more expansive geography and then supplement with more or less REMs. So you can can So So
It's really more of a piloting around what's the right mix. And so it's less about, hey, let's say five heads, let's get the mix right.
Think they added that jump?
Now, I think you should arise as well.
Thanks. And if I could maybe just squeeze one other quick one in. I know during the first quarter you received overstitch, I'm sorry, you received clearance in Japan for overstitch. And we're going to obviously working on timing and the dollar value there for reimbursement. Was there any new updates that you can provide at this time for the Japanese market? And I'll get back in queue. Thank you. No, so we have a clearance in January . Sorry, in queue one, you're right.
We still, as you may well know, Chris, from other companies you cover, having the right distributor in Japan is critical and thinking long-term how you approach it. And so we are actually still finalizing our distributor relationships in Japan, which will end up impacting and what we expect on the growth trajectory. And then what we expect on the growth trajectory.
Thank you. Your next question is coming from Adam Mader from Piper Sandler. Your line is live.
Hi, good afternoon. This is Simran on for Adam. Congrats on the great quarter and thank you for the fulsome update on the business. So I know it's very early days, but what impact, if any, have you seen on ESG and overstitch volumes since the FDA approval of the labeling change for ESG and revised? And then maybe as a follow up there, how do we think about the adoption?
publication last week has been extremely high. There's a lot of excitement.
But there'll be a time lag from that to cases and people being treated.
right? I mean, if you think about the different elements I mentioned that come together to accelerate in their practice, they take some time. And so we do see that factoring into later in the year and then certainly our momentum heading into 2023. And so that's kind of the time frame I would expect to see an impact of moving from, as I said, a lot of interest to real impact.
And then it's also been offset, the analysis have just come in the last month. And as Jeff mentioned, we have seen some summer seasonality. And if any of you have traveled recently, airports are extremely busy, people are taking vacations. And we've seen that both with a number of our key customers. And so that's normal this time of year, but I think maybe even a little bit more so this year.
And that might cloud any immediate impact relative to putting the pieces together. We really are thinking about this from a long term as well. One of the things I meant to mention in my upfront comments is speed is not our most important thing in this next phase quality is. We want to make sure we get very good customers getting excellent outcomes, because that will result in the most long term sustainable growth. Because that will result in the most long term sustainable growth.
Okay, perfect. And then maybe as my second question, can you expand on the international performance of the business? And I know both, you know, in Jeff had mentioned the effects headwinds and...
Even despite that, we saw pretty strong growth coming from that business. So maybe talk about some of the underlying trends offsetting that foreign currency dynamic and even the trends that you saw in the direct versus distributor channel.
Sure, no happy to. Yeah, overall we had a really good quarter outside the US. You know, and the ESS business which is primarily overstitch outside the US, we only have ExTech in a few countries cleared. You know, we reported 24% on a gap basis and 35% year-on-year growth. So just good continued adoption of overstitch.
Most of our business outside the US is for overstitch, is endoveriatric, but we are having a focus on also expanding core GI as well, and the team is doing a nice job with that. A pretty good balance growth between distributor and direct markets.
And so we're pleased with that. We also see, you know, good growth on the IGB side as well. We've had some share wins on. We're much more competitive outside the US. Orvera really does have a great track record of tried and true. And so we continue to do well there. So we have a nice balance in our business and are pleased with how the performance went. You know, again, despite the FX piece, since I don't over over to wrap the.
add to that just to give a little more color when you see our international performance, what you're seeing is growth in predominantly existing geographies. So we really haven't done a lot of...
expansion into new geographies and are yet seen growth in new geography. So we're very encouraged by that because it is predominantly organic growth.
and are yet seeing growth in new geographies. So we're very encouraged by that because it is predominantly organic growth.
Got it. And then if I could squeeze one quick one in there.
Maybe any update on the NAS strategy, I know Jeff, you were talking about modulating spend and your efforts to do that. Some of the more longer term priorities are kind of being put on the back burner for now. So just what are your latest thoughts there, any update?
Yeah, I know that a Jeff did get a loot to the fact that we really are focused on driving the core businesses. And we now are really looking at Nash as one of the key comorbidities associated with improvements in weight loss as well as things like diabetes and hypertension. And so we're really trying to look at as part of the integrated strategy that's going to maximize the utilization of our products. And originally the Nash strategy started with Orbera.
But we really are looking at in the context of ESG as well. And especially ESG now with the clearance. And so that is an area where we absolutely are doing a lot of homework, working with thought leaders in the hepatology community, but also in the diabetology community and others to say which will have the greatest impact and therefore what the clinical strategy would need to be. So it's one that we're not rushing into a new clinical trial right now, especially given the broader economic environment.
Got it. Thank you both.
Got it. Thank you both. Thank you.
Thank you. Your next question is coming from Frank Tachanan, to the capital. Your line is live.
As Jeff, thanks for taking my questions, congrats on the quarter and all the progress. I wanted to start off with reimbursements around ESG more specifically, if there's any opportunity and apologies if I missed it, around establishing a temporary seat vote for the outpatient setting a little bit quicker than some of those other timelines so you can start generating data and maybe start to see some partial or one-off reimbursement in the outpatient setting while you await final coverage in the multi-year process.
Yeah, no, it's an insightful question, Frank, and it's one that our reimbursement team is working through as part of the overall facility payment side of things. So I mentioned things like new technology codes, but you're right, C codes could be part of that strategy as well, we're working through those details right now.
Okay, helpful. And then just back to the marketing authorization, my sense there was a couple last things to complete like developing some new skews, specific to ESG and revise. One, can you provide an update on that? And then two, as it relates to that, can you talk to any potential pricing power for the weight loss indications and how that could impact gross margins over time?
Sure. Yeah, so on the new, so there are new devices that were cleared, the Apollo ESG and Apollo revised devices.
There is still some, you know, frankly kind of logistical elements that go into the packaging around those and being ready to ship that we would expect will still take a few months and probably be early in Q4 when we're shipping the new devices. And that just aligns with what we expected the original timeline would have been and unusually FDA beat us to it, but we were more than happy. So we can still train physicians, we can still speak to the procedure. But the actual SKUs being available will be a few months.
And then we are also still finalizing the pricing strategy, but we do expect the opportunity for some premium pricing that would help. But we are still working through the final pieces of that strategy because it will have long term implications for things like reimbursement and others. And as we get further along we will provide an update on that.
Okay, and then it just said the second half of that, any comments on how it could impact gross margins over time.
Well, just that. I mean, the ability to have some pricing leverage would absolutely improve and help that. And then as Jeff mentioned, the overstitch and the components overstitch are our primary focus areas of reducing costs as well. So we've factored that into our overall plans of getting into the mid-60s on Gross Margin. But we'll work that as part of the overall mixes we go forward.
Okay, perfect. I'll stop there. Appreciate the question. Thanks.
Thank you. Your next question is coming from Matt Hewitt from Craig Hallum. Your line is live.
Good afternoon. Good afternoon and thanks for checking the questions. Thank you.
First one and you touched on this a little bit in your prepared remarks, but obviously there was a ton of buzz around DDW for both Overstitch and X-TAC. Now that we're three months removed, I'm just curious...
How has that kind of played out? Obviously you've gotten the big approval since then as well as the publication last week. So maybe it's still...
Difficult to pull those two pieces apart. But you know, follow through post T D W would be helpful.
Yeah, no, you're right, Matt. The interest level has been very high, increased awareness, especially for X-TAC as a new product and having, you know, podium presentations about it, really for the first time in a big meeting, just because it was one of the first really large in-person meetings, has been exciting. And that has played well and helped support the 16% sequential growth that I mentioned.
So our sales team is very much focused on building on that momentum and continuing it going forward. And we have a balance of now needing to be able to do that while also focusing on the end of the bariatric side as well.
So that'll be an important thing that we're going to need to balance. That is part of the rationale for these dedicated and no-bariatric manager roles. And so we have a certain subset of our sales force that is 100% focus on and no-bariatric side while our reps are carrying the full bag. And then a bariatric side while our reps are carrying the full bag.
Got it. And then maybe my second question. I think with slide 24, where you were talking about your top 10 private practice groups, as well as your top 10 academic groups and the growth that they're seeing. I guess that was one of the things that came up at DDW was that some of your top accounts are figuring out ways to navigate the reimbursement with pre-authorization. As they get more adept at doing so until you've got more formal coverage in place.
Is that something a kind of a road map that your other accounts can follow, especially now that you've got the formal labels, but is that something where they can follow that road map and kind of get reimbursement kind of pre-charged even ahead of formal coverage?
The short answer is yes. That is something that has, what you heard in some of your conversations at D.D.W. of people have been able to do that on a case-by-case basis, really it's some of the more sophisticated accounts who know how to do this, right? And have been able to effectively navigate those conversations. And they've been doing that independent of Apollo. We didn't have the labeling, so we didn't have a team in place supporting those kinds of efforts.
With the labeling, we can implement a team that can help support that. And for example, share best practices. And for example, share best practices.
It can even vary by payer, right? Some payers will respond to certain things that really will make or break the difference in terms of whether a patient gets covered and learning that, documenting it and helping people navigate it will be part of our strategy going forward.
That's great. Thank you.
Thank you. Your next question coming from Josh. Thanks from Cal. You're a lot of life. You're a lot of life.
Hi, good afternoon. Thanks for taking the questions. Chaz, I wanted to just ask about the label for OASG.
at just a BMI range of 30 to 50, how do you see...
your customer base and the future customers, physicians.
utilizing ESG in those BMI patients in between 40 and 50.
I think it's a really interesting question of how it will play out. I think people for the most part currently assume that the sweet spot will be in the 30 to 40 range, i.e. the merit population, and that's probably where we will start for the most part. But there were data presented at DAW, as you may recall, by one of our customers that showed very good results in patients with a BMI over 40.
is typically a little bit lower on the accuracy side, but really good.
safety profile and a lot of patient benefits, we'll probably start in more of a sweet spot in that 30 to 40 range and then maybe migrate up over time.
Great, I mean, well, there will be subunitization, and there may already be a VFG in patient, and a preliminary procedure to...
make a patient a better candidate for maybe a surgical sleeve.
We have seen people think about a kind of bridge of surgery approach.
at times as well. I'm not sure how common that is. I mean we certainly have heard it a bit more anecdotally.
and could that play out over time? Possibly. I mean, one of the benefits of ESG is you aren't cutting off future treatment options. It's something that surgeons are very interested in and know that they can do a sleeve in the future or do a bypass in the future if they choose to. Or do a bypass in the future if they choose to.
But I don't expect necessarily a bridge approach will be that widespread at least initially. Okay, okay. And then just wanted to ask about how your team is playing on marketing, durability of the S-Chadig, to marry it's out to two years through Southern publications that provide a signal of durability to be less longer or just five up to five years. How are you playing on working that? And just in the thinking about...
ESG revisions and how you see it path to potentially
the potential for an ESG revision with an ESG procedure.
So for an ESG revision with an ESG procedure, I actually take all the questions.
Sure, yeah, no, it's it.
Appreciate the question. It, you know, there, we have a lot of data out to two years. There was just a patient study with 3,000 patients out of the Middle East with very good data out to three years. And then there's limited data, but some out to five years. So we're in that range. I think our, you know, experienced customers who've already been doing this in advance of us talking about it are careful not to promise it as a panacea and really emphasize the importance of the patient follow-up and patient management.
and the programs that they do and if they, you know, how they engage in that can really impact the durability. But then also, you know, obesity is a chronic disease and if people understand and expect that, then, you know, setting up the possible expectation that yeah, down the line, you may need a retightening procedure and we've got experience with that and good success with it. Or in the future, you may be a candidate for a surgical procedure. These are often part of the conversations and I think will be part of how we market it as well.
that they do and how they engage in that can really impact the durability. But then also, obesity is a chronic disease. And if people understand and expect that, then setting up the possible expectation that, yeah, down the line, you need a retightening procedure. And we've got experience with that and good success with it. Or in the future, you may be a candidate for a surgical procedure. These are often part of the conversations, and I think we'll be part of how we market it as well. Thanks again.
Thank you. Your next question is coming from Matthew Blackman from Steeple. Live. Hi, this is Colin on from Matt. Just one quick one for me today. First of all, congratulations on the recent approval and the strong quarter. I had a question on the midterm growth target of 20%. Is that step up largely ESG driven or do you also contemplate potential halo effect for me against the rest?
of the broader portfolio pull through. Thank you. Yeah, no, Colin, I appreciate that. As we've done our strategic plans, we like, as I mentioned on the call and what we've seen so far, a good balance across both products and geographies. And so, I think there is a potential halo effect on ESG and revisions on the balloon. And I mentioned that in terms of sustainable endobariatric practices. We do still continue to see very good traction growth with X-Tact.
And that is before the CE mark, so that can be an important growth driver outside the US, where especially the economic value proposition of X-TAC is very, it fits very well with the medical systems. But then having said all that, I have said before, I think there is an opportunity given the value proposition I mentioned for ESG to become a market leading weight loss procedure.
That level of optimism isn't fully baked into that 20% number. I mean, if we get to that, we'll be well held up. Just a matter of how long does it take to really put all the pieces together and untapped the opportunity. Given what we're already seeing in people connecting the dots and having good success with growth, we're excited about it. So it's a little bit mixed, very good opportunities with ESG and revisions, but also balanced growth with other products as well.
That's not baked in. I mean, that level of optimism isn't fully baked into that 20% number. I mean, if we get to that, we'll be well held up, just a matter of how long does it take to really put all the pieces together and untapped the opportunity. But, you know, given what we're already seeing in people connecting the dots and having good success with growth, we're excited about it. So it's a little bit mixed, you know, very good opportunities for the SG and revisions, but also balanced growth with other products as well. Okay, great. So, let's go.
Thank you. That concludes our Q&A session. I will now hand the conference back to Chas McCon for closing remarks. Please go ahead.
Just to reiterate our thanks for everybody for joining us today. And, um...
I look forward to further updates of the year progresses. Thank you, ladies and gentlemen. This concludes today's event. You may disconnect at this time and have a wonderful day. Thank you for your participation.