Apollo Endosurgery Q3 2021 Earnings Call Transcript

Quartr
Provided by Quartr
October 31, 2021

There are 9 speakers on the call.

Operator

Good afternoon, ladies and gentlemen, and welcome to Apollo Endosurgery's Third Quarter 2021 Results. 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 is now my pleasure to turn the floor over to your host, Matt Kreps. Sir, the floor is yours.

Speaker 1

Thank you, and thanks everyone for participating in today's call to discuss Apollo's Q3 2021 Financial and Operating Results. Joining me on the call are Chaz McCahon, Chief Executive Officer and Jeff Black, our Chief Financial Officer. Today's call will include slides to accompany the audio presentation. For 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 about the continued spread of the COVID-nineteen virus and the ongoing impact it may have on our operations, the demand for our products, global supply chains and economic activity in general.

Speaker 1

These forward looking statements involve material risks and uncertainties, and Apollo's actual results may differ materially. For a discussion of risk factors, I encourage you to review the company's annual report on Form 10 ks for the year ending December 31, 2020, filed previously with the Securities and Exchange Commission and our most recent Form 10 Q. The content of this conference call contains time sensitive information that is accurate only as of the day of this live broadcast, on November 1, 2021. Except as required by law, Apollo undertakes no obligation to revise or update any statements to reflect events or circumstances after the day of

Speaker 2

this call.

Speaker 1

Additionally, today's discussion will include certain non GAAP financial measures, which we believe provide an additional tool for evaluating the company's core performance. Management uses these metrics in its own evaluation of continuing operating performance and a baseline for assessing the for future earnings potential of the company. Included in the press release issued today with our financial results and corresponding 8 ks filing are supplemental tables reconciling non GAAP figures to their closest GAAP comparable. Now I'd like to turn the call over to Chaz.

Speaker 2

Thanks, Matt, And thank you everyone for joining us this afternoon to discuss our results for the Q3 and participating in the webcast format as well. Today marks my 8 month anniversary since joining as CEO of Apollo. And so in addition to covering the quarter, I also want to give an update on what we've accomplished in the 1st 8 months and perspectives on where we're heading going forward. On the first call that I did after Q1, I laid out a strategy that we've been implementing over 3 phases energize the business, put us in a position to then accelerate and then lead over time. And that has involved Really forming a new leadership team that it takes the best of Apollo and great people that we had on board and then supplementing that with some key additions.

Speaker 2

As we focus and go after some really large market opportunities. And so I'm very pleased to then report today the progress that we've made. In that energize phase, the first phase of our growth strategy, We really talked about 3 main areas of focus: strengthening and revitalizing the team, delivering on near term growth and building a foundation for future success. And as you can see on the slide, we're very pleased with the progress we've made across all three of them. On the team, we have made some additions to the leadership team, including Jeff Black, our CFO, who is with me here today as well as additions to our sales and marketing organization.

Speaker 2

We also have been building out the team on the ground. We started in the U. S. We had 16 sales reps, which was not enough frankly to adequately cover the large country that we all that we have here. And so By the end of the year, we're projecting to have as many as 30 reps.

Speaker 2

And so a nice addition, including bringing back some experienced reps from Apollo as well as hiring others who are very experienced in the GI space. We've also made other targeted additions into key functions around the organization as we build to scale the business. And then we've also been very outwardly facing with our customers, spending time meeting with them, talking about our plans for the future and really in engaging and enrolling them in where we want to go with the business. Secondly, we delivered on the near term growth. We're very pleased with the results for the quarter.

Speaker 2

But also if you look year to date, we've got 60% growth spread equally across our endoscopic suturing business and our intragastric balloons and also quite equally across U. S. And outside the U. So the word I use as I look at our growth, this so far this year is balance, really nice balance across products and across geographies. And then the Xtac launch has been a big component of that as well.

Speaker 2

And we're very pleased with the success of the Xtac launch and the progress we're making, and I'll provide some updates there as well. And then all the while, we're building a foundation for future opportunities. Just about 10 days ago, we announced the results from the MERIT study at the Ipso meeting, and I'm going to touch on those. We also just this morning announced The first clinical publication for Xtac, we have submitted the FDA, a de novo 510 submission for APOLLO ESG and APOLLO REVISE, a critical step for us in developing a new indication for endoscopic weight loss for the OverStitch device. Early in the year, we got our breakthrough designation for the Orbera balloon for the treatment of NASH, and we continue to make progress on designing the path forward for a Huge opportunity in front of us with NASH potentially.

Speaker 2

And then we also have the ex TAC approval that we've received in Australia, which we've already gotten the approval in some of the other markets around the world, but this is another important one and sets us up, we think, well for more approvals outside the U. S. In the coming months. And then last but certainly not least, we completed the fundraise here in just a few weeks ago, which helps strengthen our balance sheet and positions us for future growth. So some key metrics, as we look to the quarter, I mentioned already 60% year on year growth.

Speaker 2

Clearly, 2020 was a difficult and challenging year and also a strange comparison. So you can see 33% growth compared to 2019, equally spread across our ESS and IGB businesses. And an interesting metric also that our top 10 accounts, direct accounts in both U. S. And outside the U.

Speaker 2

S. Have grown 100% year on year. So really building nice depth while also expanding the breadth of our business in new accounts as well. X Tek, as I mentioned, is progressing well and a key metric there is that in the Q3, 72% of our sales came from utilization from reorders. And that's important because that's showing real usage, real utilization, while we also in addition continue to open additional accounts as well.

Speaker 2

We're very pleased with the publication for Xtac that just came out. It's a multicenter trial, 93 patients, Excellent centers involved, including the Mayo, Johns Hopkins, New York University. So this is the first clinical publication for Xtac. Remember, it's a very new product for us. And as you if you had a chance to see the press release we issued today, demonstrated excellent efficacy and results in that publication.

Speaker 2

And then the MERIT trial, a big milestone for us, as I mentioned, was presented, and I will touch on that here in just a minute. So the DUMERIK study, I I think many on the call are familiar with it, but if you're new to APOLLO and are not, it is a randomized controlled trial of our ESG procedure, which utilizes the OverStitch device. So ESG is an endoscopic sleeve gastroplasty, and this was a trial that was randomized to patients who are receiving ESG versus a standard of Care of medically monitored diet and exercise and enrolled 2 0 8 subjects with a VMI between 3040. We are very thankful to the principal investigators, Doctor. Bahramabadeo from the Mayo Clinic, a leading GI in the field and Doctor.

Speaker 2

Eric Wilson from the University of Texas at Houston, a leading surgeon. And so we've had a close partnership throughout the study among GI and surgeons. You can see the primary endpoints of the study on the page, excess body weight loss of at least 25% and safety having We also importantly enrolled patients, a pre specified number of patients with hypertension and patients with Type 2 diabetes. Some of the highlights of the presentation that was made by Doctor. Abadad, Again, at a virtual session from Ifso, are presented here on this slide.

Speaker 2

We achieved a 49% Excess body weight loss at 12 months or patients did who underwent ESG, that was compared to a target of 25%. And importantly, the targets were developed based off of a 2011 white paper that was developed by the ASGE, which is a gastroenterology society and the ASMBS, which is a surgical society. And they set out guidelines for endoscopic weight loss therapies and a target of at least a 25% excess body weight loss was used to set the primary endpoint. Importantly, there was a 45% difference in excess body weight loss, compared to control versus a target of 15%. 77% of patients achieved at least a 25% excess body weight loss and the SAE rate as defined by the investigators was 2%, and all patients recovered from those events.

Speaker 2

The Importantly, as you see on the right side of the page, we also exhibited very good durability in the study. So after 2 years, patients maintained the majority of the weight loss out 2 years as well as the crossover patients who received ESG had excellent results. As I mentioned, one of the other key metrics or areas that we looked at in the study was the impact on comorbidities. And as you can see on the slide, we're very pleased with the results on comorbidities. Metabolic syndrome, Significant improvements, 82%, 83% improvement in metabolic syndrome, Type 2 diabetes and hypertension also showed significant differences compared to control.

Speaker 2

Same was true with quality of life as measured by a standard questionnaire called the SF-thirty six. Another interesting finding is around GERD. The ESG procedure preserves the function of the stomach. And one of the evidence of that that we saw was actually a reduction in GERD symptoms and no new or worsening GERD, which is an interesting finding because traditional bariatric surgeries actually often result in an increase in GERD symptoms. So this is important clinically and a nice finding from the MERIT study.

Speaker 2

And so these results along with Other data in support of ESG have formed the basis for the de novo submission, and we will look to continue dialogue with FDA about that in the coming months. So with that update on the quarter, let me take Step back and provide a little bit of an update on where we view the company going over the coming years and vision for where we're heading. To start with, we are serving large market opportunities. We have 3 products, the Xtac, OverStitch and Revera products across 2 large business opportunities, what we call advanced GI and our endoscopic weight loss opportunities. In addition, in the future, we have a third potential opportunity in the area of NASH, which is non alcoholic fatty liver disease.

Speaker 2

So Three product lines, big opportunities that we're already being able to build some really nice momentum in. And one of the things I really like As I look across each of the three product lines is that we've got really nice opportunities for growth and value creation over the near term, medium term and over time. With OverStitch, we continue to increase the number of users and the range of applications for the product, again, across both of those two main areas and are building a foundation for growth in the weight loss area. As I mentioned, we've submitted to the FDA for a new indication. And if that submission is successful, we would be in a position to then launch ESG, Apollo ESG and Apollo Revise in the coming months.

Speaker 2

In addition, over time, We could see that establishing endoscopic weight loss as a standard of care. For Xtac, we're pleased with the development here in the U. S, Primarily right now in terms of building utilization and experience, over time, we will be able to move that into a global product line as evidenced by some of the near term approvals, but likely a CE Mark, which is the European approval, is more of a 2022 event. And over time, we see the combination of Xtac and OverStitch putting us in a position to create a leadership position in defect closure. And then your vera atrogastric balloon has been performing very well as you can see in our results.

Speaker 2

There are new AGA guidelines. AGA, the American The neurology association issued clinical practice guidelines earlier this year and the market conditions have been favorable. Over time, we see the balloon as a key component of an integrated endovariotric weight loss practice that can incorporate both balloons and suturing options. And then in addition, we are working on the trial design for a new indication for NASH, which would create a brand new pathway to have the balloon potentially be reimbursed for those patients. So moving through each of the products, OverStitch in that advanced GI therapies, It really is the flagship product for the company.

Speaker 2

It creates a unique offering of being able to do what are called full thickness sutures through the stomach. Primarily, we've been growing through training, through medical education, new users, different applications, developing procedures and data. And you can see the procedure mix, right? About 60% of our business in the U. S.

Speaker 2

For OverStitch Are these advanced GI applications outside the U. S, it's more heavily weighted to the endovariiatric procedures, both ESGs and bariatric revisions, which I'll come back to in a minute. For X TAC, it's an important new addition to our portfolio. It creates or it fills an important clinical need between OverStitch that is used for full thickness, large defects typically in the upper GI and through the scope clips, which often are used for quite small defects. Xtac can be used in the upper and lower GI and has a good clinical and value proposition, especially in cases where you might need more than 3 or 4 through the scope clips.

Speaker 2

We are in the process of targeting high volume accounts here in the U. S. And building utilization and building experience with the product and are pleased with the progress we're making. And I just emphasize, we're still in quite early days of account penetration, of experience with the product and with just the first clinical data being published today. So lots of room and opportunity to continue to grow.

Speaker 2

Moving to the endovariatrix side of things, it's a really, really significant and large opportunity. Obesity is clearly an epidemic that is continuing virtually unabated. You can see some numbers of 650,000,000 People globally who suffer from obesity in the U. S. 42% of adults that translates to more than 100,000,000 adults in the U.

Speaker 2

S. Who You have a BMI over 30. And yet despite that, there are only about 200,000 primary surgical procedures currently in the U. S. In addition to primary procedures, revisions of prior surgeries It's a very meaningful opportunity for us.

Speaker 2

It's the fastest growing segment of the bariatric surgery market, increasing almost 5 times in the last decade, and we believe to be a potentially $1,000,000,000 opportunity based off of the volume of procedures that have taken place. Building on that, to be clear, what we're talking about Our patients who have previously undergone, the 2 leading procedures for bariatric surgeries. 1, is a gastric bypass procedure and the other is a laparoscopic sleeve gastrectomy. The data show that there were 1,400,000 of those procedures in the last decade. And there's a lot of clinical evidence that suggests that at least a third to a Patients will in fact regain weight, often within about a 5 year period.

Speaker 2

And there were 43,000 revision procedures, surgical revision procedures that were already done in 2019. But we believe that there's potentially an important role for OverStitch in endoscopic revisions. And in fact, 70% of our top 100 accounts in the U. S. Are already performing at least some of these procedures.

Speaker 2

And the reason why or at least some evidence for it is on the right This is from a study that was published over the summer. It was conducted at Brigham and Women's Hospital, and it's a 5 year study that compares endoscopic revisions to surgical revisions of gastric bypass patients. And what you see in the data are essentially equivalent weight loss. We're very close to it and but a much better safety profile, a lower rate of adverse events and especially serious adverse events. So we're encouraged by that And it's one of the main reasons why in addition to submitting for ESG for a de novo integration, we also submitted for revisions as well.

Speaker 2

For the ESG procedure, again, endoscopic sleeve gastroblasty. It is performed completely using the OverStitch device. And interestingly, it's been in development for a number of years now. And there are over 200 publications or abstracts that have already been developed, more than 6,500 patients in addition to the MERIT study that I referenced earlier. And consistently those results have shown a procedure that has a very good efficacy profile.

Speaker 2

The data on the right side of the page show a pooled analysis of 8 studies and nearly 2,000 patients that showed very promising both excess body weight loss and total body weight loss. There's another part of the same pooled analysis showed an SAE rate of 2%, which is exactly what we saw in the MERIT study. And then there are other inherent benefits to the ESG procedure as well. It can be reversible, if need be. It's anatomy sparing, because you're not taking out any tissue.

Speaker 2

There's no scarring. It can be done as an outpatient procedure and there's a relatively quick return to work. So there are a number of potential benefits. And one of the reasons why we are already seeing some practitioners embrace the procedure, but we are also very conscious of not marketing explicitly for it. And so we are going to work through the approval processes with the FDA and look forward to the potential of a new indication.

Speaker 2

We would estimate in a period on average de novo 510s take about 12 months. And so we'll be planning around that kind of a timeline for a new launch. So hopefully that gives you an update on the quarter to date from an overall business standpoint and a vision for wherever going forward. But to dive more into the financials, let me turn it to Jeff.

Speaker 3

Thank you, Chaz, and good afternoon, everybody. I'd spend a couple of minutes here just reviewing the financials we recorded today and then give some brief commentary on our operating spend profile and cash profile. So starting with revenue, We ended the quarter with strong growth across all of our products, the 3rd consecutive quarter of double digit growth. As Chaz mentioned, we saw a nice balance in that growth. In the U.

Speaker 3

S, we saw 66% growth. Outside the U. S, 55%. Our endoscopic suturing was up 30% and that's just highlighting continued demand for our products, OverStitch and Xtac across a number of patient indications. Orbera grew more than 20% and that was against what we would consider a stronger than expected rebound in elective procedures a year ago in Q3 2020.

Speaker 3

On a year to date basis, suturing and balloon product lines both grew 60 22. In terms of the full year outlook, we expect $63,000,000 to $64,000,000 in revenue for 2021. And this represents more than 50% growth over 2022, which we acknowledge was heavily impacted I'm sorry, over 2020, which we acknowledge is heavily impacted by COVID, but it also represents 40% growth in endobreatic revenue over 2019. Moving to gross margin. In the 3rd quarter, we saw gross margin improve by 190 basis points over Q3 2020.

Speaker 3

We saw an improved 3 60 basis points on a year to date basis. We also saw gross margin improve sequentially over the Q2 by 150 basis points. As we continue to talk about, we remain very focused on continued gross margin improvements, particularly with OverStitch, which has a lower Margin profiles on Orbera and Xtac. Major drivers of overall margin expansion will be product mix, improved absorption of overhead and direct cause improvement programs, particularly focused on OverStitch. We're still very early innings, but we're beginning to see the impact from all of these factors and we remain confident that we'll see a blended gross margin in the mid-60s over the next 3 to 5 years.

Speaker 3

Moving on to operating expenses. We look at our operating expense spend profile and we think it's important to Exclude non cash stock based compensation to get a clearer picture of what our non GAAP core operating expense run rate looks like. And today, our non GAAP OpEx is running at about 72% of revenue, of which 36% is sales and marketing, and that's a combination of variable and fixed Compensation and investments in overall channel development, much like we've been talking about. We do plan to invest for top line growth over the midterm and Focus areas there will be sales channel expansion, marketing, medical education, clinical reimbursement, product development and COGS improvement programs. So we do expect to see operating expenses increase in both of both absolute dollars and percentage of sales, particularly in 2022 and we should start to see some operating expense leverage in 2023 and beyond.

Speaker 3

But I think importantly, we have the ability to modulate spend as we need to and we're well positioned from a balance sheet perspective to make these investments. And that brings me to Slide 21 on cash usage. You'll see that over the 1st 9 months of this year, our average gross our gross quarterly cash burn was $3,700,000 net burn was under $3,000,000 We ended the quarter with pro form a cash of $98,000,000 That includes the net proceeds from the $75,000,000 follow on we executed a few weeks ago. So we're now very well positioned to execute on our growth initiatives. But not only did this financing provide us with Substantial cash runway, it added a number of very high quality fundamental healthcare investors to a solid and growing shareholder base.

Speaker 3

And so we thank our investors, both existing and new for the continued support and confidence. And then finally, before I turn it back to Chad, just a few comments on Slide 22 here regarding our cap table. We think it's important To paint a complete picture here, given that there are a couple of elements that don't show up in our issued and outstanding share count. So today, we have just under $40,000,000 in issued and outstanding common shares. In addition, there are just under $14,000,000 shares in prepaid funded warrants.

Speaker 3

So this would equate to 54,000,000 shares in outstanding common and common equivalents. We also have about 6,300,000 shares underlying our $19,000,000 in convertible debt. So all in, as we think about our cap table, which represent Just over 60,000,000 common shares outstanding on a pro form a fully diluted basis. And we think it's important to provide this clarity on the call just given the recent raise and historical funding mechanisms for Apollo. And with that, I will turn the call back over to Jeff.

Speaker 2

Thanks, Jeff. And let me echo Jeff's comments of thank you to our investors, both existing, who've been with the company for a long time as well as those who joined us in the recent fundraise. We very much appreciate it. So looking forward and kind of wrapping up, we absolutely view a number of very significant catalysts across each of our product lines in the coming months years. And I've touched on these already, but with OverStitch, the submission for the 510 is a big step for us, looking for a potential approval, right?

Speaker 2

We still need to work through the process with the FDA, but if successful, a potential approval potentially in the next year, which could form the basis of developing endoscopic weight loss practices and procedures and then also the basis of expanding reimbursement over time. With Xtac, good progress with the U. S. Launch. Our first clinical evidence published and just recently here, we announced it today.

Speaker 2

We are aware of others that are also in development. So more Studies that will be coming out about the product, in coming meetings over the course of the next year. And as I mentioned, looking towards a broader launch outside the U. S. Potentially in 2022 as well.

Speaker 2

And we also have our engineers working with the early clinicians who've used on R and D initiatives and what we're calling product line extensions for Xtac. There's some great ideas there and hold the future potential of New developments of using Xtac essentially as a platform for new developments and we'll have more updates as we move forward with that. And then the balloon, which has been doing very well globally. In the coming year, we would expect to start a trial for NASH and the new indication. As we've announced previously, there are new CPT codes that will be implemented starting in January 1, 2023.

Speaker 2

And then we also see the balloon as a critical component of an integrated practice for endoscopic weight loss as a key driver for the product line globally. And so to finish with our overall growth outlook, We're very pleased with the growth we've seen this year, essentially 50% growth over 2020. As you look at the guidance of $63,000,000 to $64,000,000 and all of that underlying this energized phase. So top line growth, really building the team and energizing the organization as well as our customers, continuing to grow the commercial organizations globally, both within the U. S.

Speaker 2

And outside the U. S. Enhancing our position in that advanced GI category, OverStitch a great product and then adding X Stack to it, developing the next new things from our R and D standpoint, and then very importantly, fortifying our balance sheet. And all of that creates the foundation, we believe, for the next phase of acceleration and then ultimately leadership. And so with that, we thank you for your interest.

Speaker 2

Thank you for joining the call and we'll open it up for questions.

Operator

Certainly. Ladies and gentlemen, the floor is now open for questions. Your first question is coming from Frank Tekken from Lake Street Capital Markets. Your line is live.

Speaker 4

Hey, thanks for taking my questions guys and congrats on the great results. I wanted to start with Extech. I'm curious if you could tease out just how much revenue Was generated from Extech in the Q3. And then as a follow-up to that, can we just take a step back? I know we've spoken about market sizes a couple of times as far as Total account opportunity, how large the clip market is and those types of things.

Speaker 4

But I wanted to take a step back and just now that you've had a couple of quarters under your belt, if you could Frame up how large of a product line you feel like Extech can be for Apollo?

Speaker 2

Yes. So thanks, Frank. Appreciate your comments. So for competitive reasons, we're still not separating ex STACK out individually. It's continued to do well.

Speaker 2

As you know, in the first half of the year, On our Q2 call, we mentioned that we passed the $1,000,000 mark, which was an important milestone for us, and we've been able to continue to grow from there. We see Xtac as an important contributor to growth, especially as it becomes a global product line for us. It's we're pleased with the utilization across both upper and lower GI. There are a lot of potential cases, inclusive of A big opportunity that we talked about in colonoscopies, 20,000,000 These that are performed each year, a significant portion of those that do require or should be closed, right? There's a lot of clinical data that said they should be closed.

Speaker 2

Otherwise, there's a risk of delayed bleeding That's at least 8% to 10% based off of a number of studies. And that aspect predates Xtac, right? The pivotal study, that study that was actually sponsored by some of the equipment manufacturers, but it's growing. I was just recently at the ACG meeting and there was discussion The need to close and we think Xtac is very much well positioned for that market among others. So we see it being an important growth driver for us, as well as along with OverStitch as well as the balloon.

Speaker 2

And so it can play a very important role going forward.

Speaker 4

Got it. Okay. And then I just wanted to maybe back up to a little bit broader question. I think I saw on your slides 20% plus Midterm target revenue CAGR on a go forward basis. Am I understanding this correctly that you're thinking on On a regular basis, you can be growing top line about 20% as a whole?

Speaker 2

Yes. I mean that's a that We went through a strategic planning process over the summer as a team and really looked at our opportunities across product lines and across markets. And so that is, in our view, sort of a medium to longer term target that we're aiming for, and that we I believe that we can potentially achieve. It's we're not guiding to next year yet, but it is what we are kind of aiming for from an overall we want to be a consistent growth company and we believe that that's at the right level that we can achieve.

Speaker 4

Okay. That's helpful. And then the last one for me. I just wanted to touch on the revision market a little bit more, Specifically as it relates to reimbursement, I know there's some things working you're working through as it relates to ESG reimbursement, but My sense is there is some reimbursement that's in place and it's a little bit easier for the reimbursement in place to be applicable to revisions with OverStitch 1, am I understanding this correctly? And 2, can you maybe just give us a little background around reimbursement as it specifically relates to revisions?

Speaker 2

Yes. So revisions are interesting in that you're right. Because the patients have had a prior procedure and have experienced the benefits of weight loss. When they have weight regain, they often also have a lot of additional comorbidities as well. And the alternative is a surgical procedure, right, and which is often an inpatient procedure.

Speaker 2

So what we find or at least as I talk to many of our customers is that they are able to pursue case by case prior authorizations for revision procedures. They're using typically an unlisted code. There's no dedicated code for revisions. But what we hear quite frequently is a lot of success in being able to make the case that an endoscopic revision is the right way to go and be able to get those procedures reimbursed. And so we think that's a good foundation to build on.

Speaker 2

That's our customers are pursuing that individually. Again, we don't have the indication. So we are not actively supporting that. We're learning from our customers and we're thinking about the team we might want to have in place if we are in fact successful with an indication to help support other customers in having similar success.

Speaker 4

Got it. Perfect. Thanks. I'll stop there.

Operator

Thank you. Your next question is coming from Chris Cooley from Stephens. Your line is live.

Speaker 5

Good afternoon and congratulations on the stellar quarter. Maybe just Two quick operational questions for me. Could you help us think a little bit just when we look at The growth in the U. S. And internationally, I guess, 2 components there.

Speaker 5

1, Do you attribute the decline in the IGB franchise outside the United States to Is this more COVID related? Do you think these were competitive concerns during the quarterly period? Just would appreciate some color there then how we might extrapolate that to the United States now that the stats balloon is approved here as well. And then similarly though, if I could Just thinking about the U. S.

Speaker 5

Growth, which was really strong in the ESS franchise, up about 130%, if I'm looking at this correctly. Could you maybe just help us think a little bit about the contribution there from Extech? I know you're not willing to give the dollar revenue piece out, but in the past you've talked about Number of accounts, I'm curious if that's a statistic you'd still be willing to help us with? And then I have got one quick follow-up.

Speaker 2

Sure. Chris, let me make sure I'm clear on your question on IGB when you talked about the Fine. What are I just want to make sure I'm addressing the right questions.

Speaker 5

I picked up the wrong number. It's only it's actually up there. I'm looking at the queue here quickly. I apologize. So if you could just maybe speak more to the U.

Speaker 5

S. Growth?

Speaker 2

Sure. Yes. And so just want to make sure I was clear in answering the right question. Actually, on the IGB, we're very pleased with the growth. Important to recall, last year It was actually kind of a rebound quarter, at least in the U.

Speaker 2

S. For gastric balloons. And so seeing growth on top of that, we were very pleased with. On the U. S.

Speaker 2

Growth for endoscopic suturing, again, the growth I think has been nicely balanced, both Core growth with OverStitch, if we look especially if we look year on year, pretty comparable quarter on quarter. And that's not surprising as you think about summer months and as well as and we've talked about previously Navigating through COVID and OverStitch depending on the setting of care can be impacted as a lot of procedures still are and we're all still navigating that. But we did see with ex TAC A growth in the number of accounts utilizing in the quarter of kind of a double digit growth in that. Our strategy It is much more focused on utilization than just growing accounts. So we do continue to see growth in accounts, but we're actually frankly incentivizing our team and focusing our team on growth within the targeted accounts that we're already in, while continuing to add to the account base.

Speaker 5

That's helpful. And if I could just as well quickly and I'll get back in queue. Just looking through here as well, see that Distributor sales increased pretty significantly as a percentage of revenue versus the prior year. But when I look at least at first pass here in terms of kind of the standard metrics like DSO and the like Cash conversion cycle, it doesn't seem like that impacted things have impacted you improved on those ratios. So one, I was hoping you could just expand on maybe The increase in distributor efforts outside of the U.

Speaker 5

S. And 2, if you're doing anything different there such that Just when we look at those kind of metrics, we're not seeing any kind of expansion in the short run with that kind of step up in distributor sales. Thanks so much.

Speaker 2

Sure. I'll hit the sales side of it and then Jeff can elaborate. Distributor sales can be somewhat lumpy sometimes, right? They can be large orders. And then I would say the historical Comparison is important in that, the U.

Speaker 2

S. Did recover faster last year than the distributor markets. And so it is important to kind of take a longer term view of kind of quarter to quarter. But we feel good about where we are in terms of with the distributor orders and solid orders across geographies. So there wasn't one big order that affected the results here.

Speaker 2

It was pretty balanced again across our different distributor markets. My lumpy comment was really just sort of a reference to the comparisons to last year where the distributor market was much slower to come back. And so that comparison is probably important as you will see year on year. Jeff, as you look about the other Other metrics?

Speaker 3

Yes. Chris, on DSOs, I can tell you that I'm almost 90 days in now, I guess, I guess, 90 in today. I've actually been really impressed with The company's ability to collect and I think it's a function both OUS and in the U. S. Of The team really knowing the customer, particularly in OUS distribution.

Speaker 3

Mike and his team has just done a phenomenal job At building a customer base or whether you call them a direct distributor or otherwise and really understand their customer. And so we've been really pleased. We've not had collection issues to date. And as we bring on new The distributors, they're very well vetted. And so I think, we continue to really push on collections and we've had A lot of success there.

Speaker 5

Super. Thanks so much.

Operator

Thank you. Your next question is coming from Matt Hewitt Craig Hallum Capital. Your line is live.

Speaker 6

Good afternoon. Thank you for taking the questions. Maybe first one, and I realize it's only been a week, but I'm Just curious what the initial feedback or interest or inbound calls that you receive following the final release So of the MERIT data, this is something that I know, the investment community has been waiting for, for several years, but so has I would think the practitioners, the people that are doing these procedures on a daily basis have likely been waiting, too. So I'm just curious what you've heard, in the past week.

Speaker 2

Thanks, Matt. Yes, there's been a lot of excitement. It was fun to be at the ACG meeting, which was immediately after that, if So, virtual meeting, and so to talk to a lot of customers there. It was Yes. For as you follow the space and know the data were very much confirmatory to a lot of data that have already been collected, but it's still really nice to see, Right.

Speaker 2

In terms of the randomized control data that supports the value proposition. And so we've had good conversations with leaders from both the GI and the surgical side of things. People are obviously looking forward to the indication as well because that will certainly also play a role in things like reimbursement and other activities. But the general feedback is a lot of excitement and very positive.

Speaker 6

That's great. Thank you. And then, one of those we really appreciate the slide, kind of going through what's next, the near term and kind of midterm catalyst, but one that I didn't see on there. How should we be thinking about CPT codes for OverStitch? Do you need to get the labels in place first?

Speaker 6

Or is it possible that in the January meeting you could see, Even if it's just more of a generic label or a CPT code, what's the cadence there?

Speaker 2

Yes. No, so the CPT process really is led by the societies. And so the GI societies are very aware of and are thinking about CPT codes both around revisions and primary ESGs. And so they're actively working on that. We're just getting into the new cycle that would be for the next Three meetings that take place over the next year would point towards a CPT code being in effect January 1, 2024.

Speaker 2

That's just the way those cycles work. And so they know those deadlines and are thinking about it. It's a combination of primarily making sure all the docs are aligned with the actual publication, and then the submission process. And frankly working together across other societies to ensure their support. And so that activity is ongoing.

Speaker 2

We're optimistic that it could happen within one of these next three meetings to be in that January 2024 cycle. But there's more work to do. And ultimately, the societies are going to drive that timeline. We'll do our best to make sure they've got the information they need to be able to do that.

Speaker 6

Got it. Yes, just like you had with Orbera, where the societies were kind of led that charge to, I understand that. And then maybe last one for me and then I'll hop back in. Regarding the Orbera NASH study, has there been any update as far as the Specifics on the trial, where do those stand? Because I think it starts early next year, but if you could provide an update on that, it would be appreciated.

Speaker 6

Thank you.

Speaker 2

Yes, Matt. Previously, we had communicated a start potentially at the beginning of next year. We're still in the design phase, quite frankly, Of that, as we work through, both with the FDA and with CMS and working it through. We've also with the information around the comorbidity effects with ESG are also having some interesting discussions of exclusively an Orbera balloon trial, is it potentially an Orbera balloon as well as an ESG trial, maybe a multi arm trial. So we want to make sure that whatever study we design and get By the agencies, it does lead us to a pathway towards positive reimbursement.

Speaker 2

So we're taking the time with our advisors to make sure We get that right. And so we won't be starting a study early next year, but we are working on the design of that that would still allow us to move forward from there.

Speaker 6

Got it. Thank you.

Operator

Thank you. Your next question is coming from Adam Mater from Piper Sandler. Your line is live.

Speaker 7

Hi, Jazz. Hi, Jeff. Congrats on all the success here And appreciate you guys taking the questions. 2 for me, 1 near term and then 1 on the mid to longer term. So first and foremost, just on the guidance, revenue guide, you took that up to $63,000,000 to $64,000,000 I think that implies $16,800,000 or so at the midpoint for Q4, clearly some good underlying momentum in the business exiting Q3, and by my math, that's about 4% quarter over quarter sequential growth.

Speaker 7

So it seems pretty reasonable and I guess given the environment, but wanted to dig in a little bit just on the construction of the guidance. So maybe what's embedded in the guide for various things like COVID-nineteen, potential staffing issues or other capacity constraints. And then we've heard some other medtech companies talk about a backlog accumulating during Q3. So just wondering if you have a backlog that needs to

Speaker 2

be worked through as well?

Speaker 7

And then I had a follow-up.

Speaker 3

Yes. Adam, this is Jeff. I appreciate the question. Look, I think As we've talked about, Q3 was there was definitely a COVID impact and we're maybe less exposed to it than others that are more dependent upon inpatient hospital procedures. We do have a fair amount of our business that's outpatient and even in surgery centers.

Speaker 3

So I think we're probably less impacted, but we certainly saw the impact. And It's lumpy. And to the extent that we see concentrations of impact in geographies where We have greater amounts of business and we will certainly be impacted. But I think we've got the benefit of being in outpatient. We've got the benefit of having being geographically dispersed not just within U.

Speaker 3

S. Geography, but globally. But that said, we are still seeing some pressure and we Expect to continue seeing pressure. So we're being cautiously optimistic and feel good about the guidance we put set forth. I'd like to say that there's a huge backlog.

Speaker 3

We'd love a backlog. That's not been our experience. And We're pretty certain that the business that we're seeing represents run rate demand. And going into the 4th quarter, Would have been great to start with the backlog, but that's not the case for us.

Speaker 7

Okay. Very helpful, Jeff. Thank you for that. And then just for the second question, the Merit data now in hand, results look really compelling. Just curious if I could push a little bit on the mid to longer term outlook for OverStitch.

Speaker 7

How are you guys thinking about growth going forward? You've grown that product very nicely 20% to 25% range or even above that with the exception of last year, which is impacted by the pandemic. So does the future ESG label potential broader reimbursement steepen that curve? Does it sustain the durability? Just how do we think about the dynamics there?

Speaker 7

And I'll hop back in the queue. Thanks so much, guys.

Speaker 2

Yes, Adam. So the 3 phases I laid out, going back to the originally sort of Just defining the strategy, we're going to put an exact timeline against those, but in my mind, The critical trigger of moving from that energized to the accelerate phase is the indication for ESG and for revisions, Right. And so I do see them as a potential accelerator, even while we're working on the broader reimbursement pathways that we just discussed. But even in that sort of medium term of with an indication being able to again learn From physicians and institutions that have already started to connect the dots, we do think that there's a significant opportunity here. And so, we're in that learning phase.

Speaker 2

We're going to be very careful and appropriate from a promotional standpoint. But if we are successful in getting the new indication, then absolutely, we see that as a potential data as An accelerator, from a growth standpoint for OverStitch.

Speaker 7

That's helpful, Chaz. Thanks so much.

Operator

Thank you. Your next question is coming from Josh Jennings from Cowen. Your line is live.

Speaker 8

Hi, good evening and thanks for taking the questions. Great to see the positive MERIT results and the strong quarterly results. Wanted to ask about, the MERIT study and just what you So with the durability of the outcome for ESG and just thinking about the body of evidence In front of Marriott, where do you think or what does your team think that durability will wind up? I mean, this seems like 2 year Sustained weight loss was demonstrated effectively in the MAREIT study, and I was just curious in terms of how we should be thinking about the durability of the procedure going forward.

Speaker 2

Thanks, Josh, for the question. Yes, the Merit study had a 2 year endpoint. And you're right, as You saw in the data that we summarized today, there really was nice durability of maintenance of weight loss out to 2 years. And there have been a number of other studies that have demonstrated that as well, including the pooled analysis that's in the slide set. That does show nice consistent results after that time period.

Speaker 2

There's also one study on ESG out to 5 years that was published just a few years ago that has also shown a really nice maintenance of effect out to 5 years. And so, we will encourage our investigators to keep collecting longer term data because durability will certainly be an open question, especially for for payers, for example, but we're pleased with what we're seeing. And so we think it I think the investigators presenting the MERED study Talked about ESG potentially filling a really nice important gap between whether it's the balloon that typically has a shorter term time horizon as well as medications, right? There are some really interesting new medications, but compliance and costs have often been an issue for medications between those and then the surgeries, which do have some very good durability data for both laparoscopic sleeve and gastric bypasses. We think ESG can fill an important gap, a very good durability and an overall really good value proposition.

Speaker 2

And so we were pleased with the outcomes.

Speaker 8

Excellent. Just one quick follow-up on the Understand the societies will be submitting for CPT code issuances, but thinking about Payer decisions on coverage and payments. Is there anything that Apollo can do while the FDA is reviewing the de novo application, Just get this data in front of payers and start that process or do you need to have approval first before those discussions start? Thanks for taking the questions.

Speaker 2

Yes. No, we're going to tread pretty carefully there just because we don't want to get ahead of ourselves, from a but we can absolutely get all of our ducks Right now with the benefit of the multiple studies I referenced, and then the NAREIT study on top of that, Things like putting together all the economic value dossiers that you would need, continuing to encourage Our investigators to publish on their results with comorbidities, for example, really reinforcing the different So we've got a really good story to tell. So I think it's a matter of, again, sort of planning and preparation now, making sure we've got the right team in place to do that, and we've been working on filling out that group. But the actual activities We'll depend on first the publication, but importantly the indication as well.

Speaker 8

Great. Thanks again.

Operator

Thank you. There are no further questions in the queue.

Speaker 2

Listen, thank you all very much for joining us this evening. We very much appreciate your support and have a good evening.

Operator

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.

Powered by Quartr
Earnings Conference Call
Apollo Endosurgery Q3 2021
00:00 / 00:00