Allurion Technologies, Inc. Q4 FY2023 Earnings Call

Good morning. My name is Krista and I will be your conference operator today. At this time, I would like to welcome everyone to the Ellurion fourth quarter earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during that time, simply press star followed by the number one on your telephone keypad. And if you'd like to withdraw that question, again, press star one. Thank you. I will now I'll turn the conference over to Mike Kavanaugh, Investor Relations. Mike, you may begin your conference.

Good morning, and thank you all for joining us today. Earlier today, Allureon Technologies, Inc. issued a press release announcing financial results for the quarter ended December 31, 2023, and describing the company's recent business highlights. You can access a copy of the announcement on the company's website at www.investors.allureon.com. With me on the call today are Shantanu Gore, Founder and Chief Executive Officer, and Chris Geber, Chief Financial Officer. Shantanu will begin the call by discussing the quarter's business and operational highlights. Chris will then provide a review of our financial results, and we will close the call with a question and answer session. Before we begin, I would like to inform you that comments mentioned on today's call may be deemed to contain forward-looking statements made pursuant to the safe harbor provisions of this private securities litigation reform act of 1995 including but not limited to the financial outlook for 2024 the market and demand for our products and elective procedures the impact of cost reduction initiatives on cash burn and runway and the ability to compete with GLP-1 drugs or use the Illurion program in combination with GLP-1 trunks. Actual results may differ materially from those expressed or implied as a result of certain risks and uncertainties. These risks and uncertainties are described in detail in our Securities and Exchange Commission filings, including our most recent 10Q filed on November 14, 2023. Our SEC filings can be found through our company website at investors.elurion.com or the SEC's website. Investors are cautioned not to place undue reliance on such forward-looking statements, and Ellurion undertakes no obligation to publicly update or release any revision to these forward-looking statements. Please note that this conference call is being recorded and will be available for audio replay on our website at Ellurion.com under the Events and Presentations section on our Investor Relations page shortly after the conclusion of this call. today's press release and supplementary financial data tables have been posted to our website and with that I will turn it over to Shantanu thank you Mike and

good morning everyone revenue in the fourth quarter of 2023 total 8.2 million dollars and revenue for the full year 2023 total of 53.5 million dollars in line with our pre-announcement in early January while our fourth quarter results reflected macroeconomic headwinds in certain markets leading to what we believe were temporarily lower reorder rates as distributors and certain accounts adjusted their inventory levels. These markets appear to be stabilizing, and we are seeing improving demand. Our global market checks affirm our expectation that we will see continued improvement throughout 2024. Given this, we are guiding revenue in the range of $60 million to $65 million, dollars, representing growth of 13% to 23%. Notably, for the full year 2023, procedural volume, which we estimate through new app user data, increased by 30% compared to 2022. This growth showed strong consumer demand for the Ellurion program, which, despite significant reductions in overall marketing spend, we expect to continue in 2024. In addition, we recently completed strategic cost reduction initiatives right sizing our business ahead of a pivotal 2024. This included a reduction in force which we expect will reduce our cash burn to approximately 30 million dollars for the full year. These actions as well as our recent debt pay down are intended to increase our operational and financial flexibility, position the company to navigate an evolving economic landscape, and extend our financial runway for sustained future growth. Chris will provide additional details on our fourth quarter performance and our outlook in a moment, but I would like to provide additional details on our most important near-term initiatives, the Audacity FDA trial, our post-market clinical pipeline, capitalizing on the increased market opportunity we believe GLP-1s provide, and the expansion of the Allurion Virtual Care Suite as a B2B SaaS offering. As I reflect on Allurion's fourth quarter, only our second quarter as a publicly traded company. I am proud of the milestones we have achieved in the past 12 months. In October, we completed enrollment in our Audacity trial, a randomized pivotal control trial designed to support a pre-market approval application, or PMA, for the Illurion Balloon to the U.S. Food and Drug Administration. We completed enrollment two months ahead of schedule after receiving unprecedented interest from U.S. subjects. And the interest we observed for the Audacity study, amidst the pervasive interest in GLP-1s and anti-obesity medications, further underscores just how massive we believe the market opportunity is. We will be providing further updates on the Audacity trial and our PMA submissions on future calls. In addition, throughout 2023, we presented several scientific studies that demonstrate the transformational nature of the Ellurion balloon. For example, in a 5,000-patient study, the largest gastric balloon study of its kind, results showed patients lost 14% of their total body weight four months after balloon ingestion. In a separate 522-patient study, results showed patients maintained 95% of their weight loss 16 months after initial balloon ingestion. Allurion is also approved for a second balloon treatment. With a two-balloon program, the results are even more impressive. In an initial study, our patients were able to achieve 23% weight loss after 12 months. Taken together, these results underscore the significant and sustainable weight loss that can be achieved through the Ellurion program without expensive surgery or drugs. Importantly, we have demonstrated the Ellurion program can be used effectively in combination with GLP-1 drugs. Results from two recent studies of more than 100 patients showed an approximately 18% weight loss in just four months and approximately 19% weight loss at eight months. We also see tangible catalysts that we expect will increase the scope of the patients we are able to assist. Today, broad awareness of the Ellurion program remains relatively low. Our data show that approximately one-third of our patients previously tried GLP-1s before starting on Illurion. Additionally, 45% of our surveyed health care providers have stated anti-obesity medications boost awareness and interest in the Illurion program. While GLP-1 drugs may have contributed to the short-term headwinds we faced in the second half of 2023, we believe that new anti-obesity medications can be a powerful driver of patient demand in the long term, since studies show over two-thirds of patients who have started one of these new drugs discontinued it within the first year, leaving them to search for a second-line therapy. We believe our weight loss program is further amplified when combining the balloon therapy with a Lurion's holistic behavior change program. To deliver this program at scale, we have developed a suite of digital tools, including our proprietary virtual care suite, or BCS, which is an AI-powered remote monitoring platform that continuously monitors patients and facilitates clinician intervention through secure messaging and telehealth. This allows patients to stay on course with their weight loss objectives. Integrated with the Allurion mobile app and connected scale, the VCS provides real-time patient data, with 82% of providers reporting higher patient engagement, 87% reporting increased patient accountability, and 88% reporting improved deficiencies in their practice. The program comprises over 100 modules covering topics such as healthy eating, exercise, sleep, and stress management. These modules are delivered to patients throughout their balloon journey, providing comprehensive support for sustained lifestyle changes. With last year's introduction of Coach Iris, a personalized AI-powered 24-7 weight loss coach, we are now seeing even better results throughout a patient's weight loss journey and are happy to report that in-app sessions for the platform are up over 60% year-over-year with over 4.1 million total app sessions in 2023. To support this growth, we have begun to commercialize our digital platform with a B2B SaaS model that calls upon large weight loss clinics in need of a solution to manage high volumes of patients. In January, we announced three exciting commercial agreements. With Weight Doctors, Germany's largest weight loss clinic chain with 12 locations and more than 2,000 patients already onboarded onto the VCS. Transform, the UK's largest aesthetic and weight loss clinic chain with 16 locations, and Lazio, France's largest aesthetic and weight loss clinic with 135 locations, solutions, all of which signed for 2024. Turning to the long-term opportunities, obesity is a massive worldwide epidemic. The growing prominence of GLP-1 drugs is a strong indicator of just how large the market for weight loss solutions is, with analysts projecting $50 billion of revenue by 2030. We continue to be excited about the buzz that GLP-1 drugs are bringing to weight loss therapies, creating interest among patients to seek medical weight loss options and driving more patients towards the Illurion program. Bottom line, we believe we are just scratching the surface of this massive obesity market. With that, I'd like to turn the call over to Chris Geber, Illurion's Chief Financial Officer, for a full review of our financials. Chris?

Thank you, Shantanu, and thank you all for joining the call today. Fourth quarter revenue totaled $8.2 million, a decrease of 57% from the fourth quarter of 2022 as we shifted our marketing spend to more efficient channels, sought deeper penetration in key markets, and focused on reducing our channel inventory from earlier in the year. Gross margins in the quarter were 78% compared to 79% the same period a year ago. Sales and marketing expenses of $10.7 million decreased by $4.2 million, or 28% for the quarter, driven largely by reductions in spending as we shifted our focus to reducing cash burn. Research and development expenses increased by $339,000 to $6.1 million in the quarter as we continue to invest in the FDA Audacity trial. General and administrative expenses of $15.4 million increased by $10.7 million, driven by $7 million in accounts receivable reserves, and $3 million in stock-based compensation and public company expenses. Walsham operations for the fourth quarter increased by $15.6 million to $25.7 million, compared to $10.1 million in the same period in 2022. The increase in Walsham operations was driven by a $9 million less gross margin due to low revenue and increased accounts receivable reserves and stock compensation expense, partially offset by a reduction in sales and marketing expenses. As of December 31, 2023, we had cash and cash equivalents of $38 million, an increase of $30.4 million from December 31, 2022, as a result of the completion of the business foundation with continued help in August 23 and partial paydown of debt in December 2023. Revenue for the full year ended December 31, 2023 was $53.5 million compared to $64.2 million in 2022. As previously discussed, Elorion's business combination would compute health for those later than planned, and as a result, we delayed sales and marketing initiatives during the year. We began to reinvest in the middle of the third quarter, and we believe that those investments will lead to procedural volume growth in future quarters. With that, I would like to turn the call back to Shantanu for some final thoughts before we begin the questions and answers portions of the call.

Thank you, Chris. I expect 2024, the 15-year anniversary of Allurion's founding, to be a pivotal year for the company. Earlier this month, in a study published in Lancet, researchers concluded that over 1 billion people, or one-eighth of the global population, now suffer from obesity. This is a stark reminder of how much opportunity lies ahead of us. We have launched several exciting initiatives to expand distribution of the Allurion program globally, advance our artificial intelligence platform, and most importantly, improve patient outcomes. More recently, we have taken the steps we believe are necessary to set our business out for long-term success and sustainability. We are entering 2024 with a solid foundation in pursuit of our mission to end obesity around the world. With that, I would like to begin the questions and answers portion of the call. Operator, please open the call for questions.

Question, please press star followed by the number one on your telephone keypad. And if you would like to withdraw that question, again, press star one. Your first question comes from the line of Matt Taylor from Jefferies. Please go ahead.

Hi, good morning.

Thanks for taking the question.

I wanted to, I guess, start with a question on Q1 and phasing, given the first quarter is almost over. Could you talk a little bit about the trends that you're seeing in Q1 and relative to your $60 to $65 million guidance for the year? How do you expect that to land through the year? And can we expect that gross margins basically follow the top line so you'd also expect gross margin improvement through the year? Maybe I'll just do one follow-up. I would like to ask more about the spending reductions and the focus on cash burn. It sounds like you're having some success there, but obviously there's a trade-off, as you alluded to, with less marketing spending. I guess, can you talk about how you're able to try to balance those two things in terms of being able to continue to drive the top line, but also with an eye to cost and lowering the cash burn?

Yeah, when it comes to lowering cash burn.

Thank you very much. Your next question comes from the line of Ryan Zimmerman from BTIG. Please go ahead.

Good morning. Can you hear me okay? Oh, good. Thanks for taking questions. Just follow up a couple quick ones for me. You know, as you guys think about and, you know, pursue this B2B model with some of the software programs you've developed, how much of that is contemplated in the 60 to 65 million this year in guidance? So, reading between the lines and those comments, Jantanu, it's fair to assume it sounds like that you're not going to ramp, you know, spending would be very modest for these efforts in 2024. I just, you know, I ask that in the context of the reduction in cash burn and also, you know, kind of, you know, moderating some of the growth initiatives that you're pursuing.

Yeah, absolutely.

Yeah, certainly. And then just last one for me, you could talk a little bit about the user base, particularly physician customers in some of the markets where you've had a lot of success. And the reason I want to ask about that is because given the dynamics we saw in the fourth quarter with the distributors, how did some of those high-end users, some of your top users navigate the fourth quarter? Did you see, you know, kind of binary outcomes with, say, the top users and the broader customer base? I'm just wondering kind of how, you know, distributors aside, you know, what you're seeing in the end markets, particularly with some of your key customers in certain markets in the Middle East or India and so forth, and just kind of reflect on how they navigated some of the GLP headwinds.

Very helpful. Thanks for taking the question.

Your next question comes from the line of Kay Nakai from Chartin Capital Markets. Please go ahead.

Yes, thanks. A couple of questions. Chris, when we think about the G&A line going forward, what's sort of a nominal level there you're expecting in 24?

Okay, great.

And then in terms of VCS and, you know, the initial use of that with the clinics you announced earlier this year, talk about maybe two things. One, with those first set of clinics, you know, what's the economics associated with that? And then what are the opportunities in some of the other territories where you're currently at to enter into similar agreements?

Yeah, in terms of the initial commercial and, you know, the second part of that question,

the opportunities on the geographies and maybe even looking at it a little further, what are the opportunities, you know, once you enter the U.S. for integrating that?

Yeah, we believe the opportunities.

And we have no further questions in our queue at this time. And with that, that does conclude today's conference call. Thank you for your participation and you may now disconnect.