Earnings Call Transcript - BSX Q1 2020

Operator, Operator

Good day, ladies and gentlemen, and welcome to the Apollo Endosurgery First Quarter 2020 Results Call. At this time, it is my pleasure to turn the floor over to Matt Kreps. Sir, the floor is yours.

Operator, Operator

Thank you, and thanks everyone for participating in today's call to discuss Apollo's first quarter 2020 financial and operating results. Joining me on the call are Todd Newton, Chief Executive Officer; and Stefanie Cavanaugh, Chief Financial Officer. Before we begin, I'd 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 spread of the COVID-19 virus and the ultimate impact it may have on our operations, the demand for our products, global supply chains and economic activity in general. 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-K for the year ending December 31, 2019, as well as our most recent Form 10-Q filed today with the Securities and Exchange Commission. The content of this conference call contains time-sensitive information that is accurate only as of the date of the live broadcast May 4, 2020. Except as required by law, Apollo undertakes no obligation to revise or update any statements reflecting events or circumstances after the date of this call. During this call, we will interchangeably use the term ESS for OverStitch and the term IGB for Orbera and vice-versa. With that, I'd like to now turn the call over to Todd.

Todd Newton, CEO

Thank you, Matt. Good afternoon everyone, and thank you for joining today's call to discuss our first quarter 2020 results. I hope all of you joining us today and your families are safe, healthy and adapting well wherever you are. In hindsight, the first quarter of 2020 had the makings of a true breakout quarter, particularly for OverStitch in our direct markets. We had very good demand through the start of March when the COVID-19 macro disruption began. Even with the COVID-19 disruption, first quarter OverStitch sales increased 25% in the United States, and 15% in direct markets outside the United States as measured in constant currency. For Intragastric Balloons in our direct market sales outside the United States, we were also trending very well in Q1, prior to the COVID-19 disruption. In the U.S., IGB sales were trending to decline by a high single-digit rate before the disruption, and Stef will go further into detail on our first quarter sales shortly. As is well known to everyone on this call, in March, a number of countries, particularly countries in Europe that comprised our most important international markets and the United States implemented several public health interventions to reduce the risk of COVID-19 transmission and conserve healthcare resources for the anticipated community health needs from COVID-19. This resulted in an unprecedented decline in global healthcare resources available for elective or deferrable procedures, including those that use our products. Patient access to treatments was also interrupted due to shelter-in-place and social distancing protocols resulting in cancellations or postponements of procedures. In order to preserve our balance sheet and withstand the severe disruption COVID-19 began to have on our business in late March and on into the second quarter, we took several aggressive cost reduction steps that have already been publicly disclosed. The initial steps we took to reduce expenses can be found in item 9B of our 10-K which was filed on March 26, subsequent actions which include a number of personnel furloughs and additional salary reduction measures were disclosed in an 8-K that we filed on April 20. One thing that is certain though, the pre-COVID-19 benefits and desire to perform procedures less invasively will survive this temporary disruption to our markets. For the medical conditions impacting the gastrointestinal tract, this next level of less invasiveness is endoluminal. Whether due to gastrointestinal complications or the needs of obese patients for more palatable interventional weight loss solutions, our products and our company intend to contribute tremendously to this post-COVID-19 future. I will pause with that and turn the call over to Stefanie now to cover the first quarter financial results in greater detail. Stef?

Stefanie Cavanaugh, CFO

Thank you, Todd, and good afternoon, everyone. Beginning with ESS, worldwide ESS product sales increased 5% as reported and 8% in constant currency. U.S. ESS product sales increased 25% to $3.8 million in the first quarter of 2020. Outside the U.S., ESS product sales decreased 12% as reported and 8% in constant currency to $3.1 million. While OUS direct market sales increased by close to 15% in constant currency, overall OUS, ESS sales declined due to lower sales to distributors. Certain OUS distributor orders that have been received and scheduled for shipment in March were deferred due to the distributors concern that COVID-19 would reduce second quarter procedure demand in that market. Intragastric Balloon or IGB worldwide sales decreased 18% as reported and 16% on a constant currency basis for the quarter reflecting soft demand in the U.S. and a $200,000 reduction OUS, both of which were impacted by COVID-19 concerns. As a result, total endoscopy product sales decreased $500,000 to $10.4 million, which is a 4% reduction as reported and 2% in constant currency. ESS product sales are now 66% of total endoscopy sales in the first quarter of 2020 compared to 60% in the first quarter of 2019. Total revenues in the first quarter of last year included $2.3 million related to our former surgical product line that we sold in December of 2018. Today, our sole remaining obligation is to continue to manufacture products and this obligation will expire by the end of 2020. Gross margin for the first quarter was 53% for 2020 compared with 55% for 2019. The decline in gross margin is primarily due to the absence of surgical product sales in Q1 of 2020. Gross margin for our endoscopy products was 52% for the three months ended March 31, 2020 compared to 51% for the same period of 2019. Total operating expenses in the first quarter of last year included a $5.6 million settlement gain that reduced operating expenses on a one-time basis. Excluding last year's settlement gain, total operating expenses in the first quarter of 2020 decreased $3.1 million due to reduced consumer advertising and clinical trial expenses. Similarly, after adjustment for the one-time gain in last year's first quarter results, our operating loss in the first quarter 2020 contracted by $1.5 million, or 18% to $6.7 million. Our net loss for the first quarter of 2020 was $10.3 million compared to $2.8 million for the first quarter of 2019, which again benefited from the $5.6 million settlement gain. In addition, currency rate fluctuations in late March of 2020 increased net loss by $3 million compared to the prior year, primarily due to unrealized currency losses on inter-company payables. Cash at the end of the first quarter was $24 million. As Todd indicated, we have undertaken a number of aggressive actions on multiple fronts toward preserving cash. Our goal is to complete the second quarter with the same cash balance we expected before the COVID crisis. These actions included suspension of all advertising, medical education and conference activity, salary reductions across the company, reductions or deferrals of our inventory purchase commitments, consolidation of our California and Australia offices into existing facilities, and the transition of our Brazilian business to a third-party distributor. In addition, in mid-April we furloughed approximately 90 of our 200 worldwide employees. From these actions, we estimate the overall cash savings in the second quarter to exceed $7 million. In closing, our Form 10-Q filed this afternoon also indicates that we were approved for an SBA loan in the amount of $2.8 million under the CARES Act. This two-year loan defers interest and principal payments until November of this year and bears interest at a rate of 1% annually. Also, we disclosed an amendment to our credit agreement, which provides a waiver on minimum revenue covenants for the second and third quarter and permits the SBA loans. Together the SBA loan and the credit agreement waiver further improve liquidity and relief as we work through the impacts of the COVID-19 pandemic and chart our path back to normal operations as the pandemic awaits. I will now turn it back to Todd.

Todd Newton, CEO

Thank you, Stefanie. Like most in our industry, we are expecting a substantial reduction in procedure volumes during the second quarter. This has been our experience for April, which was very quiet, but the push within our customer base to restart suggests to us that we might see sequential monthly improvement here in May and more still in June. The third quarter will likely also be down compared to the third quarter of last year, and perhaps by the fourth quarter, we will see a more normal level of procedure activity. As we took the aggressive cost reduction measures outlined to preserve capital, we have also retained flexibility to monitor the demand signals and any initial emerging customer support needs. Additionally, we are continuing to make key investments to position the Company to thrive again when the market returns to normal. I'm going to take the next couple of minutes to update you on some of these continuing efforts. First, the MERIT trial continues to make progress. This nine-center prospective randomized trial comparing the Endoscopic Sleeve Gastroplasty or ESG procedure to medically managed lifestyle management is a key piece of our reimbursement strategy for the ESG procedure and also supports label expansion. In late 2019, the investigator sites completed all level one procedures. As of this past week, more than 60% of the crossover procedures are completed. With the remaining crossovers being primarily patients resident in U.S. cities, they were hardest hit by COVID-19. In the first quarter, in order to adapt to the COVID-19 situation, all MERIT trial investigator sites began to use our Apollo Care telehealth platform to support their recurring MERIT patient follow-up needs. Apollo Care is our interactive telehealth tool that enables physician practices to engage with and follow the progress of their patients, and the MERIT investigators determined this could be very helpful and ideal for patient follow-up, while current stay-at-home and shelter-in-place guidelines are in place and potentially beyond. Second, in 2019, Apollo provided an educational grant to the American Society for Gastrointestinal Endoscopy, or the ASGE, to collaborate on the development of an Endoscopic suturing channel. This channel was launched in the first quarter and is now offered as part of the ASGE's GI Leap online learning portal. ASGE's GI Leap online learning platform is the home to all of ASGE's online educational offerings. The advanced technological features of GI Leap give the learner a modern optimal online learning experience and lays the foundation for the future of GI learning. The Endoscopic suturing channel on GI Leap includes 20 procedural videos that highlight endoscopic suturing techniques across a wide variety of clinical applications in advanced GI closure, as well as revisional and primary bariatric suturing applications. In the three months this channel has been available, more than 80 U.S. physicians have registered. Medical education has been very important to our ESS success and this collaboration with the ASGE continues to advance our medical education mission. Moving forward, we see ASGE's GI Leap as an attractive virtual medical education platform to supplement our more traditional in-person medical education resources once in-person training is again an option. We plan to work with ASGE to offer their endoscopic suturing content to physicians outside the United States and add robust content to further develop the channel. Lastly, we are continuing to invest in new product development to bring the benefits of endoluminal suturing to the lower GI tract. Based on the preclinical work to date, we think this will offer a meaningful advancement for better closure of complex defects in the colon. There are two important elements of this project. First, we expect the new product will expand the addressable market for endoluminal suturing. As most of you will know, our current OverStitch product portfolio is primarily used in upper GI procedures due to the length of our current product line. Within the broad GI endoscopic procedure market, upper endoscopy represents about 40% of the overall market, and thus the lower GI tract represents a significant market opportunity for us. In the U.S. alone, there are over 20 million colonoscopies performed per year and the need for closure in the lower GI tract is as prevalent as it is in the upper GI tract. Second, it will address a very important technical need as most of you will also know our current ESS product portfolio requires that the device be attached externally to or over a flexible endoscope, which is the reason the device was given the name OverStitch to begin with. For core GI applications, this requires the physician to either plan to use suturing prior to scope insertion or it requires a physician to remove the endoscope, attach our ESS device, and then reinsert and reorient the scope back to the area of the GI tract for suturing. Our new product offering is designed to provide the physician with the ability to suture through the lumen of the endoscope, and this will improve the efficiency of many core GI procedures when suturing is desired. There is always some uncertainty to a product development timeline, but we are currently of the belief that the new lower GI product has the potential to be available in the U.S. market late this year. And with that, we'll now open the lines for a question-and-answer session. Christie, please proceed.

Operator, Operator

Thank you. Our first group of questions comes from Matt Hewitt with Craig-Hallum. Please go ahead.

Matt Hewitt, Analyst

I guess my first one is, when you look at the landscape today, obviously a lot has changed from your fourth quarter earnings call. But where do things stand maybe internationally and domestically, separately, but where do those sit today versus maybe two weeks ago or a month ago? Are you starting to see some of those, particularly in international markets or some of those starting to relax their procedures and therefore you could start to see things pop back up? I know you mentioned it briefly in your prepared remarks, but where do we sit today and how do you see those opening up over the next couple of months to quarters?

Todd Newton, CEO

Yes. Thanks, Matt. We are seeing, I would say, a more pragmatic approach to the return to normalcy in the U.S. market than what we're seeing at least in Europe. What we're seeing in Europe continues to be just very slow at this point. But in the U.S., we clearly are seeing a great desire, especially among our physician base, to restart. Now in some cases the reality of having new processes implemented for things like patient intake within a hospital or facility setting is still lagging a little bit behind the desire of the physicians to get going, but that gap between the desire and the ability to get going is continuously closing over the last couple of weeks, so we are comfortable to say that in May, I think we're going to start to see some facilities begin to do procedures again. And that's particularly in the U.S. As I said, outside the U.S., it's a little bit slower at this point, still, especially in Europe.

Matt Hewitt, Analyst

Okay, that's helpful. And then a second, one of the things that I guess as you look at the data on the coronavirus, and this is globally, one of the key factors that has been shown to result in increased severity for the patients that receive it has been obesity, and I'm curious if there is something that you're doing or that you see the potential to do from a marketing perspective, once things start to normalize. Is that something that you can, I hate to use the word capitalize on, but is that something that you can do to help before a second wave or to address the problem before next winter?

Todd Newton, CEO

Well, it's a great macro question, Matt. It's a difficult one to answer. We have known for a long time, and it's been demonstrated for a long time that probably the co-morbidities of obesity may drive higher costs in our healthcare system than any other identifiable factor that's been down for quite some time. I do hope that if there is a silver lining to the COVID-19 pandemic, it will be a clarification of the importance that addressing the obesity epidemic has on our total healthcare costs as a society.

Matt Hewitt, Analyst

Got it. And maybe one last one, then I'll hop back in the queue. Regarding the new R&D program, the new device, and it's not the attachment. But what you're discussing at the end there. Is that a regular 510-K pathway or will that require PMA? Just help us understand; it sounds like it was the end of the year, then you're looking at just a simple 510-K. Is that correct?

Todd Newton, CEO

That is correct; we believe a regular 510-K pathway is available for this new product.

Operator, Operator

And our next set of questions comes from Adam Maeder with Piper Sandler. Please go ahead.

Adam Maeder, Analyst

Was hoping to dig in a little bit more on Q1, just between January, February, and March. Obviously with large kind of when COVID really started to impact the business, just wondering if you're able to quantify that to some degree. Just really hoping to get a better sense of what the impact was from COVID-19 in Q1.

Todd Newton, CEO

Yes, we don't have quantitative monthly information to share with you. But what we've disclosed in our Q and we'll say again here on this call, Adam, is that January and February were tracking very well to our expectations and March, we saw probably at the same time that most elective procedure markets saw the truncation. We saw that. That was probably around the second week of March that we started to feel that in earnest right around the time of the World Health Organization announcements and of course, the President's national declaration of the State Emergency here in the United States that tracks really well with when we started to see a pullback on elective procedures. So January, February were great. March really saw it begin to slow down and it slowed down fast.

Adam Maeder, Analyst

Okay. I appreciate the color there. And then I guess as it relates to just the near-term cost-cutting efforts for Q2. I understand you want to be judicious with cash. But do you see any potential impact to your business from a competitive standpoint over the next three, six, 12 months from the lack of spend and then just put the furloughing of employees? Any more color there; is it manufacturing, is it sales force and just how quickly can you bring those folks back online? And then I just had one more follow-up. Thanks.

Todd Newton, CEO

Yes. Any time that you go through a cost-cutting exercise, you're weighing long-term and short-term goals sometimes against each other. Nonetheless, we felt like that the actions we needed to take in order to maintain our liquidity were the right actions to take. We have a technology that we feel is very unique and different in the marketplace, so we're not really competing against another endoluminal suturing device. As a result, as we've talked about, I think in the past, Adam, our customers are customers who like the technology very much and like to use it in their practice. So we weigh those things and felt like the right course of action was nonetheless the short-term actions that we took and we'll figure out the longer-term consequences as we go. In terms of where the personnel reside, it was basically across the entire spectrum.

Adam Maeder, Analyst

Okay, got it. That's very clear. And just for my last question, OUS Orbera sales were pretty solid, all things considered and ahead of our expectations. I'm just curious, and sorry if I missed this in the prepared remarks, what drove the strength in that business outside the U.S. in Q1? And just I guess looking ahead, how do you think about the Balloon business in subsequent quarters, just given that it is cash pay? Just any color there would be helpful. Thanks again.

Todd Newton, CEO

Yes. And so our Orbera business outside the United States is a very well-established, solid business. We enjoy in various different markets, aspects of reimbursement for the Orbera device that we don't have in the U.S. or in the U.S. is probably considered fully cash pay. It's not necessarily considered fully cash pay in Europe, especially in certain markets. So it's been a good franchise for us and continues to be stable. We would anticipate that coming out of this COVID-19 situation, the Orbera franchise outside the United States will continue to be a very stable business for us.

Operator, Operator

And that does conclude our question-and-answer session for today. I will turn it back over to management for any closing remarks.

Todd Newton, CEO

Well, thank you, Christie. And thank you everyone for joining us today on the call. Stefanie is, of course, disappointed she didn't get a chance to answer any questions directly, but should you have any questions or would like to arrange a call with us, please contact Matt Kreps of Darrow Associates. Stay safe everyone, and thank you again.

Operator, Operator

And that does conclude today's teleconference. We appreciate your participation. You may disconnect your lines at this time, and have a great day.