Apollo Endosurgery, Inc.

Good afternoon, ladies and gentlemen, and welcome to Apollo Endosurgery's second quarter 2021 results. At this time, all participants have been placed on a listen-only mode, and the floor will be open for your questions and comments following the presentation. It is now my pleasure to turn the floor over to your host, Matt Kreps. Sir, the floor is yours.

Thank you, Catherine, and thanks, everyone, for participating in today's call to discuss Apollo's second quarter 2021 financial and operating results. Joining me on the call are Chas McCann, Chief Executive Officer, Stephanie Kavanaugh, our Chief Financial Officer, and also joining today's call is Jeff Plack, our incoming Chief Financial Officer, who will officially assume his duties upon filing of our second quarter Form 10-Q. 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 continued spread of the COVID-19 virus and the ongoing impact it may have on our operations, the demand for our products, global supply chain, and economic activity in general. These forward-looking statements involve material risks and uncertainties, and if all those actual results may differ materially. For discussion of risk factors, I encourage you to review the company's annual report on Form 10-K for the year ending December 31, 2020, followed 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 date of the live broadcast, August 3, 2021. Except as required by law, Apollo undertakes no obligation to revise or update any statement to reflect events or circumstances after the date of this call. And now, with that, I'd like to turn the call over to Chas.

Good afternoon, everyone. and thank you for joining today's call. Our strong momentum continued into the second quarter, driving our fourth straight quarter of sales growth. In the release that just crossed the wire, we reported record sales for our endoscopy products of $16.6 million for the second quarter, leading us to increase our revenue guidance for the full year from $55 to $57 million to now $61 to $63 million. You may remember that my first call with you in May I laid out a growth strategy with three phases to energize the business, accelerate growth, and lead from the front. Our investor deck, available online, includes a slide describing the three phases in more detail. The results of our reporting today clearly align with the first phase, energize, as we seek to deliver transformational growth at Apollo. The energize phase is all about building momentum by driving near-term performance and achieving strategic milestones. that will lay the foundation for years of sustainable growth. Customer demand for our products is increasing around the world, and we are seeing that reflected in our performance, despite ongoing challenges presented by the pandemic. In addition to delivering record revenue for our endoscopic suturing and intragastric balloon businesses, we made substantial progress on many key initiatives. These include, first, transforming our senior leadership team with the recent appointments of Kirk Ellis, our VP of US Sales, Steve Bosrock, our VP of Marketing and Medical Education, and Jeff Black, our incoming CFO, who started this week and is with us on today's call. Second, strengthening and expanding our sales team. In the U.S., we have hired back four experienced sales reps, all of whom are fully trained on our products and were previously top performers. In addition, we have recently opened six additional new U.S. sales positions and some key positions in our international team, to further improve coverage and allow our sales team to focus on driving growth in high priority geographies. Third, announcing that the merit study investigators have reported that in a preliminary analysis, the trial has achieved its primary efficacy and safety endpoints. And fourth, continuing the successful launch of our novel XTAC helix tacking system with more than 120 active sites at the end of Q2. Since starting at Apollo earlier this year, I've been engaging with customers continually as have many on our leadership team. We consistently hear feedback that physicians love our products, and now they also share our excitement for the revitalization that is taking place at Apollo. Turning now to updates on each of our product lines, starting with OverStitch. We continue to see strong OverStitch demand from our core users. We are very pleased to see that in Q2, growth of OverStitch was driven by an increase in both the total number of accounts ordering and the average revenue per account. This tells me that we are successfully growing the base of physicians who are trained in using OverStitch, while also increasing adoption among our experienced users. Our mobile learning lab is back on the road training physicians on our products, and our training programs continue to evolve to best meet the needs of physicians. We work closely with physician societies, such as the American Society for Gastrointestinal Endoscopy, the ASGE, who just last week hosted an excellent training program focused on endoscopic suturing with overstitch. Outside the US, we are seeing the strong results despite periodic COVID flare-ups in various markets around the world. Mike Gutteridge and our international team have done a remarkable job navigating these complex market dynamics in the first half of the year, and conditions continue to improve in most of our markets. We do anticipate that disruptions from COVID will continue to pop up, but we are seeing broad bases of improvements in both our direct and distributor markets that we expect will continue to build in the second half of the year. Perhaps one of the most significant overstitch milestones to date came in June at the Surgical Disruptive Technology Summit, where the merit study investigators announced that, based on a preliminary analysis, the study has achieved its primary endpoints for both efficacy and safety. I'm pleased to now report that the merit study results have been accepted for a presentation by the International Federation for the Surgery of Obesity and Metabolic Disorders, otherwise known as IFSO, at their annual meeting in Miami in October. Based on the positive announcement about the merit trial endpoints, we anticipate filing a de novo submission with the FDA for a new indication for weight loss, most likely in the third quarter. In addition, we are initiating preparation for a comprehensive launch of the ESG procedure at the time of a new indication. We are very excited about this milestone because we believe ESG has the potential to be transformative, not just for our business, but also to the millions of patients worldwide looking for a weight loss solution that better fits their needs. As a reminder, there are more than 100 million adults in the U.S. alone with a BMI greater than 30, and there is a vast unmet clinical need for new treatment options. Our sense of optimism for ESG stems directly from what we hear from our customers who are expressing rising enthusiasm on two dimensions. First, that the ESG value proposition resonates very well with patients. And second, that they have been experiencing success offering both provider-driven cash pay solutions as well as some positive case-by-case reimbursement decisions by private payers. Turning to Extac, the customer response continues to be very promising. On our May call, we announced that we had added over 50 accounts in the first quarter, and I'm pleased to say that we now have more than 120 accounts in the U.S. We also have initiated our OUS launch in select countries, including Hong Kong, Chile, and Israel, and are making plans for additional markets. Our OUS XTAC launch will be targeted to select markets initially while we work through the new procedures to gain CE mark in Europe, which we believe will be a 2022 event. Our US XDAQ rollout initially targeted experienced over-stitch users, which made good sense and generated initial interest in the product. Awareness about XDAQ continues to build in the GI community, and at the end of the second quarter, we have a pipeline of approximately 80 additional prospective accounts worth approximately $650,000 of initial orders to be delivered upon completion. That said, under the direction of Kirk Ellis and Steve Bosrock, our new commercial leadership team in the US, is increasingly focusing sales activities on driving additional utilization within key targeted institutions, rather than simply opening up a large number of new accounts. We believe this approach can generate more sustainable success by having multiple users at each hospital, including many who are not existing OverStitch users, and create highly experienced advocates who see Extech as a vital tool that they rely on frequently for their closure needs. We are also supporting multiple clinical evaluations of Extech with several papers in development based on initial cases that have already been completed, and we look forward to the first clinical publications in the months ahead. We anticipate that these studies will further document XTAC unique benefits and ease of use in the closure applications for which it was specifically designed. In short, we are very pleased with the initial clinical performance of this highly differentiated and effective product, and we look forward to building on its initial success going forward. Recognizing that these are simply anecdotes, allow me to share some additional comments that we've just recently received about XTAC. A physician within a large VA hospital shared, quote, XTAC is going to be the new normal in endoscopic repairs. From a user at a major medical center, he said, quote, XTAC has good applications and can replace the need for a lot of endocrypts. And finally, a message from another KOL physician after their first case. I absolutely love the XTAC device. I used it last week for the first time on a very challenging case. The XTAC system worked beautifully. I'm 100% obsessed. This enthusiasm from our customers driven by delivering better patient care and real clinical success is very rewarding to our entire team, but especially to our R&D engineers who developed this outstanding product. In completing the product updates, Orbera continues to demonstrate very compelling performance on a global basis. achieving the best revenue quarter since the very early days of the launch of the U.S. I continue to believe that this is a potentially underappreciated asset. We're seeing growing market adoption of IGB as a less invasive but effective weight loss solution for those needing something more effective than diet and exercise alone. Olvera is the market leader globally with an unmatched body of clinical evidence, excellent weight loss results, and excellent value for the patients. A recent publication of new clinical practice guidelines by the American Gastroenterology Association have been very well received, and there were many positive sessions about the role of balloon therapy at the 2021 Digestive Disease Week meeting in May. Looking ahead, we believe the recent positive announcement of new Category 1 CPT codes for IGV procedures and the FDA breakthrough designation for the treatment of NASH further bolster the potential value of this franchise. We are now seeing rapidly rising interest among physicians in building dedicated endobariatric practices, another development in favor of ORBERA. The ASGE has created a specialty group called the Association of Bariatric Endoscopy that is focused on developing this emerging field. In addition, there are multiple sessions at the DDLV meeting about developing successful endobariatric practices. which include the placement of intracrastic balloons, such as Orbera, as one of the cornerstone procedures offered to patients. Over time, we believe that endoscopic suture, including both primary ESG procedures and endoscopic revisions of prior bariatric surgeries, could become the second cornerstone. Apollo's product lines are uniquely positioned to support this emerging field. And briefly, an update on Orbera for NASH. Recall that non-alcoholic steatohepatitis, or NASH, is a debilitating condition that impacts millions of patients and is one of the leading conditions that cause the need for a liver transplant. In February, we received a breakthrough designation for Rivera for this new indication of NASH. We continue to work on potential designs for a NASH pivotal trial and we'll continue to make additional updates on this as it becomes into better focus. FDA's breakthrough designation was a seminal event for us and an affirmation of IGB's full potential as a therapeutic solution. With this update, I hope to have conveyed the tremendous sense of excitement and momentum that permeates Apollo right now. In my first two quarters as CEO, I've had the pleasure of hearing directly from our customers how positively they view Apollo's products. And in addition, our team here at Apollo has a passion for improving patient care and a dedication to advancing the field of therapeutic endoscopy. We are well positioned to deliver continued growth with large opportunities across all three of our product lines, We continue to build our capabilities, including addition to our sales and marketing team, and we work to scale supply and expand our volumes across all three platforms and move towards the accelerate phase of our growth strategy. With that, I'll turn the call over to Stephanie to cover the second quarter of financial results. Stephanie?