Apollo Endosurgery, Inc.

Good afternoon, ladies and gentlemen, and welcome to the Apollo Endosurgery fourth quarter and full year 2021 results conference call. 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.

Thank you, John. And thanks, everyone, for participating in today's call to discuss Apollo's fourth quarter and full year 2021 financial and operating results. Joining me on the call today are Chas McConn, Chief Executive Officer, and Jeff Black, our Chief Financial Officer. Today's call will include slides to accompany the audio presentation. For those joining us by telephone, you can download a copy of the slides at our investor relations site, ir.apolloendo.com, and choosing events and presentations. 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 COVID-19 virus and the ongoing impact it may have on our operations, the demand for our products, global supply chains, and economic activity in general. 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 most recent annual report on Form 10-K 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, February 22, 2022. As required, 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. 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 future earnings potential of the company. Included in the press release issued today with our financial results and corresponding 8 filing are supplemental tables reconciling non-GAAP figures to their closest GAAP comparable. And now I'd like to turn the call over to Chad.

Thanks, Matt. And thank you, everyone. Good afternoon. Thank you for joining us. Next week will mark one year since I joined Apollo Endosurgery. And I am truly grateful for having the honor of leading this team and this company with such unique products that impact patients' lives. Last year, I laid out a three-phase strategy as described on page three. The first phase was to energize the business by building momentum across all three of our product lines while executing on foundational initiatives that can set us up for growth in the years ahead. The second phase is to accelerate the business by developing new indications and markets. And the third phase is to lead in the fields of advanced defect closure and endoscopic treatments for weight loss. As we implement this strategy, we have bolstered the Apollo leadership team by bringing in new talent into the organization to join an already strong Apollo team. In addition, we are focusing our efforts on developing large market opportunities. I'm pleased to report today that in the past 12 months and in Q4 that we've made tremendous progress. We've strengthened the team at Apollo at all levels. At the leadership team, earlier in the year, we brought on new commercial leaders here in the U.S., We brought in Jeff Black as our new CFO who's with me today. And then just in January, we announced the addition of Keely Scamperly to lead our reimbursement and market access efforts. Keely is an experienced professional and is already working at building her team that will lead our reimbursement efforts in facilitating patient access for our products. We've nearly doubled our sales team in the US and we've added to our US team. We're building our marketing and training capabilities and becoming a more professional selling organization. We've strengthened our R&D and engineering team and are implementing new processes to strengthen our new product pipeline. And we are addressing a historical underinvestment in other critical functions like operations, supply chain, business analytics, and customer service. Simply put, we have very talented people at Apollo, and I'm very proud of the work that they've done. We've just not had a scalable organization. And so we're strengthening our capabilities across the organization to support our growth plans. We're also building and developing a new culture, focusing on a set of five core values that I'll come back to later in the discussion. And so in summary, at Apollo, we are undergoing substantial change in our team, our processes, and our culture. And we anticipate that these changes will allow the company that has historically struggled at times and underperformed to become a growth engine. Now, often when a company undergoes this much change, the business often needs to take a step backwards before moving ahead with renewed confidence. And I'm very pleased that that is not the case for Apollo in 2021. For the year, we delivered 50% revenue growth, and for Q4, we delivered 26% growth, despite a meaningful impact of the Omicron variant in many markets in Western Europe and the U.S. Our growth has been balanced across product lines with Overstitch, Orvera, and our newest product, XTAC, all contributing to growth. And we've seen balanced growth across geographies with strong performance in both the U.S. and international markets. And while we kick-started the business in 2021, we've also created a foundation for the years ahead. In our advanced GI franchise, X-TAC is an important new product for us. We've gained initial traction in the marketplace and published the first clinical data for the product. In our endoscopic weight loss franchise, obesity is a global epidemic that remains largely unchecked. and the opportunity for endoscopic weight loss therapies is tremendous. 2021 was a year of important strategic milestones. Early in the year, in the spring of last year, the AGA implemented new clinical practice guidelines for the first time ever in favor of intragastric balloon therapies. The investigators presented the initial results at the IFSO meeting in the fall. We submitted a new de novo application, de novo 510K application for Apollo ESG and Apollo Revise. And through the course of the year, we saw an emergence of new endobariatric programs in both academic and private practice settings. In the area of NASH, we received a breakthrough designation for the treatment of NASH in Q1 of last year. We've also been collecting data on ESG and working through the best strategy to address this large market opportunity. And then on our balance sheet, In 2021, we secured access to $175 million in capital. We now have a strong balance sheet to support our growth initiatives. And so page five gives you a sense of the balance that I just mentioned. On the left side of the page, you can see 50% year-on-year revenue growth, 55% for the ESS franchise, and importantly, 50% for the IGB franchise. And the figures relative to 2019 are shown as well. Another interesting development has been the growth in our top 10 accounts. We saw 85% year-on-year growth in our top 10 accounts, and the average sales for Apollo in those 10 accounts is more than $600,000. We think that gives a pretty good indication of the scale that we can drive as we increase penetration of our products into our largest customers. For XTAC, we continued to gain traction, and we saw 40% sequential quarter-on-quarter growth for XTAC. And as I mentioned, we had important milestones for both the MERIT study and the de novo 510 . Related to MERIT and clinical data for ESG and revisions, we do expect additional presentations of the data at the upcoming DDW meeting. That's the Digestive Disease Week meeting. That's in May. We also expect other presentations at that meeting on ESG and revisions from investigators around the world, so important additions to the clinical body of evidence. For MERIT itself, the investigators are working on the publication, and we look forward to that in the months ahead. Jeff will now provide a review of our financial performance, and then I will be back to provide additional commentary on our priorities for the year ahead.

Thank you, Chas, and good afternoon, everybody. Thank you all for joining us today. I'll spend a few minutes to recap our financial results and then hand it back to Chas to discuss our 2022 outlook and strategy. Starting with revenue on slide seven, in Q4, we continued to see strong year-over-year growth across the product portfolio and our fourth consecutive quarter of double-digit growth. And that was against the backdrop of pandemic-related pressure. As we all know, this has been a changing dynamic throughout 2021. and we did see pressure on Q4 volumes. Outside the US, we saw pressure earlier in the quarter in concentrated markets, particularly Western Europe, and inside the US, we began to see slowdowns later in the quarter, particularly December, predominantly in academic hospitals and larger community hospitals where access was more limited. Even with this pressure on procedural volumes, we still maintained a healthy monthly revenue cadence in December, consistent with the rest of the quarter, What we didn't see was the ramp that we expected in the last half of December. And that was really the difference between hitting the low end of our annual revenue guidance and the high end or better. Growth in the fourth quarter was balanced between U.S., where we saw 25% growth, and international, which grew 27%. Globally, our endoscopic suturing business was up over 37% in the fourth quarter. And that just highlights continued demand for our overstitched and XTAC products across a broad range of indications. Globally, our bearer revenue was up 20%, and that was below our blended growth rate, really due to volume pressure in the U.S., where growth was about 6%. But we believe this downtick is transitory, and that it was mostly attributed to inpatient and hospital settings in the U.S., where access was limited in Q4. For the full year, we saw revenue growth of 50%, and again, balanced across our U.S. and international businesses and across product lines. Overall, we're pleased with our revenue performance in 2021 and our ability to navigate a challenging fourth quarter for MedTech broadly. Turning to gross margin on slide eight, in the fourth quarter, we saw gross margin improve by 40 basis points versus fourth quarter 2020. 260 basis points on a year-to-date basis. We continue to remain focused on gross margin improvements, particularly with overstitch, which, as we've discussed, has a lower margin profile than Orbera and Extech. Major drivers of overall gross margin expansion will be product mix, improved overhead absorption, and direct COGS improvement programs, again, focused primarily on overstitch. During 2022, we should start to see the impact of some of the cost improvement initiatives that we completed in 2021. And at the same time, we're navigating supply chain and manufacturing scale-up complexities, but we remain confident in our ability to drive blended gross margin to the mid 60% range over the next three to five years. Moving to slide 10. Sorry, moving to slide nine. As we look at operating spend profile, we think it's important to exclude non-cash stock-based compensation to get a clearer picture of what our real non-core GAAP operating expense run rate is. In the near term, we're focused on building capabilities following historical underinvestment in the business. For example, you'll see in the fourth quarter, our non-GAAP OpEx ran at about 79% of revenue. That reflects our planned investments in growth initiatives, primarily to build out our US sales channel and our marketing programs as we prepare for the anticipated launch of our ESG products. In the US, we have a small commercial team relative to the size of our opportunities, but we made great progress throughout 2021 to expand that footprint. We started the year with 16 direct reps in the US. We ended with about 30 by the end of the fourth quarter, And going forward, we'll continue to evaluate the appropriate scale of our commercial team and invest as necessary. Our other focused areas of planned investment will be medical education, clinical reimbursement, product development, and continued COGS improvement initiatives. We do expect to see operating expenses increase in both absolute dollars and as a percentage of revenue, particularly in 2022. And we should start to see operating expense leverage in 2023 and beyond. But I think importantly, we have the ability to modulate spend as appropriate. And we're now well positioned from a balance sheet perspective to make these investments. Moving to slide 10, you'll see that during 2021, our average quarterly burn was about $4 million a quarter. We ended the year with cash of about $92 million. Until now, Apollo has not been capitalized to adequately fund our long-term plans. The company historically did a very nice job managing burn, particularly during a very challenging global pandemic. However, due to historical underinvestment, the company really has not been well positioned to support even modest growth. That changed for us in the fourth quarter as we secured over $135 million in new capital and borrowing capacity, which enables us to begin making the investments required to capitalize on the opportunities we see ahead of us. And we can do this without creating a concern about cash runway. We're now extremely well positioned to execute on our planned growth initiatives. Turning to slide 11, and before I turn things back over to Chas, just a few comments on our new credit facility with Innovatis Capital Partners, which we executed in December of last year. Key strategic reasons for the new term loan is a reduction in our cost of capital, an extension of our amortization by an additional 33 months over our prior term loan, and a decrease in debt service costs by nearly $30 million over the next three years. We also have now additional borrowing capacity that provides minimally inclusive growth capital and strategic flexibility. At close, we drew $35 million to repay our prior term debt, and we now have up to $65 million available for future tranches. 15 will be available in 2023 and $25 million available in 2024, both based on achievement of revenue milestones. And another up to $25 million available for approved strategic acquisitions if such opportunities arise. Borrowings mature in December of 2027. Interest-only payments run through January of 2027. This was a great result for us. We couldn't be happier with the outcome of this. and we look forward to our new partnership with Anabotus. And with that, I'll turn this all back over to Chas.

Okay, so now as we look ahead to the year of 2022, let me talk about our overall strategy and our outlook for the year ahead. Page 13 gives you a summary of our three product lines and the two main businesses in which we operate, in advanced GI and endoscopic weight loss. And we are excited that we have very attractive growth opportunities across both sides of our business. As I mentioned previously, we also are focused on going after large market opportunities in advanced GI, in weight loss, and then over time in NASH as well. So for the year ahead, our outlook from a revenue standpoint is $73 to $75 million, which translates to 16% to 19% growth compared to 2021. And let me also share a few words as it relates to the COVID impact. In Q4 and early Q1 of this year, we have seen an impact in markets globally. As others have reported, lower procedure volumes, staffing issues, reduced hospital access have all presented challenges, especially in larger academic medical centers and community hospitals. That said, more recently, the Omicron case counts are coming down. The situation appears to be improving. And so we are optimistic that the impact of this wave is beginning to abate. And so as we look ahead for 2022, we see four key catalysts to drive our growth in the year ahead. XTAC expansion and Orvero resurgence, preparing for the Apollo ESG and Apollo revised launches, and continuing to advance our organization. So first with XTAC, and I'm on slide 16. The XTAC has been a very important product for us as it adds to our portfolio in the advanced GI side of our business, and it offers a truly differentiated product in defect closure. And with XTAC, we are still in the early days of the adoption of a new product and procedure, and we feel that we've got a lot of room to continue to grow. For example, currently more than 60% of our XTAC sales are in upper GI. There are many reasons for this. Our overstitched device which is the core device for the company, is used primarily in the upper GI. And so many of our existing customers primarily do upper GI procedures and are familiar with suturing techniques. Furthermore, for most of 2021, we had a very small sales team in the U.S. And it's not surprising that they had more success with their existing customers initially and applications in the upper GI. That said, we continue to see very positive feedback from customers. about the role of XTAC following polyp removal in lower GI cases, such as the colon and the duodenum. And procedure volume suggests that ultimately these applications have potential to be a much larger market opportunity. And so in 2022, we anticipate that we can continue to expand usage in both upper and lower GI, approach and train new users, and increase adoption of XTAC. Importantly, 2022 will also be a year where we add additional clinical data for XTAC. To date, the data is strong, but it's very limited. We anticipate additional studies on the use of XTAC, including at the same DDW meeting that I mentioned, in areas like the colon and the duodenum and stent fixation and other potential applications for the product. In addition, we are wrapping up our efforts in peer-to-peer education for XTAC. The best way for physicians to learn about a new product or procedure is from their colleagues. And we've done some peer-to-peer education to date. but we are ramping up these efforts as part of our strategy in 2022. And we also have a significant growth opportunity for XTAC outside the U.S. We've gained initial success in a handful of markets outside the U.S., and we are actively working towards a CE mark, which we expect in the second half of this year. And for feedback from physicians, for example, in Western Europe, they're very excited about the clinical and economic value proposition for XTAC in their practice. Turn into slide 17 in Orvera. Orvera is a meaningful part of the Apollo portfolio and offers compelling clinical benefits for patients. And 2021 was a very strong year for Orvera. It accounts for more than a third of our total revenue and grew by more than 50%. And there are a number of reasons for this resurgence, and many of these we view as sustainable trends. First, as it relates to COVID, we have seen a trend towards more procedures taking place in outpatient facilities and offices, which is the primary location for Rivera. I mentioned earlier the AGA practice guidelines. And again, those talked about the clinical benefits of intragastric balloon in general, but especially the clinical benefits of a 10% total body weight loss on cardiovascular disease, diabetes, and liver function. So really adding to the clinical validation of the product. We've seen an uptick in physician interest and training on the balloon. And we are implementing new co-marketing programs. These are programs where we can work directly with practices that know how to treat patients with balloons and get excellent patient outcomes. And we can invest in these, we can track the performance, and then double down on the programs that are most successful. Finally, we anticipate a continued opportunity for intragastric balloons to be a meaningful part of a broader endoscopic endobariatric practice, endoscopic weight loss practice. And I'll come back to that here in a minute. but a lot of good things happening in the IntraGasic balloon franchise. The next catalyst, which we talked about previously, is the potential for a new indication for the Apollo ESG and the Apollo revised products. Now, importantly, we don't currently have an indication for these weight loss applications, and we are very careful to only promote within our approved labeling. But we have submitted to FDA, and we're working through that process, and we are very excited about the potential for a launch of Apollo ESG and Apollo Revise. And I use the word launch very intentionally here. I want you to think about this like a new product launch that you hear about in the pharmaceutical world or you hear about from a larger medical device manufacturer in terms of a comprehensive, holistic approach to really maximize the opportunity for the product. Internally, we have a massive effort ongoing in areas across marketing, medical education, reimbursement of market access, and sales team readiness to prepare ourselves for the ultimate launch of these new products. Our team is very busy, and they're very excited. And while we're busy preparing for the launches internally, there's an interesting dynamic in development taking place more broadly in the medical community, the growth of new endovariatic programs in academic settings. A few years ago, there were a handful of pioneering physicians and practices in this field. The centers that participated in the MERIT study were among the early adopters. The Mayo Clinic, UT Houston, Brigham and Women's, Cornell, and Johns Hopkins are all good examples, as well as some leading centers internationally that really have driven the development of this field. More recently, many new programs are emerging across the country in institutions such as the Cleveland Clinic, UCLA, USC, West Virginia, and others. In recent months, I've personally visited many of these centers that are highlighted on this page, and it's very encouraging to hear about their plans to develop this emerging field of endoscopic weight loss. And this is just a U.S. snapshot, similar phenomenon absolutely happening outside the U.S. in countries around the world as people become more familiar with the MERIT study and other data that's been collected for both primary ESGs and revision procedures as well as for the atriobastic balloon and the role of the Orbera balloon with the new AGA practice guidelines. So it's an interesting development and one that we'll keep an eye on. So turning now to our organization, I mentioned right up front that we are retooling all those people, processes, and culture to meet our aspirations. Our new commercial leadership team is creating a professional selling organization, new sales processes. We've hired a new director of sales training. We're improving our analytics and CRM capabilities. We've also recently brought on Kiri to lead the reimbursement of market access efforts. And we are rallying our organization around a new culture that centers on five core values. We are patient-centric, we are customer-focused, we are innovative, we are passionate, and we care. We care about all of our stakeholders, and we care about delivering operational excellence. And we are working to build an organization that can deliver sustainable growth in the years ahead. So before we move to the Q&A, I'd like to take a moment to recognize Dr. Bruce Robertson from HIG Capital for his tremendous service to Apollo Endosurgery and our board of directors for more than 14 years. Bruce participated in the very first institutional investment round for the company in 2008 and has served on our board since then. He's been instrumental in guiding the company through its formative stages and getting us to the point where we are today. In addition, Bruce has been a fantastic colleague and advisor for me in my first year as CEO. Bruce has decided to step down, do other commitments, and we wish him well. We are conducting a board search process and look forward to providing updates soon. And so in closing, in 2021, we made excellent progress in energizing the business and building the foundation for future growth. I anticipate that over the course of 2022, we'll begin to transition from this initial energized phase of our strategy. We have multiple catalysts for growth across our product lines and geographies, and we're putting in place the right team, the right processes, the right culture to meet our aspirations. Thank you for your time today and for your interest in Apollo, and we'll now open the line for questions.

Thank you, ladies and gentlemen. The floor is open for questions. If you have any questions or comments, please indicate so by pressing star 1. Pressing star 2 will remove you from the queue should your question be answered. And lastly, while I'm posing your question, please pick up your headset if you're listening on speakerphone to provide optimum sound quality. Please hold while we poll for questions. Once again, that's star 1 if you have a question or a comment. The first question is coming from Josh Jennings from Cowan. Your line is live.

Eric Ohm for Josh. Thanks for taking the questions. I appreciate all the great commentary around the early experience of XTAC. Just curious, as you get closer to European approval here, could you help us understand what would be included in your CE mark submission? And then, is any of your U.S. regulatory work leverageable for attaining that CE mark? Thank you.

Yeah, no, thanks, Eric. Yeah, so, you know, under the new NDR requirements, There's obviously additional need for clinical data, so we have been able to leverage some of the data that was included in our initial clinical study that's been published, as well as a lot of the work that went into the U.S. application. As I'm sure you know, in the past, having an FDA approval, it'd be almost a slam dunk to quickly follow on if you get U.S. first. It really, right now, is just a timing element as our notified body works through a backlog of applications from a lot of companies, but we think we've got the right materials that they need to get the approval.

Understood. That's great. Thank you. And then thinking about guidance for 2022, could you help us understand what COVID assumptions you're baking into the range here? Jeff, your comments around trends in December, especially in the U.S., how should we be thinking about Q1 revenues relative to the result that you've just delivered here in the fourth quarter? Just any commentary on the cadence of revenue through the year would be really helpful. Thank you.

Sure, Eric. And again, we haven't given quarterly guidance, as you know, but I think it's consistent with what you're hearing broadly in the industry is certainly early in the quarter we saw pressured volumes, much like we saw in the fourth quarter. We're starting to see some of that abate. We're seeing nice momentum. What we can say about the quarter is that we're certainly comfortable with where where the street has us in terms of consensus for Q1. I think as we start to think about the acceleration of the ramp to that 20% growth, you know, that really happens once we get, you know, beyond the COVID impact and we start to see acceleration in some of these endobariatric practices.

That's great. Thank you, guys.

Okay, the next question is coming from Matthew Blackman from Stifel. Your line is live.

All right, good afternoon, everybody. Thanks for taking my questions. Just got a couple. Maybe, Chas, just to start with you, I'm hoping to get the priorities in 2022 for the U.S. commercial team, whether it's figuring out the Salesforce size, whether it's focusing on existing accounts or expanding the customer base. I just want to understand what the focus is in 2022 and And if you could layer on top of that, you know, the folks that you've onboarded over the course of 2021, how they're ramping, how productivity for the whole Salesforce looks like, and then just a couple of quick follow-ups.

Sure. So we, Matt, as I think you know, have our core reps and the vast majority of our sales team in the U.S. kind of carry the full bag of all three products. And then we've now layered on regional endobariatric managers that are focused on the opportunity in that area. And so for the first group, their priorities, if you look across product lines, we think we still have excellent opportunities to continue identifying and training new users in OverStitch, and they're doing that, but also driving additional usage in our existing base. So that's a very important focus. For XTAC, it's... The strategy we laid out last year continued to be quite focused on a targeted set of accounts and really driving the model of increasing adoption remains a priority for us. And as I just alluded to, the importance of being able to do that across multiple users in both upper and lower GI is a real focus for that group. And then another focus I'd say is to sell the whole bag. We've got some of our reps who are very good at selling Orbera and some who've got less experience in it. And I think given what we're seeing already in the marketplace of a nice bounce for that product, we've got a lot of shared learnings on it that I think is going to help our sales organization expand the product across some regions that have had a lot of success and make that more consistent. So we're pretty excited about the opportunities across across each of those. And then for these REM roles I mentioned, we have a group of early adopters internally we refer to as Wave 1. That's the reference on one of the slides you saw. And it's really learning from them. It's a mix of both academic and private practices. It's a mix of GIs and surgeons. So we've got different models that are already having a lot of success. across a range of endobariatrics. So the balloon is a big part of that, but then also some of the other procedures. So we're learning a lot about everything it takes to kind of build and grow those kinds of practices, and then having a focus on what the next waves are going to look like. And we're just checking the right balance, given the fact that we don't have any indication for the suturing side of it, but we actually do a lot with the balloon, including those co-marketing programs I mentioned.

Got it. I appreciate that. And I'll just ask one more, I'm curious, you called out the top 10 accounts, something like greater than $600,000 in revenue. Are those accounts using multiple products within the APEN portfolio, or is it largely driven by one product? I'm obviously trying to get at sort of what opportunity there may be to cross-sell, and obviously, as you've mentioned before, how you could turn that into a playbook for the rest of your account.

Yeah, I think you see there's a mix of accounts in there, some that are Pretty broad-based, some of the larger academic settings that truly are using a whole range of the products and really incorporating XTAC into that as well. So you've got all three products that are involved. And then you've got some that are more endobariatric accounts that absolutely will use both the balloon and overstitch. Probably not likely to use a lot of XTAC because the applications are more limited in that setting.

Got it. Thank you. Appreciate it.

Okay, the next question is coming from Adam Mader from Piper Sandler. Your line is live.

Hey, Chaz. Hey, Jeff. Thanks for taking the questions here, and congrats on a nice year. Wanted to start with the guidance and see if we could just deconstruct that a little bit further, you know, particularly by segment. Just curious to get some additional color on how you think about the ESS franchise versus the balloon business in 2022, and if you're willing to kind of put any color around contribution from X to X. Maybe we can start there and then add a follow-up or two. Thanks.

Yeah, no, thanks, Adam. You know, look, as we look across and we see each product can continue to contribute to growth, you know, thinking in order a little bit, I think on the balloon side, I think we're still learning, frankly, in terms of sustainable elements of growth and what it can deliver. Well, we're encouraged. Obviously, we had a very good year last year. We're not planning for another year of 50% growth. That would be nice. But we do think it can be a sustainable contributor, which given the history for the product line would be a really good outcome. And so we're looking at that. And as we implement more of these programs and get more runway with it, we'll have more to build on to stay sort of the level of sustainable growth. And then we see, I think, a good balanced contribution then across the other two products. You know, good opportunities with XTAC here in the U.S. and then layering on depending on the timing of approvals outside the U.S. and so that can absolutely be added both this year and beyond. And then a lot of excitement, obviously, around OverStitch, both the core GI applications. We continue to add new users there and, you know, the opportunities as the year progresses on the weight loss side. And again, I mentioned before, we really are trying to to be appropriate and have the right level of, well, we're not the folks promoting the aspects around the weight loss side for overstitch until we have the right indication.

Yeah, Adam, just to add to that, as you think about it and as we think about our long-term growth play, and we talk about this 20-plus percent long-term kegger, I think you need to think about it as ESS, overstitch, and XTAC being the outsized growers relative to that 20%. Morbara, you know, likely being behind that. But that's really how you get to the blended growth of 20 plus percent, if that's helpful.

Yeah, that's helpful color, guys. And maybe just a quick follow-up on that, and then if I can squeeze in a third, I'll try my luck. But, you know, for the follow-up, you know, I'm wondering if you guys can put a finer point on, you know, ESG and revision FDA approval timing, right? you know, any, any finer point or specific quarter where we should expect those to, um, you know, come on label. And then is there anything in terms of the guidance that you've had that you have issued the 73 to 75 million that currently contemplates, um, you know, revenue directly associated to those, uh, indications. Thanks.

Yeah. So, you know, when we submitted the application for the de novo five 10 K, I think even in the press release, Adam, we mentioned that we had one of our outside law firms do an analysis that says, on average, a de novo 510 takes four months. And each one is unique because there is no predicate. And we're working through the process, but we've kind of mentally prepared ourselves for that kind of a timeline, which would put you in the second half of the year from a timing standpoint. But there's uncertainty around that and we're going to do everything we can to move it along and support the process hopefully to a successful conclusion. From that vantage point, given that kind of timeline, we haven't put sort of a hockey stick kind of ramp into the sort of back half of our year, although we do know that even just general awareness in the community is having somewhat of a lift effect. And so, again, we're playing our role appropriately, but we do see a broader awareness about weight loss and endoscopic procedures and people kind of coming to us interested about it. And we can appropriately do things like training on the suturing techniques, but, again, we're trying to be careful here.

Okay, really helpful, Chaz. And just the last one, if I may, just gross margin. Jeff, I think you gave some helpful puts and takes. in the prepared remarks, but just want to kind of flesh that out a little bit more. You know, I think you have the mid-60s number in the slide deck over the next three to five years. You know, do we kind of straight line that from where we currently are to get there? Is it going to be a bit lumpier, I guess, just trying to figure out exactly, you know, how we think about 2022 gross margin if you're willing to quantify it to any extent? Thanks so much, guys. Appreciate it. Sure.

Yeah, Adam, I think about 2022. I haven't given specific guidance, but we will see expansion. I think it's more of an evolution of the margin and not a step change. I think that's the way you need to think about it. There's still a lot that we're working through in terms of the planning for the launch of new products, the configurations, pricing considerations, a lot to really think about in terms of what might drive longer-term margin. I think you think about 22 margin and even early 23 as more of a gradual evolution.

Okay, got it. That's helpful. Thanks, guys.

Okay, the next question is coming from Matt Hewitt from Craig Hallam. Matt, your line is live.

Good afternoon. Thank you for taking the questions and congratulations on the progress in 21. Maybe first up, and I don't know if this is a metric that you can provide or if you're going to kind of focus on other areas, but as far as XTAC accounts, where did the year end up? And as you look at 22, is it more about driving utilization and focusing on the quality of the accounts, or is it still about kind of grabbing new greenfield opportunities within new accounts entirely?

Yeah, Matt, I think the overall, it's still very much about the quality aspect. We do view this as a product that can be used quite widespread, but there are definitely learnings about the learning curve and nuances to even just, especially for people who aren't used to suturing, right? And it's much simpler than overstitch, but it is, you know, for some, the alternative procedures are doing nothing, right? And so we want to make sure that people understand the product and how to use it well And so we've got a heavy focus on a targeted set of accounts that are doing these kinds of procedures at high volumes, and they're the primary focus for our sales organization. It doesn't mean we're not opening other additional accounts. But again, we really are trying to focus on that utilization metric because I think Many people have been involved with launches where you try to get out too quickly, get out to a lot of institutions, but you're not getting the traction you want to get from a utilization standpoint. So that continues to be a big focus with the team. We will continue then to build and grow over time, but kind of a utilization-first strategy in terms of how we do it.

That's helpful. And I guess along those lines, and I realize it might be a little bit early, but As the year progresses or as we maybe start looking at 23, will you start providing some utilization trends, even if just high level, to help us kind of recognize the ramp that you're seeing within accounts?

Yeah, Matt, it's a fair question. I think the answer is possibly. You know, it's a competitively sensitive product as well. We're trying to be as guarded as we can around how much we actually offer, but to the extent that we can continue to share more of our key metrics without compromising some of that, we'll do that. We've tried to lay out, as an example, our sequential percentage growth, 40%. We saw a 20% increase in number of ordering accounts. Clearly, you probably don't have a good view on the baseline. but we're trying to give you what we can without sort of compromising some of the competitive sensitivity.

Completely understand. Thank you. And then maybe one last one. Is there any update on the status of the NASH trial as far as timing or plans, whether or not that would just be Orbera or whether you would include Overstitch? Any color on that process would be helpful. Thank you.

Yeah, no, Matt, it's a good question and one that we are working through, frankly. It's We've been with some experts in both the GI side of things and the hepatology side of things to really work through the learnings that have gone into recent trials in these NASH areas. I'm sure you're aware there have been, you know, tens of trials, you know, multiple trials on the drug side, many of which haven't been very successful, and so we're really trying to learn from those while also taking a hard look at the data that we have for both balloons and ESG, right, as we are collecting some additional data. You know, Merit had data on comorbidities. Liver function was not one of them, but we've got some other studies in Europe that have reported some initial data that looks interesting. And so, and then you wrap in that there's still a whole ongoing set of discussions with CMS about exactly what their coverage policies might be for new technologies. The previous MCIT doesn't look like it's going forward, but they're talking about kind of new versions of what they might do. So for all of those reasons, we're taking a pretty deliberate approach to whether it's one product or both products. Is it one trial or multiple trials? As a small company, we probably only get one chance to get this right. So we're kind of measuring twice-cut-once kind of approach here intentionally because there are just a lot of moving parts.

I completely understand. All right, thank you.

Okay, the next question is coming from Frank Pakenin from Lake Street Capital Markets. Your line is live.

Chas, Jeff, congrats on all progress. Thanks for taking the questions. I wanted to ask a couple more on the top 10 accounts. First, can you comment on how many of those top 10 are endobariatric specific? And then two, my assumption is there's been a little mix in the composition of those top 10 accounts. Can you comment on what's driving that, whether that be an over-stitch account and introduced XTAC or endobariatric account that's growing quicker than the rest of the account base, just any color around how the composition has changed and why would be great.

Yeah, Matt, I would say the majority do fall under that category of endobariatrics, or at least where endobariatrics is a significant portion of what they do. And so that's an important element. Some of those will also be doing some of the core GI procedures, so they may, as I said, in fact, be using XTAC as well. And so I think we do have some where it's kind of all in and you've got all three product lines contributing to that growth, but I would say a number of them and probably the majority is primarily being driven by the balloon and overstitch at that level, really driving sort of those, as I mentioned, $600,000 kind of volumes Those are typically when you have institutions that really are embracing the role for endoscopic therapies on the weight loss side. Again, with the balloon often being a big part of that.

Got it. Okay, that's helpful. And then two in the operating expense region. First, how should we think about Salesforce growth for 2022? And then secondly, what Thinking about just broad business investment sounds like that's going to take up pretty aggressively now that you have the funds to do so. Where should we expect to see that most in the operating expense structure?

Yeah, Frank, good question. I think the first question on the sales course growth, we ramped up to about 30 by the end of the year. We've made some incremental hires throughout the course of the first quarter. I think where we are now is that we're really more focused on making sure that the existing sales force is trained up and that they begin to ramp up and we start to see the programs that are working, the ones that aren't, and adjust. I think you'll definitely see a bit of a ramp in hiring Q1. We'll probably start to see another ramp later in the year. I think as you start to think about sales and marketing expenses ramping in the nearer term, it is some of the run rate from the larger commercial sales rep footprint, but then it's also the investment in the marketing type programs around endopriatrics that Chas walked you through. And then as you think about investments beyond sales and marketing, the reimbursement initiatives, bringing Keeley on board and building out that team, some of the clinical initiatives in terms of a deeper dive on extract publications and NAS strategy that we hope we'll get more clarity on by the end of the year. And then across the R&D, product portfolio, COGS improvements. It really is, in many cases, just really making up for some level of underinvestment historically.

Just one more thing on the sales force, just to give you an order of magnitude, Frank, and, you know, last year, this is U.S. I'm talking about, you know, we almost doubled the sales force to about 30. I'd say order of magnitude by the end of the year of 2022, we'll be in the range of call it 40 to 45, right? We're not looking to double again, right? Now that could change, you know, things take off and we're going to evaluate that as we go. But just to give you a sense of our thinking, you know, it's not doubling again. It's continuing to grow and split some of the larger territories, continue to get depth in some of the markets where we know we can drive growth with our current footprint. While in parallel, we're going to evaluate the overall footprint. I mentioned these regional endobariatric managers. That's almost like a pilot, right, to see what that role, how it contributes, how it complements the existing roles in advance of the newer indication. And so we'll see the exact sort of structure and size as the year goes on.

Got it. That's helpful. I'll stop there. Thanks for taking my questions.

Okay, the next question is coming from Chris Cooley from Stevens. Your line is live.

Hi, this is Ben on for Chris. Thanks for taking the question. Just a quick one for us. So given the current inflationary environment and your prior comments around potentially passing on price, I was just wondering if you could provide some additional color around any potential timing on those price upticks and then really how we can think about volume growth moving forward if you do implement those. Thank you.

Yeah, hi, Ben. So for OverStitch, we did take a price increase at the beginning of the year. We have in the past taken a cost of living increase. It was modestly higher this year in light of the inflationary environment that we see. And so that was certainly part of our planning. And so we implemented that really at the start of the year. Jeff was alluding to also as we get the new indication and the new products, how exactly we price those in the marketplace is still something we're working through and that plays into things like some of our reimbursement strategies and other areas. So that determination would be more closely tied to the rollout of the new products and the systems, as it were, for ESG and revisions, which will, you know, certainly in the back half of the year or even beyond as we kind of think through that aspect of it.

Thank you.

Okay. I'd now like to turn the floor back to management for any closing remarks.

Well, thanks again, folks, for joining us. We really appreciate it. Very gratified with the progress we made in 2021 and looking forward to an exciting year ahead. And thank you for your interest in Apollo.

Thank you, ladies and gentlemen. This does conclude today's conference call. You may disconnect your phone lines at this time and have a wonderful day. Thank you for your participation.