Apollo Endosurgery, Inc.

Good afternoon, ladies and gentlemen, and welcome to the Apollo Endosurgery Third Quarter 2022 results 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 Third Quarter 2022 financial and operating results. Joining me on the call are Chas McCann, Chief Executive Officer, and Jeff Black, our Chief Financial Officer. Today's call will include slides to accompany the audio presentation. For those of you who are joining us by telephone, you can download a copy of the slides at our investor relations site, ir.pauloendo.com, and choosing the Events and Presentations tab. 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 continuing effects of the COVID-19 pandemic, the macroeconomic conditions, and the 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 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 this live broadcast, November 1, 2022. Except as required by law, Apollo undertakes no obligation to revise or update any statement to reflect events or circumstances after the day 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 AK filing are supplemental tables reconciling non-GAAP figures to their closest GAAP comparable. Now I'd like to turn the call over to Chas.

Thanks, Matt. Good afternoon, everyone, and thank you very much for joining us. I'm very pleased to report that in Q3, we achieved another quarterly record with nearly $20 million in sales. We've increased our revenue guidance for the year. And in operational terms, we anticipate achieving approximately 25% growth for the year in constant currency. Apollo's business is heading in the right direction. And importantly, our 2022 growth is occurring in advance of four big growth drivers that we're going to discuss on the call. Seizing the endobariatric opportunity with the launch of Apollo ESG and Revise. Continue to scale our commercial channel, especially in the U.S. The exciting launch of a new product, OverStitch NXT, which we have not disclosed publicly before, but I will describe later on the call. And then some new large growth opportunities in markets outside the US. But before we speak about those, let me talk about the quarter. Slide four includes some highlights from some of the key metrics for the quarter. 24% growth year on year in constant currency. and 45% growth in ESS. And as a reminder, that is the combination of both OverStitch and XTAC. We have publicly discussed that we really view those two products as our primary growth drivers in the portfolio, and I think 45% growth is indicative of that. We continue to see excellent depth in our top accounts. So our top 10 accounts worldwide have grown 80% year-on-year as they continue to expand usage of Apollo's products. And XTAC is doing very well. It has grown, essentially doubled year on year. And as we mentioned in the press release, XTAC is now the number two product in our portfolio in the United States. And this is now our seventh consecutive quarter of revenue growth. And so these are some of the operational highlights. In addition, we had two very important strategic milestones through the quarter, which we talked about on our prior call, those being the FDA marketing authorization for Apollo ESG and Apollo Revise, as well as the publication of the merit study in the Lancet. And so I'm thrilled with the results that we achieved in Q3. I am very thankful for the tireless efforts of members of the Apollo team that have allowed us to achieve them. And so with that, I'll hand over to Jeff to provide an update on our financial results, and I'll come back and talk about some of the opportunities we have to build on these successes.

Thank you, Chas, and thank you, everybody, for joining us today. Just to get started on slide six with revenue, as Chas reported, another record quarter of strong year-over-year growth, our seventh consecutive quarter of double-digit growth. For the second consecutive quarter, we achieved the highest revenue on record for Apollo on both a GAAP and constant currency basis. Globally, our ESS portfolio was up by nearly 5 million, grew 45 percent in constant currency, it grew by about 4 million and 41% on a GAAP basis. In the U.S., we grew revenue by 29% with our ESS portfolio up nearly 3 million and 41%. And this growth in ESS is reflective of continued impact of our planned investments, particularly around Salesforce expansion and our increased productivity of the Salesforce. ESS volume increases were the primary drivers of the growth we did see a moderate impact from price increases. The growth in ESS was led primarily by oversight adoption in our endographic accounts, and we also saw, as Chas mentioned, increasing contribution from XTAC in our defect closure accounts. Orbera, which is our intragasic balloon, was down for the quarter by about 200,000, and that's due to summer seasonality and macroeconomic conditions. In the U.S., we grew revenue by 18 percent on a constant currency basis, 9 percent on a GAAP basis, with our ESS portfolio up nearly 2 million and 53 percent in constant currency. OUS, we saw strong procedural volumes were overstitched with some price offset due to a higher distributor revenue mix. We saw a similar dynamic OUS for Ribera as we experienced in the U.S., where volumes were down due to seasonality. and macroeconomic conditions, which we do believe is likely impacting some patient decisions about whether or not to get a balloon procedure. But we've communicated in prior quarters that Orbera is a strategic asset for us in our endobariatric growth strategy. We continue to believe that Orbera will be a stable to low to mid-single-digit grower, both in the U.S. and internationally. We did see significant foreign currency headwinds, which had a nearly $700,000 impact or 900 basis points on year-over-year growth. And as a reminder, we're disproportionately impacted by foreign currency pressures compared to similarly sized medtech companies because of our large OUS footprint relative to our peers. Moving to slide seven on guidance. As we look at the outlook for the rest of the year, we increased today, as you saw in the press release, our full year 2022 guidance to 75 to 76 million, and that's really on the strength of our Q3 performance. This implies full year growth of 19 to 21 percent, second half year-over-year growth of 20 to 23 percent on a gap basis compared to first half growth of 18 percent. On a constant currency basis, this implies growth of up to 25 percent, which is above our medium-term 20 percent growth outlook that we have communicated previously. We have a number of positive growth drivers in Q4 and heading into 2023, but with that said, as we set guidance for the remainder of the year, we do remain cognizant of the continued potential global macroeconomic impacts, especially from inflation. continued foreign currency pressures, particularly for the Euro, which currently represents nearly half of our OUS direct revenue. And again, potential seasonality later in the fourth quarter in our endobiatric accounts, which represent a growing mix of our total revenue. Moving to margin on slide eight, we remain on track with our margin expansion targets, although we did see impacts of both foreign currency and product mix in the third quarter. Gross margin was flat in the third quarter on a constant currency basis versus prior year and down about 150 basis points on a gap basis. We did continue to see overall COGS reduction in our ESS product line from the impact of 2021 overstitched COGS improvement projects as well as improved overhead efficiencies. But offsetting these improvements were a lower revenue mix from Ribera, which has a higher gross margin profile. We also saw a higher revenue mix across the portfolio from our OUS distributor channel, and that typically has a lower gross margin profile than our direct channel. As we look to Q4 of this year and beyond 22, there are a number of factors that we believe will drive gross margin expansion. First of all, we recently made a decision to increase prices in both OUS and U.S. markets. The gross margin benefits of these recent price increases should begin to show up in the next one to two quarters, and we also expect future price increases to contribute to incremental gross margin expansion over time. And beyond the price increases, there are still a number of major drivers of overall margin expansion, including improved overhead absorption and direct COGS improvement programs, which are focused primarily on overstitch. several leads are already underway. We continue to navigate supply chain, manufacturing scale-up complexities, and we remain confident in our ability to drive margin in the mid-60 percent range in the medium term. Moving to our operating expense profile, on a non-GAAP basis, we do think it's important to take a look at our expense run rate on a non-GAAP basis, excluding non-cash stock-based compensation. And as we stated before, 2022 is a planned investment year for Apollo with a targeted focus on building capabilities to drive both near and long-term growth for our existing portfolio. And the most significant area of that investment continues to be sales and marketing in the U.S., which ran at about 42 percent of revenue in the second quarter. It reflects our expanding U.S. sales channel and marketing programs as we prepare for the anticipated launch of Apollo ESG and revise. In total, our non-GAAP expenses were 75% of total revenue in our most recent quarter. That's down from 80% in the second quarter. And this is reflective of improved Salesforce productivity and the timing of the marketing spend. Given the current environment, we continue to be careful stewards of our resources. Through the first three quarters of 22, we're well below our OpEx and CapEx spend plans while on target with our revenue plans. And perhaps most importantly, we're well positioned from a balance sheet perspective to support these growth initiatives. And with that, addressing our balance sheet on slide 10, at the end of Q3, we had over $130 million in cash and committed cash. That includes about $68 million in cash and cash equivalents and access to another $40 million over 2023 and 2024 based upon revenue milestones, which are well below our base case expectations. We've seen operating cash use continue to improve throughout 2022. The increases in cash use have been primarily working capital for inventory builds and CapEx to support revenue growth. And really, thanks to the diligence of our entire operations team, we've been able to successfully manage a number of supply chain complexities, mitigate risk, secure raw material supply, and begin to build inventories to more appropriate levels given our midterm forecast. We expect to end the year with $125 million in cash and committed cash, including about $60 million in cash and equivalents. And this implies cash use for the year of around $30 million, which we still continue to anticipate as our high watermark for annual cash burn, based upon our base case model. And again, we've got a multi-year cash runaway to execute the plan as we stand here today, a clear line of sight to a cash flow breakeven business, and a balance sheet with committed capital to get us there. And with that, I'll turn the call back over to Chas.

Thank you, Jeff. So on my first call with investors last spring, I laid out a plan that had three phases to it. And we really were focusing at that time on a first phase of energizing the business, then moving into an accelerate phase, and then leading the markets that we serve. So slide 13 provides a little bit of a scorecard, as it were, of how we've done during that first energized phase, a little over a year. And people within Apollo know that I place a very high premium on delivering on our commitments, so let's talk about how we've done. In terms of strategic milestones, we said that Extact was going to be an important new product that delivers exceptional clinical value. It is now the number two product in the U.S. in our portfolio, and adoption continues to grow. We said that we were pursuing FDA authorization for the ESG procedure and for endoscopic revisions. Those were granted in July. We said that we believe that the MERIT study represented a fundamental step forward in the field of endobariatrics and that the study was worthy of publication in a top-tier journal. MERIT was published in The Lancet also in July. And then all the while, we've been undergoing a financial transformation. If you compare our growth in the quarter that we just announced and compare it to Q4 of 2020, and the reason that was the right before I took over as CEO, our growth in that period is 52%. So Apollo is rapidly becoming a growth company. And all the while we've strengthened the balance sheet, and as Jeff mentioned, have a very clear pathway towards cash flow breakeven. In addition, we've been revitalizing the organization at all levels. But in the leadership and the board, we've made some significant additions. I particularly want to highlight again the recent additions of Jeanette Banks, who's a senior executive at Alcon, and Sharon O'Keefe, the former president of the University of Chicago Medical Center, to our board of directors. Jeanette and Sharon have added tremendous value already in the short period of time, just fresh new perspectives on our board, and adding to an already very strong team. And we are thrilled to have them. We've also been building key functional capabilities and critical mass in the organization. We've highlighted a few on the slide in R&D, in reimbursement and health economics, and in marketing. And we continue to expand our sales team, and we're hiring some of the best in the industry as we do so. And so Apollo is entirely a different company than we were just a little over a year ago. And so now we turn our attention to the next phase, the accelerate phase. And I'm very pleased to talk about today four opportunities that are either in the very early stages or are brand new that will help drive that accelerate phase. And you see them on the slide. I referenced them earlier. The endobariatric opportunity, growing our commercial channel, expanding access to suturing with overstitch NXT, and then pursuing significant expansion opportunities outside the U.S. So let's walk through them and starting with the endobariatric side. Slide 15 is a repeat of a slide we showed on the August call, and I'm including it again because I think it makes a really important point. And that is that ESG is entirely different than anything else that has come before in the field of endoscopic bariatric procedures. No other procedure has the combination of an FDA authorization, level one clinical evidence, and then delivers a combination of effectiveness, safety, and very good durability. And the market is already starting to respond to that. The slide 16 shows results in 20 of our top accounts in the US, our top 10 private practices and our top 10 academic medical centers that primarily do endobariatric procedures. And that combined group of 20 accounts year-to-date are up 50% year-on-year in terms of their performance. And then importantly, among the private practices, that group will average over 500 procedures with Apollo products between ESGs, bariatric revisions, and or baroballoon procedures, an average of more than 500 each this year. So clearly, we're gaining adoption in these initial pioneering accounts. And one of the true pioneers in this space is a physician named Dr. Chris McGowan, who's based in North Carolina. He is the founder and leader of True U Weight Loss. They've recently opened a new location in Atlanta. And two weeks ago, Dr. McGowan did a live case presentation of his 2,000th ESG procedure. That's not a typo. In a few short years, Dr. McGowan personally has done 2,000 ESGs. And so he did a live case that was presented on YouTube and other social media platforms. The case video is available online, and it's excellent. In less than an hour, while conducting a flawless ESG procedure, Dr. McGowan answered questions about ESG. His answers are clear, they are balanced, and they are intended for a lay audience interested in learning more about the procedure. Some of the topics he covered are included on the right hand of the slide. I won't go through all of them, except to highlight a few. The average total body weight loss in Dr. McGowan's practice is 20 to 21%. Their safety profile is excellent with an average adverse event rate of 0.1%. And the procedures are typically done in an outpatient setting in a same day procedure and patients return, can return to work within three to five business days. And so if you have an interest in learning more about ESG or if you've got family members or colleagues or friends who'd like to know more about the procedure, I do encourage you, to look online and there is a link on page 17. And so Dr. McGowan is a gastroenterologist who really now specializes in endobariatric procedures. In addition, and importantly, bariatric surgeons are also starting to embrace ESG. And slide 18 describes the experience of Dr. Brandon Vanderwell that was presented in August at the IFSO meeting, which is a big international conference and it was in Miami this year. Dr. Vanderwaal is a bariatric surgeon who practices outside of Seattle, and he presented these data at the conference. That in, again, only about two years, he started offering ESG, and he had 469 new patient consults, specifically because people heard about ESG. And out of those, he really found two things. First of all, that ESG could absolutely help him treat more patients and expand his practice. Almost 200 of those interested people who came in the door got an ESG procedure, and about 100 of them received a laparoscopic sleeve. The biggest reason why people would get a laparoscopic sleeve were twofold, those with higher BMIs, as well as insurance. All of Dr. VanderWaal's ESGs are cash pay procedures. And so, despite that, from a two to one ratio, people were getting ESGs over laparoscopic procedures. The second thing that was really meaningful about Dr. VanderWaal's presentation is just the outcomes he's achieving. 24% total body weight loss at 12 months. He and his team do an excellent job with the procedure and are very rigorous in their aftercare patient follow-up. And you can see the results in their outcomes. And so we are just in the very, excuse me, in the very early days of patient understanding. and awareness about ESG, and patient stories are just starting to emerge, and you see some examples on page 19. I'll highlight just the one on the left because it's a pretty remarkable story. This was a woman in South Carolina who underwent an ESG procedure and lost a lot of weight, and in doing so actually discovered a lump in her throat that was diagnosed and turned out to be cancerous. They caught it early, were able to intervene, and my understanding is she's doing very well. And so just the impact is so gratifying to see. I am the son of a physician. I come from a medical family. Patient care is in my familial DNA. And these kind of patient impact stories really are what drive me and I think drive our team in how we move forward. And so we will actually be adding additional patient marketing and patient awareness activities here starting this quarter. And so more to follow as those get launched here in the coming weeks. I mentioned some of the early adopters, the practices that are absolutely having success with endobariatrics. And so our next stage obviously is training, right, training the next wave of people, both surgeons and GIs. I'm pleased to report that we have already completed one course in October and have another one scheduled in December with a total of about 50 physicians. We've got plans for similar courses for at least 100 physicians next year. And importantly, this group, these are experienced physicians. Most of them already have suturing skills with overstitch and now have a strong interest in developing an endovariatic program. We also have an outstanding group of faculty. Some of the faculty members across the already scheduled programs are shown on the page, on page 20. That includes three GIs with Dr. Gestaut, our chief medical officer, Dr. Thacker and Dr. Charvel, as well as two surgeons, Dr. Ujiki and Dr. Snow. We've got a mix of private practice and academic. And so a whole range of perspectives, not only on the technical aspects of having the best possible patient outcomes with the procedure, but also in terms of how to incorporate endoscopic sleeve gastroplasty and revision procedures and the intergastric balloon into clinical practice. And last but not least on this part of the growth driver is, of course, reimbursement. And so with the recent announcements and the FDA clearance, we were able to continue to drive critical activities related to reimbursement. We are in the process of exploring new coding and new approaches for Medicare in how people undergo payment in the facility setting. We are in advanced discussions with the societies, both GI and surgical societies, around CPT codes and a new application there. We're developing a new patient access function to really support case-by-case prior authorizations. And then we're putting together the health economic materials and the value proposition and clinical evidence to really engage payers on reimbursement discussions and coverage discussions. Our second big growth driver has to do with our commercial team, which we continue to grow and develop. We mentioned previously our target at the end of the year to be at about 40 frontline sales reps by the end of the year. That is inclusive of both our market development managers, who are our sales reps who carry all three product lines, as well as the new regional endobariatric manager role that's focused on helping to grow and develop the endobariatric accounts. In addition, we're enhancing sales training, our sales analytics, growing our marketing capabilities, building out our physician medical education and training capabilities, all to build a stronger commercial organization. And importantly, we still have a relatively new team, right? About half of our team in the sales organization in the U.S. still have less than one year experience at Apollo. And so a lot of credit to Kirk Ellis, our VP of sales here in the U.S. and his leadership team for delivering 25% plus growth over the past year while essentially overhauling the entire commercial team. And that's not an easy task, and they've been able to balance it well. But we have been able to hire some excellent people on our team. Word has gotten out that good things are happening at Apollo, and people are actually coming to us. And we've become a net importer of very good talent. And you see some of the examples of companies we've hired from places like Stryker and Medtronic and Boston Scientific within the last year. Okay, so our next growth driver, we're talking about new product development, and I love talking about new product development. As I mentioned, we really have been adding into our resources on the R&D team, and Apollo's had an outstanding R&D team, including the folks that developed XTAC originally. And so our first new product coming out of this renewed focus on R&D is called OverStitch NXT. And so NXT is a new product, a new version of OverStitch. It's focused on single channels, single channel scopes. But it actually offers capabilities that don't exist on either of our existing OverStitch products. It has increased retroflexion. It's got stronger catheters. It's got new tools that allow physicians to have more control over how they engage with tissue and do their suturing. It's much easier to use and install than the existing SX products. and much faster to use as well. And so the feedback that we've received from our clinicians who've gone through usability testing as well as some of the allied health professionals who often are involved in setting up the device has been excellent. And we are in the final stages now with the R&D process. We're going through the final product development testing, the final process validations. The things you do as you're getting ready towards the launch and we're targeting if all that goes to plan to be in a position to launch no later than the middle of next year. Importantly, NXT has the potential to create multiple opportunities for expanded access to suturing. Recall that single channel scopes are by far the most commonly used scopes on the market. And so the NXT product has big opportunities now to help us expand the adoption of OverStitch in both existing and new accounts. In our existing OverStitch SX accounts, it is a fundamentally better product. You may expect people to make that shift. In our existing accounts that primarily use dual channel, the dual channel OverStitch, many of them don't have enough dual channel scopes or they may not have the dual channel scopes in all of their hospital settings, for example, satellite hospitals. So they'll have reasons to want NXT as well. New accounts, it'll make a lot of sense to just start straight up with NXT. And then we have a lot of previous customers who tried Overstitch SX and had some struggles with the prior product. And so that's an obvious group to also tackle as well. So more to follow on NXT as we get closer to the actual launch, but we're very excited by the progress we're making there in terms of bringing it to market and the role it can play in growth starting in essentially the second half of next year. And then the fourth key driver here is around OUS opportunities. And so first I wanted to provide an update on the MDR process. So the medical device regulations in Europe Those of you who follow the industry, I'm sure have heard about MDR. The transition for a lot of companies has been quite challenging. And so I'm very pleased to report that for Apollo, we are on track and anticipate having new EU MDR certifications for all of our legacy products completed by the end of this quarter. And so it's a big accomplishment and a lot of credit to David Hooper, our VP of Regulatory, and his team for the success in navigating that. And in addition, we actually have excuse me, a positive outcome. In fact, I think maybe one of the only medical-advised companies that does has had a positive outcome as a result of the MDR process, and that is some new labeling for overstitch. These are all still being finalized, but we do expect it to look very similar to what you see on the page of new indications for defect closure, stent fixation, and endobariatric procedures. And so that we expect to be a big help for us in terms of being more specific in our marketing around those three indications. and potentially helping in areas like reimbursement in places like the UK and France and Germany. And then once we are complete with the legacy products, then we will turn our attention to the review process with the reviewers on XTAC. We have made that submission, but clearly just the way the process works, we want to get through the existing products first and then we'll move to XTAC, which we hope to complete during the first half of next year. And in addition, outside the U.S., we've got some very substantial growth opportunities. As I mentioned, XTAC, we are now cleared in nine markets outside the U.S., mostly smaller markets, but most recently, earlier this year in Australia, and we're ahead of plan in our execution there and adoption, and very recently in Brazil. And we've gotten some big orders out of Brazil and very good initial feedback, which continues to reinforce for us the view that XTAC can have both very important, both clinical and economic value in markets outside the U.S. And so as I just mentioned, we're targeting a 2023 launch of XTAC in the CE mark countries in Europe and other countries that follow CE mark. Some other opportunities, Canada. Ironically, given that more than 40% of our business is outside the U.S., we have a small presence in Canada. And so we're working to change that, starting with new clearances for overstitch and XTAC that we're looking for in the first half of next year. Japan is another really exciting opportunity. We have already announced previously the clearance in Japan earlier this year in 2022. And then Mike Gutteridge, our VP of International Sales and Marketing, was just in Japan over the last two weeks and came back incredibly excited about the opportunities for both OverStitch and Extech as we continue to develop that market. And then China and Taiwan, we already have an initial clearance in China, in Hainan province. They've got a medical free trade port, which essentially gives you a foothold into China to start collecting data and collecting experience in the Chinese market. And we've already completed cases, including our first ESGs there. We also have an emerging presence in Taiwan with some excellent clinicians and investigators who are already publishing data with 21% total body weight loss with ESGs. in an Asian population. So the combination of those two things, additional data and a foothold into mainland China, we think is going to be very important and can help clear the way for clearances over the coming years. So in summary, I'm on page 31. We've got a really exciting cadence of new catalysts over the next, you know, call it year, year and a half, as shown on this page. And look forward to continue to drive each of these forward. One area to highlight that I haven't talked about yet is about the ESG and revised systems. We are on track to complete a limited launch here in the U.S. of those here this quarter. That involves basically finalizing the manufacturing and doing a targeted launch and some select accounts. And then we'll be in a position to expand that to a full launch in the first half of next year. And then you see other elements of the cadence throughout. And then finally, just to summarize, we're very pleased with the results of Q3. And we have increased our guidance to 75 to 76 million. which apply operational growth, nearly 25%. And furthermore, all of the growth opportunities that I've talked about on the call gives us further confidence in reiterating what we communicated previously, a belief that we can be a consistent 20% plus grower in the years ahead, especially as we move into this accelerate phase of our strategy. So with that, John, let's open up the call to 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 on your touchtone phone. Pressing star 2 will remove you from the queue should your question be answered. We ask that all participants with questions limit themselves to one question and one follow-up only. Lastly, while posing your question, please pick up your handset if listening on speakerphone to provide optimum sound quality. Please hold while we poll for questions. The first question is coming from Matthew Blackman with Stifel. Matthew, your line is live.

Good afternoon, everybody. Thank you for taking my questions. I've got one question and one follow-up. Let me just start, and I'm sure you guys are anxious to guide for 2023, but just looking at how 2022 has played out so far, the implied fourth quarter, is there any reason why you couldn't or shouldn't hit that midterm 20% plus growth, excluding currency next year? as I think about all the incremental drivers coming on board, like ESG, continued XTAC traction, perhaps the CPT code for IGB. Just any thoughts on how the business is shaping up as you head into 23, and then one quick follow-up.

Yeah, no, Matt, I appreciate the question. We're not prepared to give formal guidance for the year, clearly. But in answer to your question, I think we feel good about the prospects as we laid out. We've got good momentum across the business, especially on the ESS side of the business. And the growth drivers, many of them are already kind of initiating, and then some will kick in, say, in the second half of the year, for example, with the NXT launch. And so we do feel good about that. And the overall guidance, having operationally in the range of 25% this year, We are excited about the prospects for the year ahead. Now, there's some general macroeconomic factors I think we're all paying attention to, and we're not the only ones, but overall feel good about the prospects ahead.

I appreciate that. And just on ESG, just curious if you have any thoughts on sizing the cash pay opportunity and what it could be for ESG. I know it's challenging, but we've talked to docs who say something like 10% of their patients might be candidates to pay out-of-pocket, which I think equates to something like a 60 or $70 million opportunity. Just curious how you guys were thinking about it. Yeah. Put any thought into how big the cash pay opportunity could be. Thanks. Appreciate it.

Yeah, no, Matt, we, we have done some more work on that recently and it's really interesting, right? Because you've got some, some corollaries in other markets that actually turn out to be very big and significant opportunities, right? The obvious one is aesthetics. And you know, the, in various aesthetic markets are well over $700 million for tummy tuck procedures and $1.3 billion for breast augmentation procedures. Another corollary is in men's health and urology. Jeanette Banks actually alerted us to this one because she previously ran that business at Boston Scientific. A lot of that is cash pay, and it's a multi-hundred million dollar business. So we've been doing some work in terms of the modeling of both the cash pay and the reimbursed side and think with pretty modest assumptions on overall utilization that in total that the business can be across both cash pay and reimbursed in the $450 million range within a, call it eight year, eight to 10 year timeframe from now, with the cash pay part of it being maybe not fully half, but 40%, 45% of that. So we think there's real opportunity there, and that's just also extrapolating what we're already seeing in some of our existing customers.

Great. Really appreciate it. Thank you so much. Congrats on a great quarter. Thanks, Matt.

Okay. Up next we have Matt Hewitt with Craig Hallam Capital. Matt, your line is live.

Good afternoon. Thank you for the detailed update. Very appreciate it. I guess first question. So this past week, the two key societies, ASMBS and IFSO, put out some new guidelines and they, for the first time in 30 years, lowered the threshold for who qualifies or who should be recommended for bariatric surgeries. I'm just curious, and I realize it just hit, but what does that mean for your business? How does that expand the market opportunity for you even on the cash pay side. My gut tells me that it's a pretty significant jump when you go from 35 or 40 BMI down to 30 BMI, and in some cases, even lower than that.

Yeah, Matt. No, thanks for the question. You're right. The Surgical Society has been working on this for a while in terms of updating what have been very dated guidelines. And it's based off a lot of data that when you lose weight, substantial amounts of weight there are significant advantages and benefits and comorbidities in areas like diabetes and hypertension and and you know and metabolic syndrome for example as we saw in there right and so we're pleased with that they've updated the guidelines unclear how insurance companies may follow as it relates to starting with the surgical procedures that are covered now But at a minimum, it's further validation that procedure-based approaches for people with a BMI over 30 and then inclusive in some populations even going down to the high 20s, because often obesity presents differently, especially in Asian populations, that they really should consider procedures and the health benefits there. And you're right, that is a significant, it is a bell curve, right? And so it is a big growth in the number of patients who should be considered for procedures.

Got it. And then maybe a follow-up. On one of the slides, and I don't recall which one it was, I apologize, but you've got a plan of training 50 physicians here, obviously, back half of this year, another 50, I think it was in the first half of next year, another 50 in the second half of next year. If I read the slide correctly, What would prompt you to accelerate that training, or are you just trying to be very methodical in how you're approaching ramping up your surgeon and physician practices with Overstitch? Thank you.

Yeah, Matt, we've communicated previously, and I think this is built off of a lot of experience in all of our prior lives, that at this stage, it's so much more about quality over quantity of new users. We absolutely want high quality training, and you saw the types of faculty members that we have, the right people coming to training who are absolutely committed to doing these procedures the right way and put the right programs in place, and then the right follow-up. So that means proctoring cases, peer-to-peer coaching, those kinds of things. So our initial approach here is very targeted and focused in terms of delivering that. As we get more experience, especially with these first two courses this quarter, the numbers I showed are what we already have planned and are kind of minimums, I would say. But we'll ramp it up based off of knowing we've got the right kind of recipe in place to scale effectively and to protect patient outcomes.

Got it. All right. Thank you very much.

Okay. Up next, we have Frank Takanan with Lake Street Capital. Your line is live.

Hey, thanks for taking my questions and congrats on the results. Wanted to start with one on X tack appreciate the additional color was hoping you could bring us into account penetration, a little bit more specifically asking how penetrated is X tack into the overarching over stitch installed base. And then when you're thinking about penetration into the overlapping accounts is there a synergistic benefit between the two if you have a rep selling multiple products into the same facility yeah so frankly it depends on the account on the synergistic so for example you know in our more

Comprehensive accounts that do a lot of defect closure work as well as maybe some endobariatrics as well. There absolutely is a synergy, right? And we started initially, as I think you know, with XTAC with people we know quite well. Those are tend to be people who are using OverStitch in, especially in more in the upper GI. And in our early days of XTAC, we had more, a higher proportion of XTAC in the upper GI than I think honestly we anticipated initially. But as we spent more time with the product and in those accounts and broadened out to a bigger group of people even within the accounts, we're starting to see and have been a pretty steady trend of more of the procedures being in the lower GI, and the majority are now in the lower GI, which is what we would anticipate based on how the product was originally designed and intended to be used. And so as we think about penetration, there's both penetration into the number of the overstitch accounts, and I don't have that number right in front of me, but Jeff maybe will provide it, but then also the number of users per account. And so as we continue to derive depth of utilization of XTAC, part of it is also getting more people within those accounts. In many of the institutions, you see maybe one or two people who will use overstitch, but more that will use XTAC.

Yeah, Frank, I think, you know, without giving information, it's non-public, and we're typically keeping some of this close to the vest, but generally what we've talked about is our over-stitch account base is, you know, somewhere in the 4 to 450 range in terms of quarterly ordering accounts. XTAC is not there yet, but continuing to grow year over year. It's grown pretty substantially, even sequentially. So there is a fair amount of overlap, but we've also – been able to bring on a number of new Extech accounts as well. So it's a mix of existing accounts and new accounts, and that's what's really driving the Extech growth.

Got it. Okay. And then maybe on my follow-up, just sales rep productivity, I heard your comment around only about half the force being there for less than 12 months. Maybe talk to timeline to full productivity and what that can look like from a revenue basis per rep.

Yeah, no, it's, you know, it's a, we've got a good mix of products, but they do take a while to come up to speed. And so we do think that somewhere in that six to 12 months is when people really start to hit their stride, which is not atypical in the industry. And then, you know, our target on average as we do planning is on average territory sizes in the range of, you know, one and a half million dollars per rep. And so that's kind of, those are rules of thumb that we operate against and are trying to build towards that as the team develops in place and as we put the right things around them from a, as I mentioned, marketing and training and data analytics standpoint so that we can consist. We already have plenty of reps who are at that level, but have that be consistent across the whole group. That's kind of what we're shooting for.

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

Thanks, Ryan. Once again, if there are any remaining questions or comments, please indicate so by pressing star 1 on your touchtone phone. Up next, we have Josh Jennings with Cowan. Josh, your line is live.

Hi. Good afternoon. Congratulations on the strong print, and thanks for taking the questions. I wanted to just ask a follow-up on the training playbook. It sounds like the physicians that are funneling in for the bariatric training program camps are experienced with overstitch and i think chef you just talked about 400 450 centers with overstitch experience but as as we think about i guess building the funnel of overstitched experienced physicians before they move forward with the esg training is that the right way to think about it maybe you can talk about that pre-funnel if that is how you guys are approaching this and then how that builds yeah it's a good way to think about it josh the

Especially in these initial courses this year, we really are focusing on primarily, not exclusively, people who have already been trained on OverStitch. But we are getting a lot of brand new interest as well. And that's from both GIs and surgeons. Really interesting on the surgeon side, right? There, I think, has been a bit of a sea change in the last two to three months with the announcements, right? The validation that comes with FDA plus Lancet and starting to hear and see some of these models like the one I mentioned with Dr. Vanderwelle is prompting some high volume and or very influential surgeons to really take note and now want to get involved. And so we absolutely are kind of developing the list of kind of the new wave beyond the ones I mentioned. And I think increasingly we're going through now the process to get them through initial training on overstitch so that they can say participate in the course in February or the one after that. So we absolutely will view this as a nice pipeline that will continue and continue to grow the base.

Well, just in terms of that mix, Chaz, that you just spoke to between gastroenterologists and bariatric surgeons, is that The mix is evolving, but where were you, I guess, prior to the data? I mean, we were assuming something along the lines of 80-20 gastro to bariatric surgeon. Is that moving closer to two-thirds, one-thirds, or anything you can share there from that mixed perspective in terms of subspecialists that are wanting to get trained on the issue?

Yeah, no, I mean, historically in the U.S., because it does vary a little bit by markets outside the U.S., but historically in the U.S., we really have been predominantly GI-based users of OverStitch. They use it across the whole range of applications for OverStitch, and then inclusive on the weight loss side, they've been the ones most interested in adopting it for weight loss procedures. And so, it may even be a little historically even higher than the 80-20 you mentioned. But like I said, now we are now seeing an interest on the surgeon's side, and I do think that as that progresses, It'll be an evolution over time. It's not going to be a sea change, but an evolution where more surgeons get involved and view it. The important, I think, piece, as I mentioned in my comments, is the surgeons who understand and view this as complementary to what they do and a way to treat more patients. And there are many who are now kind of figuring that part out and are excited about now incorporating it into their practice.

Excellent. Just one quick follow-up for Jeff or you, Chas. Just on the price increases, any way to think about that or to quantify that in terms of the impact to ?

Yeah, Judge, I think, again, we made a decision earlier in the year to roll out some price increases. We've also just recently done it. And in terms of growth, as you start to think about third quarter growth, Most of the growth came from volume. You know, a moderate percentage called, you know, very low single-digit percentage was price. I think that mix will increase because we'll start to see the impact of the recent price increases over the next couple quarters. But, you know, think about it in terms of, you know, somewhere in the – call it mid-single-digit range price increase across the board.

And is NXT – Oversight NXT give you another opportunity to take place up next year? Thanks. Sorry for the extra question, Seth.

Yeah, we're excited about NXT. We haven't finalized the pricing strategy for it. But yeah, it is a new product with new features and benefits. And so we are working through that. And we would anticipate the opportunity to have some additional price, as well as as we launch and finalize the systems. we look at an opportunity to have an increase in price there as well. And so we'll provide more information on both of those as we progress here into next year.

Thank you. Okay, up next we have Adam Mader with Piper Sandler. Your line is live.

Hi, this is Simran on for Adam. Thank you guys for taking the questions and congrats on the quarter. Maybe if I can start off with Overstitch NFC. Can you talk a bit more about how this will fit into the broader ESS portfolio? I mean, is this expected to kind of be the workhorse over Stitch Device and, you know, replace the current offerings? And then I know you spoke about pricing a little bit in the previous question, but, you know, is this going to be another area that will help to kind of, you know, you know, improve margins going forward because of your ability to take price here?

So let me start with the positioning around NXT.

So NXT is what we use on single channel scopes. So we certainly see it and envision it becoming the workhorse for any existing single channel scope customers. But I think that's sort of the bare minimum. And then over time, absolutely, if it delivers the way we expect it to based off of the usability testing, we see it as an opportunity to, especially with any new users, and then as I mentioned, with a number of our existing dual-channel users, become a big part of what they do. Replace versus become a complement, for example, in different settings of care, still to be determined in terms of how that plays out. But over time, absolutely replacing SX and probably becoming a pretty significant part of our mix overall. And that will, by the way, vary internationally by market in some cases where just regulatory processes take longer and whatnot. So we may have a period where we've got all three products on the market internationally for a period of time. And then, as I mentioned, we're still working through the pricing strategy and what the margin implications will be. around NXT, but we're excited about the additional features and benefits and how we'll roll it out. We'll try more update at that point.

Okay, perfect. And then if I could ask one more on just OpEx Fund, how should we think about that going forward? I know you're driving investments in a lot of key areas, so maybe just speak from a higher level in 2023, how we should be thinking about OpEx Fund and you know, driving, potentially driving leverage down the bottom line?

Yes, it's a great question. And just to give you a sense of, you know, the OpEx profile, right, we did see some leverage sequentially in the third quarter, but realized that, you know, for every $100,000 in spend, it's 50 basis points of operating leverage. So, you know, the the ability to modulate spend will definitely have an impact, or just the timing of spend will have an impact. But I think more broadly speaking, we will continue to invest. We're going to have to build out the sales channel, build out marketing programs, build out reimbursement, and we'll continue to make investment in R&D. But we will start to see leverage. And I think the way to think about it is that our expectation is we'll see a our revenue growth in 23 will outpace our OpEx growth. So we will start to see some leverage, and it paints a nice picture for us toward that cash flow breakeven model.

Okay, perfect. If I could squeeze one last one. Over Stitch Japan, what still needs to be squared up prior to launch, and how do we think about potential impact in 23? Thank you, guys.

Yeah, so we already have OverStitch cleared and it already gets used in some cases in Japan and with very good feedback from clinicians. But those are ones that are able to kind of fit it into their hospitals. And so the next stage is still working through reimbursement processes. And we are in the process of working through that. And so we anticipate kind of a build of, you know, some additional modest impact here in the near term, but then over time, as we work through those and over the next few years, potentially quite substantial. So I'm not really ready to put a number on it for you except to say that Japan is a very important market in the interventional therapeutic GI world. Some of the real thought leaders in the world are based in Japan. And as I mentioned from our visit from Mike, our VP in the area, the interest level and excitement in Japan around both Overseas and XTAC is very high. So we think it can be meaningful, but it'll be sort of progressing here over the next, you know, one, two, three years.

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

Well, listen, thank you all for joining us today. In summary, we are very pleased with the performance in the quarter. We look forward to delivering on the multiple growth opportunities that it's got. And we recommit to becoming a consistent 20% plus growing company going forward. And so we look forward to that. And thank you all for your time today. Good afternoon.

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.