ReShape Lifesciences, Inc.

Good afternoon, and thank you for joining the Reshape Life Sciences Year-End 2022 Conference Call. I would like to turn the call over to Michael Miller from RX Communications. Please go ahead.

Thank you. Good afternoon, and thank you for joining Reshape Life Sciences Year-End 2022 Earnings Call. I'm pleased to be joined by Paul Hickey, President and Chief Executive Officer, and Tom Stankovich, Chief Financial Officer. Paul will provide an overview and update on the company's activities, and Tom will review the financial results for the year. He will then turn the call back over to Paul for some closing remarks, after which we'll open the call to a question and answer session. As a reminder, this conference call, as well as Reshape Life Sciences SEC filings and website, including the investor information section of the website, contains forward-looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995. Actual results could differ materially from those discussed due to known and unknown risks, uncertainties, and other factors. These and additional risks and uncertainties are described more fully in the company's filings with the Securities and Exchange Commission, including those factors identified as risk factors in the company's most recent annual report on Form 10-K. As an additional reminder, Reshape stock is listed on the NASDAQ, trading under the symbol RSLS. I'll now turn the call over to Paul Hickey, President and CEO of Reshape Life Sciences. Paul?

Thank you, Mike. I'd like to thank you all for joining us this afternoon for our year-end 2022 earnings call. We appreciate your patience while we completed our year-end close. Since I joined Reshape last August, we have pivoted our business strategy with the intent of ensuring a path of growth and profitability. With that said, I'd like to remind you of our three growth strategies or pillars for growth. The first is to operate our business with a disciplined, metrics-driven mindset to ensure we have predictable growth and profitability. The second is to continue to develop and launch new products and therapies to augment our best-in-class portfolio of proven products and services that treat obesity and metabolic disease. The last pillar is to continue to drive and gain surgeon advocacy for our product portfolio by ensuring that it is backed by compelling evidence showing effectiveness when addressing the continuum of care needed to fight obesity and related comorbidities, which is often a lifelong battle. I'm excited to say that we have continued to make significant progress in achieving our goals. We have meaningfully reduced operating expenses and right-size investments in quality, regulatory, and finance so we can invest in our growth initiatives, including marketing and R&D. In addition, we are enthusiastic about working closely with our recently formed Global Scientific Advisory Board, comprised of internationally recognized experts and surgeons in the obesity and metabolic disease fields. I have worked with advisory boards in the past, and I am extremely proud of the membership on Reshapes SAB, with their unrivaled credentials and vast experience gathered through their commitment to fighting obesity. We look forward to leveraging their expertise and feedback on our growth initiatives and expect they will be integral in helping us expand access for patients to safe and effective treatments for durable weight loss. Now, before I delve into recent highlights and upcoming milestones, I'd like to mention the enormous market opportunity before us. Obesity is a disease that has been increasing at an alarming rate with significant medical repercussions and associated economic costs. The World Health Organization currently estimates that more than 2.5 billion adults, approximately 30% of the global population, are considered overweight or obese. This number is projected to increase to 50% by 2030, just seven years from now. The global economic impact of obesity is approximately 2 trillion, or approximately 2.8% of global GDP. We believe our products, programs, and future product candidates could address the 1.64 billion annual global surgical device market, which is projected to hit 2.8 billion worldwide and 1.8 billion in the U.S. alone, by 2025. The virtual healthcare delivery market is projected to be $95 billion worldwide by 2026, and the global weight loss and obesity management market is expected to rise to an estimated value of $300 billion by 2026. Moreover, according to the FDA, approximately 70% of American adults are obese or overweight, resulting in serious health issues associated with some of the leading causes of death including heart disease, stroke and diabetes, and is linked to an increased risk of certain types of cancers. Now within the last nine months, there's been an exciting shift in the treatment of obesity. While in the past obesity has been a sensitive topic and treatment had not been normalized, there is now a greater awareness and acceptance of how critical obesity care is for adults and children. Last October, the American Society of Metabolic and bariatric surgery, or ASMBS, and the International Federation for the Surgery of Obesity and Metabolic Disorders, or IFSO, revised the outdated and overly restrictive guidelines for treating obesity and related diseases. These update guidelines advocated for earlier intervention in medical care and bariatric surgery. Similarly, in January of this year, the American Academy of Pediatrics issued new more aggressive guidelines to treat the over 14 million US children and adolescents with obesity. And lastly, the recent adoption of GLP-1 agonists for weight loss and related big pharma marketing efforts have significantly increased the number of overweight and obese individuals who are seeking medically managed weight loss. Now, given the known limitations of behavioral modifications, the inaccessibility, side effects, and durability of pharmaceutical therapy, and the anatomy-altering and irreversible nature of other bariatric surgical approaches, we believe, more than ever, that there is a substantial need for the less invasive, adjustable, and reversible lap band. Our product has proven to be a safe, effective, and durable solution, providing long-term weight loss. Now, with that as a backdrop, I'll turn back to a detailed view of our strategic strategies for growth. Our first gross pillar is paramount for Reshape in order to deliver shareholder value and ultimately profitability. The strategy for growth includes optimizing our operations and taking a focused and measured approach to the business. Toward that end, we have dramatically changed our business model to become a sustainable and scalable organization. We are now on a path to profitability, which we expect to achieve by continuing to partner with our physician advocates and leveraging our portfolio of proven products that manage and treat obesity and metabolic disease. In fact, with the combination of our just completed 2.5 million registered direct offering, our upsized 10.2 million public offering completed in February, and the continued execution of our growth pillars, we believe we have sufficient cash on hand to complete our goal becoming profitable within the next 18 months. We are confident in this projection because we know that the primary driver of lap band surgeries are patient inquiries. And this is directly supported by the significant shift in our direct-to-consumer marketing initiatives. With the support of experts in the weight loss surgery customer experience, we are strategically targeting key touchpoints in the patient's decision process for surgery. This includes developing an improved patient-centric website experience. focused primarily on lead conversion, which we expect to launch in the third quarter. As a part of our increased focus on lead conversion, we're also implementing marketing automation to improve this process with automated email, text, call, and web retargeting to ensure that every patient inquiry has the highest possible chance of transferring to a surgeon. The automation system targeted for mid-year launch will address prospective patient inquiries with the resources they need, when they need it, via the channels that best suit them. Finally, we're creating a new content based on feedback from lap band advocates that focused on the joy of lap band to capture brand awareness and lead conversion earlier in the patient's weight loss surgery research. This content is expected to better convert leads for ongoing lap band specific nurturing, build brand awareness and perception in the market, and result in more lap band surgery requests to bariatric surgeons. In order to facilitate a quick launch of these resources while staying disciplined on our spend, we are building core competencies in-house, ensuring ongoing optimization and nimble marketing while significantly cutting agency expenses. For starters, removing our call center in-house to align with the marketing automation and lead nurture efforts. This change, even with new technology, implementation and headcount, cuts our spend considerably. All while taking control of our leads, increasing our marketing, outreach, and reporting capabilities, as well as providing a near-guaranteed increase in lead-to-surgery conversion. Additionally, as we develop the new patient-focused website, we are able to establish internal competencies for ongoing updates, tests, and optimization. This will significantly reduce the ongoing outsource expense on web requests and lap-band physician site support needs. while making us more responsive to the market. Put simply, we're improving our marketing efforts to better address patient leads with the intent of increasing conversions on the website, driving more brand engagement, and ultimately more lap band surgeries, all while decreasing our external agency expenses while we build and drive these efforts internally. We also continue to focus on the development and commercialization of new products. and therapies which constitute our second growth pillar. Last year, we completed the limited release of our disposable reshape calibration tube line extension, which supports bariatric procedures across the spectrum. Based on surgeon feedback, we have made additional improvements, and I'm pleased to report that we have fully launched the redesigned calibration tube used in a broad range of bariatric procedures, such as laparoscopic sleeve gastrectomy and gastric bypass. We expect the reshape calibration to add incremental new customer revenue this year. And it's important to reiterate, this product is used in procedures other than the lap band and therefore provides a great opportunity to increase future revenues. Further, we are looking to engage several large self-insured employers to provide reshape care to their employees. The reception has been well received for this important program that can help impact overall employee health and reduce employers' health care costs. As a reminder, Reshape Care is a HIPAA-compliant, novel weight management program that supports healthy lifestyle changes for all persons, not just individuals who qualify for lap band surgery. Based on this positive feedback, we are expanding the program to support both our potential partners' employees and our lap band patient leads to improve their health and achieve weight loss. Additionally, in the second quarter, we expect to submit to the FDA our next-generation physician-led redesigned lap band, the lap band 2.0, for a PMA supplement. The lap band 2.0 is designed to reduce the required postoperative position adjustments. Like the current lap band, the lap band 2.0 is adjustable postoperatively to increase and decrease the opening of the band in order to optimize individuals' comfort and therapy effectiveness. Unique to the lap band 2.0, is an enhanced band reservoir technology that serves as a relief valve designed to alleviate discomfort from swallowing large pieces of food, thus minimizing postoperative in-office patient band adjustments. We expect feedback from the FDA by year end, and if approved, we believe the uptake by existing and new surgeons will be robust. As I noted last quarter, surgeons I've spoken with about this new design believe the LabBand 2.0 will allow us to engage new surgeons and re-engaged many of those who have used lap band historically. As excitingly, we have continued to advance the development of our diabetes block stim neuromodulation or DBSM device, which uses a vagus nerve block technology platform combined with vagus nerve stimulation. This new dual vagus nerve neuromodulation device selectively modulates vagal block and stimulation to the liver and pancreas to manage blood glucose in treatment of diabetes in individualized 24-7 glucose control, which may be able to reduce patients' dependence on medications in a personalized manner. The preclinical evidence generated thus far, funded with a non-dilutive NIH SBIR grant, is compelling. In October, data on the device was published in the peer-reviewed journal Frontiers in Neuroscience, Neurotechnology, and was presented in an abstract during Obesity Week and the Society for Neuroscience annual conference. In fact, we think this technology may have the ability to address the clear, unmet need for a non-pharmacological and patient-specific treatment, providing improved efficacy and durability for type 2 diabetes. We will continue to collaborate with leading researchers and industry-leading strategic corporate partners, all while seeking additional NIH grant support. If approved for commercial use, the DBSM device will further enhance our differentiated medical device offerings. Finally, our third growth pillar for Reshape is to gain surgeon advocacy by ensuring products and therapies are supported by strong clinical evidence. In other words, we need to provide an evidence-based care continuum to gain surgeon advocacy. As I mentioned earlier in our call, our newly formed scientific advisory board provides us access to an extensive and unparalleled knowledge base, as well as relationships and insights that will be invaluable. This is critical as we continue to execute on our disciplined approach to drive revenue and expand our product pipeline. As I mentioned above, In October of last year, the ASMBS and IFSO issued evidence-based guidelines for metabolic and bariatric surgery. These updates were long overdue and were intended to replace the 30-year-old guidelines issued by the NIH in 1991. The guidelines now recommend metabolic and bariatric surgery for individuals with a BMI of 35 or more, regardless of the presence, absence, or severity of obesity-related conditions. and note that it be considered for adults with a BMI of 30 to 34.9 and metabolic disease. The guidelines further state that even without metabolic disease, weight loss surgery should be considered an option for people whose BMI is greater than 30 and who have not achieved substantial or durable weight loss or improvement in obesity-related diseases using non-surgical methods. Now, this is important since the lap band system is FDA approved for adults with a BMI of over 30, with at least one obesity-related comorbidity, and any patient with a BMI over 40. It bears repeating that the LapBan is the only FDA device-approved laparoscopic weight loss device on the U.S. market. Also in October, the ASMBS issued a consensus statement on LapBan use and aftercare management, which we were pleased to see supports Reshape's own evidence-based best practice recommendations. The statement validated that the Anatomy Sparing Lamp Band is a safe and effective weight loss solution and concluded that proper aftercare related to behavioral health and nutrition is critical to the success of the weight loss procedure. In conjunction with our scientific advisory board, we will continue to partner with organizations such as ASMBS to identify and train surgeons on the benefits of our comprehensive Lamp Band program so that, together, we can provide the long-term care required for patients to achieve safe, durable weight loss results. As an aside, I want to also mention that I recently had the honor of being included as a part of the ASMBS Access to Care Committee, whose mission is to assist patients with obesity and metabolic disease obtain appropriate, safe, and effective medical care, and advocating for healthcare policy that ensures that access. I look forward to working with that committee, bringing my expertise to bear in order to continue to make a positive impact within the industry. One of Reshape's many assets is our strong intellectual property portfolio of 155 patents surrounding all of our products, including the lap band, Reshape DBSN device, and Reshape Oberlin balloon system. As someone who came from the technical side of medical devices, this topic is close to my heart. As evidenced by the recent notice of allowance from the U.S. Patent Office for an additional patent covering the reshape Opelon balloon system, we will continue to build a defensive note around our product portfolio and commercialization efforts and take offensive action when appropriate. To that end, on March 9th of 2023, we filed a patent infringement complaint against Allurion Technologies Inc. and the U.S. District Court for the District of Delaware. The complaint seeks among other relief, damages for Allurion's alleged infringement of our 520 patent in an amount not less than a reasonable royalty. This matters in early stages, and we are unable to predict its outcome at this time. However, we intend to continue to aggressively protect and enforce our intellectual property rights. Now, before I turn the call over to Tom to recap our financial performance, I want to highlight some additional metrics that are not captured in our 10-K. Specifically, Since my appointment last August, our commitment to our first pillar has resulted in a dramatic shift in our business model. And as Tom will detail shortly, executing our strategy has resulted in a significant decrease in departmental expenses, including our 48.9% reduction in the sales and marketing expenses, 13.6% reduction in our G&A expenses, and a 30% reduction in our R&D expenses, all comparing our 2022 first half spend versus our 2022 second half spend. In aggregate, this amounts to a 27.9% overall reduction in operational expenses before any significant one-time adjustments. This dramatic shift is necessary and sets the stage for Reshape's path to winning. I'd like to turn over to Tom Stankovich. Now, Tom is calling from a remote location with some spotty internet. So if Tom is disrupted during the course of his update, I'll take over for him. Tom, are you there? Yes, I am. And thanks, Paul.