On October 26, 2017 Apollo Endosurgery, Inc. (“Apollo”) (NASDAQ: APEN), a leader in less invasive medical devices for bariatric and gastrointestinal procedures, reported financial results for the third quarter ended September 30, 2017 (Press release, , OCT 26, 2017, View Source [SID1234521228]).
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Third Quarter 2017 Highlights
Total revenues increased 4.8% compared to the third quarter 2016
Total Endo-bariatric product sales increased 20.6% compared to the third quarter 2016 and were 56.3% of total revenues
Raised $33.6 million in a public equity offering
Todd Newton, CEO of Apollo Endosurgery, said, “The third quarter was a great quarter of accomplishment and performance for our business as we completed an equity offering, received CE Mark approval for Orbera365, and worked through a challenging disruptive event to the U.S. market for intragastric balloons due to an FDA communication in early August. Total revenue in the third quarter increased by 4.8% as worldwide Endo-bariatric product sales increased 20.6% to $9.3 million, representing 56.3% of total revenues on excellent OverStitch demand both in the U.S. and in our direct markets internationally. While Surgical product sales continued to decline, the rate of decline continued to show improvement this quarter.”
Third Quarter 2017 Financial Results
Total sales for the three months ended September 30, 2017 were $16.5 million compared to $15.8 million for the three months ended September 30, 2016 representing growth of 4.8%.
In the U.S., Endo-bariatric product sales, excluding U.S. Orbera starter kit sales were $3.2 million for the three months ended September 30, 2017 versus $2.8 million for the three months ended September 30, 2016, an increase of 14.0%, and $10.1 million for the nine months ended September 30, 2017 versus $8.1 million for the nine months ended September 30, 2016, an increase of 25.1%. As previously announced by the Company in August 2017, the FDA issued a letter to Health Care Professionals relating to potential risks with liquid-filled intragastric balloons. U.S. Endo-bariatric product sales increased at a slower rate in the third quarter compared to the first half of 2017, due to lower demand for Orbera in the aftermath of the FDA’s letter. Overstitch sales growth remained consistent with its year to date trend.
In markets outside the United States (OUS), Endo-bariatric product sales were $6.0 million for the three months ended September 30, 2017 versus $4.5 million for the three months ended September 30, 2016, an increase of 35.3%, and $15.3 million for the nine months ended September 30, 2017 versus $12.5 million for the nine months ended September 30, 2016, an increase of 21.9% primarily due to higher OverStitch sales in our direct markets. Direct market sales were 72.9% and 70.4% of total OUS sales for the three and nine months ended September 30, 2017, respectively, compared to 53.2% and 66.9%, for the same periods in 2016, respectively.
Surgical product sales decreased $0.9 million, or 11.6%, and $3.2 million, or 12.9%, for the three and nine months ended September 30, 2017, respectively, when compared to the same periods in 2016. In the U.S., Surgical product sales decreased $0.9 million, or 16.5%, and $3.0 million or 18.3%, for the three and nine months ended September 30, 2017, respectively, when compared to the same periods in 2016 due to reductions in gastric banding procedures being performed in the U.S. In OUS markets, Surgical product sales decreased by $0.1 million, or 1.9%, and $0.2 million, or 2.5%, for the three and nine months ended September 30, 2017 when compared to the same periods in 2016, respectively.
Gross margin as a percentage of revenues was 63.7% and 63.2% for the three and nine months ended September 30, 2017, respectively, compared to 66.7% and 60.8% for the same periods in 2016, respectively. Gross margin was impacted by the change in inventory reserve which decreased 0.3% and 6.3% as a percentage of total revenue for the three and nine months ended September 30, 2017, respectively, compared to the same periods in 2016. In June 2016, we recorded an inventory impairment charge related to expiring finished good inventory and excess raw materials transferred from Allergen that we were required to purchase in accordance with the transition services agreement. The remaining change in gross margin is due to the ongoing shift in our product sales mix from higher gross margin Surgical products to Endo-bariatric products that realize lower relative gross margins.
Total operating expenses were $14.8 million and $47.0 million for the three and nine months ended September 30, 2017, respectively, compared to $14.3 million and $43.0 million for the same periods in 2016. For the three months ended September 30, 2017, sales and marketing expenses increased due to higher incentive compensation, Orbera consumer marketing campaign costs and OverStitch physician training program costs. This increase was partially offset by lower general and administration expenses due to transaction costs incurred during the third quarter of 2016 associated with the Lpath merger. The increase for the nine months ended September 30, 2017 was due to higher sales and marketing expenses for the same reasons referenced above and higher general and administrative expenses due to costs incurred to meet our public company filing and corporate governance obligations. Research and development expenses also increased primarily due to costs associated with new product development efforts.
Interest expense decreased $0.5 million and $0.9 million during the three and nine months ended September 30, 2017 when compared to the same periods in 2016 primarily due to reduced cash interest on our senior secured credit facility after principal reductions. The additional decrease for the nine months ended September 30, 2017 was due to the elimination of non-cash interest primarily associated with the convertible notes that converted to equity in December 2016.
Net loss for the three and nine months ended September 30, 2017 was $4.9 million and $20.0 million, respectively, compared to $5.9 million and $21.5 million for the same periods in 2016.
Cash, cash equivalents and restricted cash were $35.5 million as of September 30, 2017.
Capitalization Update
On July 25, 2017, the Company completed a public offering selling 6,542,453 shares at a price of $5.50 per share, including 853,363 shares sold to the underwriters upon exercise of the option to purchase additional shares. The public offering generated net proceeds of approximately $33.6 million, after deducting the underwriting discount and related offering expenses.
Conference Call
Apollo will host a conference call on Thursday, October 26, 2017 at 4:00 p.m. Central Time / 5:00 p.m. Eastern Time to discuss the Company’s operating results for the third quarter ended September 30, 2017.
To participate in the conference call dial (888) 576-4387 for domestic callers and (719) 457-6931 for international callers. The conference ID number is 3769341. A live webcast of the conference call will be made available on the “Events and Presentations” section of our Investor Relations website: ir.apolloendo.com.
A replay of the webcast will remain available on Apollo’s website, apolloendo.com, until Apollo releases its fourth quarter 2017 financial results. In addition, a telephonic replay of the call will be available until November 2, 2017. The replay dial-in numbers are (844) 512-2921 for domestic callers and (412) 317-6671 for international callers. The replay conference ID number is 3769341. A transcript of the earnings call will be made available on the “Events and Presentations” section of our Investor Relations website: ir.apolloendo.com.
Non-GAAP Financial Measures
To supplement our financial results presented on a GAAP basis, we provide certain non-GAAP financial measures including adjusted total revenues, excluding U.S. Orbera starter kit sales. Adjusted total revenues, excluding U.S. Orbera starter kit sales is defined as GAAP total revenues excluding one-time U.S. Orbera starter kit sales. Adjusted total revenues, excluding U.S. Orbera starter kit sales is a supplemental measure of our performance that is not required by, and is not determined in accordance with, GAAP.
Non-GAAP financial information is not a substitute for any financial measure determined in accordance with GAAP and should be read only in conjunction with Apollo’s condensed consolidated financial statements prepared in accordance with GAAP. Apollo’s management uses certain supplemental non-GAAP financial measures internally to understand, manage and evaluate Apollo’s business, and make operating decisions. Reconciliations for each non-GAAP financial measure to its most directly comparable GAAP financial measure is provided in the tables below. Management believes that making non-GAAP financial information available to investors, in addition to GAAP financial information, may facilitate more consistent comparisons between the company’s performance over time with the performance of other companies in the medical device industry, which may use similar financial measures to supplement their GAAP financial information.