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Edited Transcript of ETRM earnings conference call or presentation 20-May-19 8:30pm GMT

Q1 2019 ReShape Lifesciences Inc Earnings Call

ST. PAUL Jun 10, 2019 (Thomson StreetEvents) -- Edited Transcript of ReShape Lifesciences Inc earnings conference call or presentation Monday, May 20, 2019 at 8:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Barton P. Bandy

ReShape Lifesciences Inc. - President, CEO & Director

* Scott P. Youngstrom

ReShape Lifesciences Inc. - CFO, Senior VP of Finance & Secretary

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Presentation

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Operator [1]

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Good afternoon, and thank you for joining us on today's call. (Operator Instructions) As a reminder, this call is being recorded today, May 20, 2019.

I would now like to turn the conference call over to Scott Youngstrom, CFO of ReShape Lifesciences. Please go ahead.

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Scott P. Youngstrom, ReShape Lifesciences Inc. - CFO, Senior VP of Finance & Secretary [2]

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Good afternoon, and thank you for joining us on today's call. I'm pleased to be joined by Bart Bandy, our new Chief Executive Officer, who will provide an overview of the company's recent activities and business highlights. I will then review our financial results for the first quarter of 2019 and then turn the call back over to Bart to wrap up the call.

As a reminder, this conference call as well as ReShape Lifesciences SEC filings and website at www.reshapelifesciences.com, including the Investor Information section of the website, contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Our actual results could differ materially from those discussed due to the 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 our annual report on Form 10-K that was filed May 16, 2019, and in our quarterly report on Form 10-Q that will be filed later today, May 20, 2019.

As an additional reminder, our stock is listed OTC, trading under the ticker RSLS.

I will now turn the call over to our CEO, Bart Bandy. Bart?

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Barton P. Bandy, ReShape Lifesciences Inc. - President, CEO & Director [3]

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Thanks, Scott. Good afternoon, everyone, and thank you for dialing in to our call today. I'm pleased to be hosting my first call as the CEO of ReShape Lifesciences. On today's call, I will start with a brief summary of the ReShape Lifesciences growth opportunity and provide some of our recent operational and strategic highlight as well as our vision as we move forward. Scott will then provide an overview of our financial results and then I will wrap things up.

Since joining the company just over a month ago, I am even more encouraged by the opportunity at ReShape Lifesciences. We have some work to do, both to refine our corporate roadmap as well as further advancing our commercial strategy. And I look forward to updating you on our strategic initiatives and plan as well as our financial expectations as we move forward together. In the meantime, our value proposition is very much intact, and we're making progress in providing increased access to our technologies as a standard of care for patients battling obesity.

Personally, I've spent the majority of my career working in the obesity space with over 10 years dedicated to launching and developing markets around the globe for LAP-BAND technology. The LAP-BAND itself has had several life cycles, and I'm very happy that it has ended up at ReShape and that I have the opportunity once again to lead the market development around this exciting and effective product, which remains the only approved weight-loss implantable device that is currently reimbursed in the United States.

As you might remember, over the past several years, while LAP-BAND was owned by Allergan and then Apollo Endosurgery, sales of the product was in a downward trajectory. It is very important to note that Allergan and Apollo invested minimally in the marketing and infrastructure for LAP-BAND during this period, presumably because the asset is such a high-margin product. LAP-BAND was left to generate cash on its own, with no significant resources allocated to increasing sales. However and unfortunately for the industry, as the LAP-BAND sales declined, no real alternative treatments came into the market to fill this void for the bariatric surgeons. This is why we're even more excited to have this effective and least-invasive product in our hands, where we will be able to provide it with the appropriate focus.

For the team here at ReShape, the LAP-BAND is our top priority. We are dedicating as many resources as we can to give this effective product the attention it deserves, with a goal to reverse the sales decline and once again establish the LAP-BAND as a leading option for the millions of people suffering from obesity.

Upon taking over as CEO of ReShape, one of the first tasks that I've charged myself with was to really understand the global market dynamic in the obesity space. What are customers seeing? What is working and not working? And how can we fulfill the market need? Through my experiences of working with bariatric surgeons around the world, it remains a fact that there really is no agreed upon standard of care in obesity. While gastric bypass and gastric sleeve are often thought of as the go-to treatments, both procedures have serious associated complications, and patients often experience weight regain over time. In fact, you may have seen recent news around the FDA's announced review of surgical staplers due to concerns with associated malfunctioning. It has become clear that there is a definite need for an anatomy sparing and effective treatments for patients, and we are confident that LAP-BAND is the answer.

In a recent 20-year study done on LAP-BAND, the results of which were presented at the 2017 IFSO Conference, over 8,000 LAP-BAND patients were followed between September 1994 and June 2017 at the Centre for Bariatric Surgery in Melbourne, Australia. Total weight loss for patients after 20 years was 59 pounds, which represented 49% excess weight loss. The overall explant rate for the entire patient population was only 7.9%, with an explant rate of 4.6% for procedures performed in a period between 2006 and 2017, when the newest version of the LAP-BAND was implanted. These excellent long-term outcomes further support the documented safety profile of LAP-BAND.

Investigators for this study emphasize the correlation and importance of patient management for good results. Continued follow-up, interaction and adherence to good LAP-BAND aftercare by the surgeons practice were noted as essential for effective durable outcomes.

With these clinical data and observations in hand, the team here at ReShape has finally hit the ground running with the integration of the LAP-BAND into our business. We have increased the number of reps selling the LAP-BAND as well as the support team in the U.S. Additionally, a big piece of our integration includes expanding our global infrastructure, one of the first steps of which was building a global ERP system, which we started implementing in the first quarter. This was a big expense requiring significant work, but it will be a game changer for our company, as there is now technology behind our sales and marketing organization that allows our reps to target the most effective and productive account and thereby align resources in an optimal manner.

As was outlined in the fourth quarter call, our initial strategy and approach, in addition to educating new patients on LAP-BAND is to stratify the top clinicians who represent significant segment of the business and to increase the number of LAP-BAND procedures performed by these accounts. Additionally, we are spending more time in the field with strategically identified account to help them understand the benefits of the procedure and to encourage them to offer LAP-BAND to more of their patients. We are also implementing new patient support tools to address the importance of aftercare to enhance efficacy. Our commercial process is focused on educating and engaging doctors and patients to arm them with the resources and true facts to realize the benefits of the LAP-BAND procedure.

Outside of the U.S., the ReShape team made exceptional progress in the first quarter on building an OUS infrastructure, which until now has not existed for ReShape Lifesciences and had limited presence for the LAP-BAND prior to our ownership of the product. As you might recall, as part of the transaction and the transition, Apollo agreed to continue selling the LAP-BAND internationally in order to give us time to set up our infrastructure. With OUS markets accounting for 40% historical LAP-BAND sales, we are very anxious to get this going quickly. As we announced last month and in line with the time line that was laid out in the fourth quarter call, we signed on a highly experienced distribution partner in Australia, our #1 international market for LAP-BAND. And as of April 1, we will now realize full revenues from that country. We're also on track to finalize our distribution partners and recognize European sales mid-year.

Additionally, I've spent much of the past weeks reconnecting with many of my contacts around the globe to reinvigorate their interest in LAP-BAND. We are very pleased with the enthusiasm from prospective doctors and distributors regarding this potential to reestablish LAP-BAND as a standard of care.

We continue to believe that the LAP-BAND is the perfect complement and precursor for our next-generation ReShape Vest, and that the LAP-BAND business will position our organization incredibly well. We believe the ReShape Vest will be the next big step for the bariatric surgeons following the 20-year accomplishments of the LAP-BAND.

With the incredible work that has been done to get the LAP-BAND distribution and system in place, particularly outside of the U.S., we will be prepared to successfully commercialize the Vest.

We have now had 6 patients treated in our ENDURE II trial for the Reshape Vest in the European Union. As a reminder, the trial will include a total of up to 95 patients at 8 to 10 investigational sites located throughout Europe. One year data from enrolled subjects will be used to support the CE Marking application for the Vest and we will continue to follow patient outcomes for 2 years. We estimate receiving CE Marking approval in the fourth quarter of 2021.

We are very pleased with our financial results in the first quarter of 2019, which was our first full quarter selling the LAP-BAND at ReShape Lifesciences. Our sales in the first quarter of 2019 alone exceeded our entire 2018 revenue, and this was without full recognition of LAP-BAND revenue outside the U.S.

We are extremely excited to continue building upon this momentum and the enthusiasm around the LAP-BAND, and I look forward to providing you with some guidance on our expectations for the remainder of 2019, once I have spent more time with the business and our extraordinary team.

I will now turn the call back over to Scott, who'll walk you through our financial results. Scott?

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Scott P. Youngstrom, ReShape Lifesciences Inc. - CFO, Senior VP of Finance & Secretary [4]

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Thanks, Bart. Moving to our financial results for the first quarter of 2019. For the 3 months ended March 31, 2019, we reported sales of $3.1 million as compared to revenues from continuing operations of $450,000 in the 3 months ended December 31, 2018, and compared to revenues from continuing operations of $139,000 for the 3 months ended March 31, 2018.

Our revenue numbers reflect $2.6 million in U.S. shipments and $500,000 of product that was sold to Apollo to support the OUS LAP-BAND operation.

As a reminder, as part of our transition services agreement, Apollo has continued to sell the LAP-BAND OUS at a transfer price until we have established our infrastructure in those markets. Apollo reported net revenues of LAP-BAND products to OUS customers of $1.7 million, and we are working diligently to bring this opportunity in-house so that we can begin to recognize these global revenues. We estimate that total worldwide LAP-BAND revenues in Q1 2019 to be approximately $4.3 million.

We reported gross profit of $2.2 million in the first quarter of 2019 compared to $372,000 in the 3 months ended December 31, 2018, and $79,000 for the 3 months ended March 31, 2018.

The gross margins of 72% are right in line with our expectations as we work through our integration plans to eventually bring on the OUS sales process in-house. We anticipate that our margins will improve as this integration takes place between now and the end of the year. Selling, general and administrative expenses for the quarter were $5.4 million as compared to $4.3 million for the fourth quarter of 2018 and compared to $6.3 million for the first quarter of 2018. Included in SG&A expenses this quarter were $1.7 million of noncash items related to stock-based compensation, amortization and depreciation. We anticipate that our SG&A spend will continue in the $5 million to $5.5 million per quarter range as we bring on the OUS sales process and incur the associated fees. The SG&A expenses for Q4 of 2018 reflects only the selling and marketing expenses associated with the LAP-BAND product for the stub period from December 18 through the end of the year. SG&A expenses for quarter 1 of 2018 include $785,000 of noncash expenses. After accounting for the noncash expenses, we have decreased our SG&A expenses by approximately $2 million from the same period in 2018.

Research and development expenses were $1.1 million for the 3 months ended March 31, 2019, compared with $2.4 million for the same quarter in 2018. This is attributable to the limited R&D necessary on the LAP-BAND product in the current quarter and our Q1 2018 R&D expense included substantial development expense associated with both the Gastric Vest and the vBloc products. We anticipate our R&D expense will continue in the $1 million to $1.2 million per quarter range.

As of March 31, 2019, the company's cash, cash equivalents and short-term investments totaled $1.8 million, also included on our March 31, 2019, balance sheet is $2 million of subordinated convertible debentures from our March 28, 2019, financing. During this financing, we entered into a definitive agreement with 2 healthcare-focused institutional investors, which notes were issued in a private placement for a purchase price of $2 million, with a principal face value of $2.2 million reflecting a 10% original issue discount. The notes mature in 3 months on June 28, 2019, however, if not repaid, will initially be convertible into shares of common stock at a conversion price equal to the lesser of $0.33 or 80% of the average of the lowest 2 volume-weighted average prices of the company's common stock during the 20 days prior to conversion.

In connection with this financing, the company amended the exercise price of warrants to purchase up to 8 million shares of common stock held by the investors that were issued on November 28, 2018, from $1.50 per share to $0.01 per share.

For the first quarter of 2019 after adjusting for the noncash charges included in our financial statements, our monthly cash burn was under our target amount of $800,000 per month at $767,000 per month. We are targeting our net monthly burn for the remainder of 2019 to continue to be in the $800,000 per month range.

Our financing strategy is to proceed with another capital raise as we continue to invest in growing our LAP-BAND sales and the infrastructure to support a growing business.

As Bart and our leadership team complete our business review over the next couple months, we plan to provide more specific guidance on our expectations for 2019.

With that, I will turn the call back over to Bart.

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Barton P. Bandy, ReShape Lifesciences Inc. - President, CEO & Director [5]

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Thanks, Scott. I could not be more pleased to be at ReShape Lifesciences. As I mentioned earlier, I've spent the past 25 years in various operational and commercial leadership roles within the obesity space, but the bulk of my career is spent with the LAP-BAND. Given my experience in building and growing organizations, products and sales in obesity and laparoscopic markets in general, and with LAP-BAND specifically, I felt -- I feel like this is a great fit. In the short time I've been at ReShape, I am very encouraged, I've already started a productive dialogue with many bariatric surgeons and the broader obesity community around the globe.

I saw a unique opportunity in ReShape in that there is truly a growing awareness of obesity and there's a jewel of a technology that has been sidelined in the LAP-BAND. There is a real data on the market and it's been confirmed there's an unmet need for a safe, effective and anatomy-sparing solution for weight loss. We have an opportunity to rebuild this market from the ground up with a well-known product that has solid long-term data demonstrating these capabilities. And I could not be more excited to help bring the LAP-BAND back to doctors and patients around the globe.

I look forward to spending more time with all of our stakeholders over the upcoming month and providing updates on all our strategies and processes. We thank our employees and investors for their support and look forward to sharing continued success with you in the future. Thanks again to everyone for joining the call today.

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Operator [6]

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Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program. You may all disconnect. Everyone, have a wonderful day.