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Edited Transcript of OBLN earnings conference call or presentation 22-Feb-19 1:30pm GMT

Q4 2018 Obalon Therapeutics Inc Earnings Call

CARLSBAD Feb 26, 2019 (Thomson StreetEvents) -- Edited Transcript of Obalon Therapeutics Inc earnings conference call or presentation Friday, February 22, 2019 at 1:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Kelly Huang

Obalon Therapeutics, Inc. - CEO, President & Director

* William John Plovanic

Obalon Therapeutics, Inc. - CFO & Secretary

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Conference Call Participants

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* Frederick Allen Wise

Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Senior Equity Research Analyst

* Kyle William Rose

Canaccord Genuity Limited, Research Division - Senior Analyst

* Suraj Kalia

Northland Capital Markets, Research Division - MD & Senior Research Analyst

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Presentation

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Operator [1]

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Good day, ladies and gentlemen, and welcome to the Obalon Therapeutics Fourth Quarter and Full Year 2018 Financial Results Call. (Operator Instructions) As a reminder, today's call will be recorded.

I would now like to turn the call over to Bill Plovanic, Chief Financial Officer for Obalon, you may begin.

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William John Plovanic, Obalon Therapeutics, Inc. - CFO & Secretary [2]

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Thank you. Good morning, and welcome to Obalon Therapeutics Fourth Quarter and Full Year 2018 Financial Results Conference Call. With me on today's call is Dr. Kelly Huang, President and Chief Executive Officer of Obalon.

This morning, the company issued a press release detailing our financial results for the 3 and 12 months ended December 31, 2018. This release can be accessed through the Investor Relations section of the Obalon website at obalon.com. You can also access the webcast of this call from there.

Before we get started, I would like to remind everyone that many statements made on today's conference call that expresses a belief, expectation, projection, forecast, anticipation or intent regarding future events and the company's future performance may be considered forward-looking statements as defined by the Private Securities Litigation Reform Act.

Forward-looking statements in this release include Obalon's financial guidance for the first quarter 2019 and its expectations regarding the near- and long-term growth potential of its business.

These forward-looking statements are based on information available to Obalon management as of today and involve risks and uncertainties, which include, but are not limited to, the risk factors disclosed in the periodic and current reports by the company filed with the SEC from time to time, including the Form 10-K for the year ended December 31, 2018.

Such forward-looking statements are not guarantees of future performance. Actual results may differ materially from those projected in the forward-looking statements. Listeners are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. Obalon specifically disclaims any intent or obligation to update these forward-looking statements, except as defined -- required by law.

The archived webcast will be available for 1 year on the company's website, obalon.com. For the benefit of those who may be listening to the archived webcast, this call was held and recorded on February 22, 2019. Since then, Obalon may have made announcements related to the topics discussed, so please reference the company's most recent press releases and SEC filings.

And with that, I'll turn the call over to Obalon's CEO, Dr. Kelly Huang.

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Kelly Huang, Obalon Therapeutics, Inc. - CEO, President & Director [3]

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Thanks, Bill. Good morning, everyone, and thank you for joining us today.

First, I'm excited to announce that we have shipped the first commercial navigation console, touch dispenser and navigation balloons in the United States after obtaining earlier-than-expected approval from the FDA in December of 2018.

We believe the Obalon Navigation System addresses the largest barrier for physician adoption. And the recently presented and published peer-reviewed data from our commercial registry, which demonstrate the safety and efficacy of the Obalon Balloon System in commercial use, will help us to further penetrate this significant potential market for patients with obesity.

On this call, I will discuss highlights of our commercial and strategic achievements in the fourth quarter of 2018, including the approval of the Obalon Navigation System that provide what we believe is a strong foundation to reinvigorate adoption of the Obalon Balloon System and Obalon as a recognized brand in the management of obesity. Following that, Bill will then take a review of our fourth quarter and full year of 2018 financial results, some of our specific underlying business metrics and current thoughts on our financing strategy. We will then briefly answer some questions.

I'd now like to highlight the strategic accomplishments and put them in context of the 3 pillars for the next-generation launch of the Obalon Balloon System as we transition from an innovative product to a more complete, plug-and-play clinical and business solution for physicians in medical weight loss.

The first pillar relates to the ease of adoption and use. On December 20, 2018, we received earlier-than-expected FDA approval of the Obalon Navigation System, which is intended to eliminate the need to use X-ray during balloon placement. We believe our navigation system has the potential to address what we believe to be the largest obstacle in new customer acquisition startup, notably, the cost and logistics required related to acquiring and using X-ray. Additionally, we believe the combination of navigation and the touch inflation dispenser make placement of the Obalon balloon more reliable, safer and easier.

The second pillar relates to patient outcomes, significant and meaningful weight loss and proven safety. On November 14, 2018, key clinical data for the Obalon Balloon System was presented at the American Society for Metabolic and Bariatric Surgery, ASMBS, the annual meeting at Obesity Week in 2018 by Dr. Rachel Moore, a bariatric surgeon and weight loss specialist.

The data set demonstrates the real-world utility of the Obalon Balloon System with weight loss and safety results from 108 treatment sites in the United States in over 1,300 patients. Average weight loss data on patients with a BMI of 30 to 40 receiving 3 balloons and at least 5 months of therapy was 21.3 pounds and a 10% reduction in total body weight. And the top quartile of patients showed average weight loss of 38.2 pounds and an average of 17.2 reduction in total body weight.

Also consistent with our prior controlled clinical trial results, the rate of serious adverse events, SAEs, reported was, again, very low at 0.14%, with SAEs occurring in only 2 of the 1,343 patients evaluated for safety. No deaths were reported. Nonserious adverse events occurred in only 14.3% of patients, also consistent with prior controlled clinical trial results. This peer-reviewed work was accepted for publication by the medical journal, Surgery for Obesity and Related Diseases and is currently available online.

The third pillar relates to bringing retail capabilities to private practice. In addition to the co-op advertising and virtual health programs that we have made available to customers, in the fourth quarter, we began to build out Obalon's own ambassador center to support our physician customers in having leads through the nonmedical aspects of consultation. This initiative supports our goal to improve the efficiency of converting patient interest into procedures. Although early, we have received excellent qualitative feedback from our pilot customers with regard to an increase in booked appointments and an increase in the knowledge of patients who show for consultation.

So to summarize, we believe that we now have a plug-and-play business and clinical solution for physicians when we combine the new navigation console, the touch inflation dispenser and our Obalon Balloon System with strong peer-reviewed data on weight loss and safety and our strong DTC lead-generation capabilities with our own patient ambassador center to create a more efficient patient interest to treatment funnel.

As a reminder, we received FDA approval of our PMA supplement for the navigation system in December of 2018. This was several months earlier than expected and our original guidance. The approvals for navigation and Obalon Touch Dispenser were based upon outstanding clinical performance. We placed over 390 first, second and third balloons in the trial using our navigation system instead of X-ray imaging, with 100% success. We also used the new touch inflation dispenser exclusively with our navigation system during the trial, also with 100% success.

The sales and marketing team did an outstanding job to pull the deal together at the end of January to support the initial commercial launch that methodically targets 2 key groups. First, a group of prior prospect customers where X-ray was a barrier with adoption; and second, a group of existing customers who we believe could benefit from navigation to drive higher treatment levels and improved economics.

I'm encouraged by the initial response in such a short time as we only began our selling efforts for the Obalon Navigation System this month. And most importantly, I participated in several sales meetings these past few weeks and I'm encouraged by the qualitative feedback and the response from prior prospects who fell out of the sales pipeline due to the need for X-ray imaging as a barrier to adoption. The level of engagement has been high, which is a positive leading indicator as interest to purchase typically takes multiple meetings with multiple practice stakeholders.

Also, I'm pleased to state that we started shipping our new navigation system with touch dispenser and the associated navigation balloon kit this week as announced in our press release this morning. We've gone through the process of launching our first-in-class product with exhaustive testing of every product produced to date. Moreover, we have worked to best ensure consistent supply with many of our suppliers who are supplying us at scale for the very first time.

Before handing the call over to Bill, I'd like to reiterate my excitement for this next-generation launch of the Obalon Balloon System with navigation and touch, our large-scale peer-reviewed commercial use safety and efficacy results as well as our centralized consumer acquisition and activation program to create a more plug-and-play clinical and business solution for physicians.

And with that, I'll now turn the call back over to Bill Plovanic to review the financial results for the fourth quarter and the full year of 2018. Bill?

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William John Plovanic, Obalon Therapeutics, Inc. - CFO & Secretary [4]

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Thanks, Kelly. Today, I'd like to share details on our financial results for the fourth quarter and full year ended December 31, 2018. I will compare 4Q '18 to 3Q '18, as I believe sequential growth is what the majority of investors are most interested in at this stage of our development.

Fourth quarter revenue was reported at $2.0 million compared to $3.0 million in the third quarter of 2018. U.S. revenue of $0.8 million were down from $1.8 million in 3Q '18.

Lower starter kit revenues and lower reorder kit sales due to cessation of shipments for our largest U.S. corporate account more than offset an increase in reorder kit revenues to the balance of our U.S. customers. Reorder kit sales were reported at $0.8 million in the 4Q '18, represented about 91% of U.S. revenues, which compared to $1.4 million and 79% of U.S. revenues in the third quarter '18.

Our number of active accounts increased to 67 as of December 31, 2018, up from 62 as of September 30, 2018, and 50 as of June 30, 2018. As a reminder, we define an active account as a practice site that has purchased a reorder kit in the prior 6-month period.

In 4Q '18, we sold 10 new starter kits as compared to 12 in 3Q '18, 26 in 2Q and 17 in 1Q. As a reminder, at the end of Q2 '18, we made changes to the sales force that included consolidating new account acquisition and existing account business development roles. We also made our new account targeting process more selective, with the intent to have new accounts become more productive faster. Lastly, we received FDA approval of the Obalon Navigation System on December 20, 2018, which we believe may have impacted new account acquisition for our prior generation product.

International revenue is $1.2 million in both the fourth quarter '18 and third quarter '18. We continue to believe our greatest opportunity for creating value is meaningfully executing in the U.S. We plan to continue to make the U.S. our highest priority. That said, as we did with our original PMA approval, we intend to focus our efforts on successfully launching navigation with a touch dispenser in the U.S.

As a result, and as previously stated in our corporate update call in January, we do not intend to ship product to our Middle East distributor after 1Q '19 or to generate any OUS revenues after 1Q '19. Also, as previously announced, our agreement with our Middle East distributor, Bader Sultan, expires at the end of 2019. We do not intend to automatically extend this agreement.

Cost of revenue was $1.5 million in the 4Q '18; that compared to $1.4 million in 3Q '18. Gross profit for the fourth quarter of 2018 was $0.5 million; that compared to $1.6 million in the third quarter of 2018.

Gross margins were down sequentially to 26% in the fourth quarter versus 53% in the third quarter. Lower revenues and overall sales negatively impacted gross margins, as fixed overhead continues to be the largest component of cost of goods sold and was allocated over a smaller number of units. In addition, there are incremental nonrecurring costs and charges associated with gaining FDA approval of the Obalon Navigation and Obalon Touch products.

R&D expense for the fourth quarter 2018 totaled $2.3 million; that compared to $2.4 million in the third quarter. In the fourth quarter, we've continued to make investments to support improvements in our recently approved Obalon Navigation and Obalon Touch as well as continued development of our new product pipeline.

SG&A expense for the fourth quarter totaled $6.9 million, up from $5.8 million in the third quarter of 2018. As a reminder, at the end of the second quarter of 2018, we revised our go-to-market strategy and that included changes to our sales force structure. We also implemented a targeted plan of action to prioritize our operational spend and more efficiently support our existing and future customers. This resulted in reduced spending across operational functions for the second half of 2018 as compared to the first half 2018.

The operating loss for the fourth quarter was $8.7 million and that's up from an operating loss of $6.6 million in the third quarter 2018. The $2.1 million increase was attributable to $1-point million less in gross profit and $1 million increase in operating expense; that compared to the third quarter.

Net loss for the fourth quarter of 2018 was $8.8 million or $0.39 per share based on 22.6 million weighted average -- diluted average common shares outstanding as compared to a net loss of $6.7 million or $0.35 per share based on 19.5 million weighted diluted average common shares outstanding.

We ended the year 2018 with $23.7 million in cash, cash equivalents and short-term investments. Our cash usage in the fourth quarter 2018 was $5.9 million and that compared to $5.5 million in the third quarter of 2018.

I will now compare select 2018 and 2017 financial results. Final audited full year 2018 revenue was reported at $9.1 million and that compared to $9.9 million in 2017. U.S. revenue was $4.7 million in 2018 and that compared to $8.3 million in 2017.

Starter kit revenue decreased to $1.2 million in 2018 as compared to $5 million in 2017, with a fewer number of net starter kits sold, about 65 in 2018 versus 189 in 2017 and the impact from offering a starter kit configuration with a smaller upfront commitment from the physician, reducing the amount of initial revenue for new account. Reorder revenue of $3.5 million was 74% of revenues in 2018 as compared to $3.3 million or 40% of revenues in 2017. U.S. revenue accounted for 52% of full year 2018 revenue and that compared to 83% in 2017. And international revenue was $4.4 million in 2018 compared to $1.7 million in 2017.

Gross profit was $3.7 million in 2018, down from $5.1 million in 2017. Gross margin decreased to 40% from 51%, which is mostly a result of sales mix as we sold more units to our international distributor, which are sold at a lower price.

R&D expense for 2018 totaled $10.7 million as compared to $10.6 million in 2017. As stated previously, we will continue to invest in product improvements and new product development that we believe may help reduce cost, increase adoption and expand the market for the Obalon Balloon System.

SG&A expense for 2018 totaled $29.9 million; that's up from $28.8 million in 2017. The increase was mostly due to higher marketing spend, stock-based comp expense and bad debt expense.

Operating loss for 2018 was $37.0 million as compared to $34.4 million in 2017 as lower revenue and gross profits and higher operating expenses all contributed to the year-over-year increase in operating loss.

Net loss for 2018 was $37.4 million or $1.96 per share -- weighted diluted average common share outstanding as compared to $34.8 million in 2017 or $2.08 per weighted diluted average common share outstanding.

We utilized $30.7 million in cash in operations and capital purchases in 2018 as compared to $31.7 million in 2017.

We have taken steps to bolster our financial position over the past few months with the intent to fund sales growth, especially the launch of navigation, while minimizing dilution.

Last week, we drew down the final $10 million from our own agreement with Pacific Western Bank. At the end of December, we entered into 2 financing agreements, which could enable us to access up to $30 million in equity capital. The first agreement we put in place is an at-the-market, or ATM, with Canaccord for up to $10 million in gross proceeds. We also executed an equity line with Lincoln Park Capital that allows us to sell to Lincoln Park Capital, subject to various limitations, up to $20 million worth of shares over the next 36 months.

Both of these financing options are subject to various limitations, but generally provide us the opportunity to sell shares of our common stock at purchase prices that are based on prevailing market rates. Either of these financings include warrants, derivatives, financial or business covenants. We believe these financing options provide some flexibility to raise capital opportunistically and cost effectively. Most important, Obalon is not obligated to use these tools but has them at our disposal.

As for guidance, given the early stages of commercialization for the Obalon Navigation System, we believe it prudent to provide our thoughts only for the upcoming quarter. We intend to update our fourth quarter guidance on a quarterly basis until we have more concrete metrics about the launch of navigation. We also intend to provide some goals so that you can have an understanding of how we look at the business.

In terms of guidance, metrics and goals, for revenues for Q1 '19, we're targeting global revenue in the range of $1.55 million to $1.9 million. For the U.S., we're targeting revenue in the range of $1.0 million to $1.3 million. And for international, we're targeting revenue in the range of $550,000 to $600,000.

Pricing and gross margins, we intend to initially sell the navigation console at a price that minimizes the barrier to new account adoption of the Obalon balloon by also covering our cost. In this sense, we do not expect the navigation console to generate any meaningful gross profit contribution. We plan to price the new navigation balloon kit at a premium to our current balloon kit based on the improvements and benefits it offers. However, we do not intend to cut into our customers' profitability.

In terms of gross margin, we would expect our gross margins with the navigation touch system to initially be lower than our current products because one, the navigation console is a new product, we've not yet manufactured at scale and the kit navigation catheter is more complex to manufacture than our current catheter. This is the first time we have manufactured it commercially at any kind of scale. We have also reinitiated higher rates of destructive testing like we did with the original launch of the Obalon Balloon System to ensure product quality; two, the touch dispensers are more complex with electronics and technology to automate pressure monitoring and gas flow regulation; and three, as previously stated, that we intend to have revenue associated with the navigation console, we do not expect to generate any meaningful gross profit from console sales.

We have several initiatives intended to reduce the manufacturing costs associated with navigation and improve gross margin. As with our current balloon, the largest potential improvement in gross margin relates to higher sales volumes and manufacturing throughput to spread overhead across more units.

At this time, I'd like to provide certain underlying business metrics for 4Q '18 that we use internally to analyze the business. The number of new starter kit sales in 4Q '18 decreased to 10 as compared to 12 in 3Q '18; 26 in 2Q; and 17 in 1Q. The percent of total U.S. revenues for reorder kits increased to 91% in the fourth quarter '18. That compared to 79% in 3Q '18; 64% in 2Q; and 60% in 1Q. The number of active accounts as measured by reorders in the past 6 months increased to 67 in the fourth quarter '18, up from 62 at the end of the third quarter and 50 at the end of the second quarter.

As a reminder, we will be participating in 2 upcoming conferences, The BTIG MedTech, Life Sciences & Diagnostic Tools Conference on Thursday, February 27 and the 31st Annual Roth Conference in California taking place on March 17 to 19.

I'd like to turn it over to Kelly for any final comments.

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Kelly Huang, Obalon Therapeutics, Inc. - CEO, President & Director [5]

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We continue to believe that the Obalon weight loss system has the potential to significantly impact obesity, one of the largest public health concerns globally. This next-generation launch of the Obalon Balloon System with navigation and touch with our real-world safety and efficacy results and our efforts to bring retail capabilities to private practice, this next-generation launch has the potential to create significant and sustainable value for patients, the health system and our shareholders.

With that, our prepared comments are complete. Operator, will you please now open the line for questions?

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Kyle Rose with Canaccord.

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Kyle William Rose, Canaccord Genuity Limited, Research Division - Senior Analyst [2]

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I hope you can hear me all right. I've got a bit of background noise. I'm at a conference, so I'll keep it quick. I just wanted to, from a high-level perspective, understand the strategic changes that took place over the second half of 2018. But with navigation now in hand, shipping the first units, can you maybe kind of talk about how we should expect the commercial strategy to evolve over 2019, now that you do have navigation and touch? And then just kind of how that should inform our model and as we move through the year? And I'll hop back in queue.

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Kelly Huang, Obalon Therapeutics, Inc. - CEO, President & Director [3]

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Yes, Kyle. Thanks for the question. Yes, navigation and touch is definitely a new horizon for the company. We are, as I said, initially looking at the commercial launch and methodically controlling that targeting of 2 key groups. The first is a group of prior prospect accounts where barrier -- X-ray was a barrier to adoption; and the second is a group of existing customers who we believe could benefit from navigation and drive higher treatment volumes. We're going to measure that and we're going to obviously analyze expansion to beyond those 2 target groups and then certainly, metrics to look at expanding into new territories in the future.

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Operator [4]

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Our next question comes from Rick Wise with Stifel.

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Frederick Allen Wise, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Senior Equity Research Analyst [5]

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Can we maybe start -- you're just at the starting gate clearly with nav. Maybe, Kelly, help us think through how quickly the adoption might be with existing accounts, your 62 -- your 67 active accounts that you're talking about. How will nav adoption unfold there? Or how do you expect or anticipate it to unfold there? And how do you think it could unfold at -- with the accounts that clearly have expressed interest, but have been waiting for nav? Is it like, we imagine with the existing active accounts that it might be a 3- to 6-month sales process and the other is a 6 to 12 to 18 month? Any color you can help us with in thinking through the sales cycle there?

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Kelly Huang, Obalon Therapeutics, Inc. - CEO, President & Director [6]

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Sure, Rick, and thanks for the question. I think Bill gave some guidance at least how we look at the quarter initially. I could tell you that we are still getting the metrics on, again, looking at our pipeline, we've been in the market around 10 territories for the last 2 years and targeting those people who said no to X-ray. It's -- the conversations are going well. It's still again a multi-meets -- a multi-meeting kind of sale, right? You have to meet with partners -- or their financial partners or their physician partners. So we're getting a read, Rick, on how long that sales cycle takes. And certainly, we have excited current customers that are looking to convert and they're going to work through their current inventory as it's not compatible with the navigation system. We'll get those results this quarter. And then navigation certainly has the opportunity to open up to different groups of people than we've been talking to in the past as well as like you said, the 67 active accounts from the last quarter, which we intend to convert most of them. So hopefully, we can continue the dialogue as we get more data in the year.

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William John Plovanic, Obalon Therapeutics, Inc. - CFO & Secretary [7]

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Yes, Rick, and I think with the initial rollout, we are targeting those 2 key groups, and we will -- in terms of the active accounts we have today and the conversion to navigation, yes, we would expect that to transpire over the next 6 to 12 months. It's not something that will happen all in one quarter. We want to make sure that we are bringing in both existing customers and converting them, but also picking up new customers that had previously said no due to imaging as the largest barrier. And we're -- so we're specifically targeting those 2 categories today and even compensating our sales channel that they have to perform in both of those areas today.

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Frederick Allen Wise, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Senior Equity Research Analyst [8]

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Yes. And just a follow-up on that. It's a tricky question to ask and any color would be welcome. I mean, when I reflect on leads that you've had that have said no to Obalon because of the X-ray or imaging barrier, I mean, is -- did 90% of your leads say no or did half of them say no? I mean, are your 10 accounts waiting for a better alternative? Are there 100? How do we frame thinking about -- whatever the sales cycle, how do we frame thinking about the opportunity for you to go out there with a already half, if you will, converted, credible interested accounts? What's the opportunity?

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Kelly Huang, Obalon Therapeutics, Inc. - CEO, President & Director [9]

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Well, I mean, we believe it's a big opportunity, Rick. It's hard to get to the specific quantities of it. It's been the #1 barrier by far. It's one of those that we're not going to -- it's a short-term focus to prove out X-ray is the barrier. The market is very broad beyond that. And I can tell you that we are very much limiting the conversations to a handful of accounts for each of our sales reps. We're not taking a shotgun approach at talking to everybody we talked to in the past. We're looking at really the people that are at the most-ready stage to adopt, to obviously refine the message, get feedback in the market and then get the metrics to figure out what we do to go out broader than that handful of specific targets. We want very deep and intimate conversations right now. So I understand the question. I would say, it's -- again, there's a short-term focus on that group to prove out that it was number one barrier to kind of get the metrics, but to expand well beyond that group.

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Operator [10]

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(Operator Instructions) And our next question comes from Suraj Kalia with Northland Securities.

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Suraj Kalia, Northland Capital Markets, Research Division - MD & Senior Research Analyst [11]

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Can you hear me, all right?

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Kelly Huang, Obalon Therapeutics, Inc. - CEO, President & Director [12]

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Yes.

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Suraj Kalia, Northland Capital Markets, Research Division - MD & Senior Research Analyst [13]

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So I know you haven't said this in the past, Bill. Would you all care to give the pricing of the balloon with navigation? I know you all have said in the past, "At a premium." Is that something you all can share right now to help us with our models?

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William John Plovanic, Obalon Therapeutics, Inc. - CFO & Secretary [14]

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Sure. So we do sell the -- so the way that we're commercializing the navigation product, we sell the package to our physicians in what we call a starter kit. That will include an Obalon Navigation System, the Obalon Touch Inflation Dispenser, enough balloons and disposables to treat 5 patients. Our introductory pricing is such that we believe it minimizes the barrier to new account adoption, but it also covers our cost on the navigation console and Obalon touch components. But that, as we've said, doesn't generate a meaningful gross profit contribution. The balloon and disposables are priced at a slight premium to our current balloon kit. We do expect, as we said, the gross margins, gross profits lower on our balloon kits in the beginning because just we haven't manufactured them at scale before and they are more complex and we are testing at a higher rate today. We -- this is our introductory pricing to the market. Like I said, we're doing it such that we don't want it to be a barrier. I think we've said in the past that the physicians -- typically, it's about $2,500 to $3,000 per patient depending on the volumes and what have you, closer to that $2,500 and we -- as I said, this is a slight premium to that.

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Suraj Kalia, Northland Capital Markets, Research Division - MD & Senior Research Analyst [15]

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Got it. And Kelly or Bill, for that matter, I heard your talk about the Obalon ambassador centers. How should we think about what the ambassador center, what metrics drive the center or centers? Are you talking about patient conversion rates, number of calls, post-procedure patient health? And to add on that, one of the metrics, Kelly, that a number of companies use is like, for whatever, right, average product per account. And then the other metric they target is how long does it take for this average -- this account to get to this average number? I guess what I'm asking is, can you give us a framework of you coming and looking at the business, this new ambassador center, what are metrics will you all be focused on? How should we think moving forward?

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Kelly Huang, Obalon Therapeutics, Inc. - CEO, President & Director [16]

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Yes. It's a great question, Suraj. I would say, first, that the ambassador center is in that vein that I brought when I came to Obalon kind of taking a solution -- a product to a solution and really bringing the consumer -- the consumerization in health care helping a private practice treat patients like consumers. So in addition to help them with advertising, in addition to virtual health programs we have for them, we are putting together this, and we have started already this ambassador center. And to your point, it is about both taking the interest that -- which is high. We had 71,000 leads in 2018; that was up from 46,000 in 2017. And not necessarily focusing on more leads now, but focusing on a better conversion of those leads into patient treatments. So what we look at is the booking rate of those leads, and not only the booking rate, but -- are a little harder to get because of the practices of those that show how many are they actually going to treatment, right? So we're trying to include that. And to do that, we have to reach these patients, leads, we have to inform them of the nonmedical consults, we allow a 2-way interactive dialogue over time with any questions they would have. And then, as you say, post-procedure follow-ups, understanding how the experience was, earning referrals, that kind of being that partner through the consumer experience is something that we're looking at, not just go from leads, but actually go from leads, to booked appointments, booked appointments to actually showing and those showed appointments to actually go through treatment. And we believe a more informed patient along the way takes a lot of the time out of the hands of the practice. And we believe that we could do it better in a central and consistent manner through Obalon.

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William John Plovanic, Obalon Therapeutics, Inc. - CFO & Secretary [17]

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Yes. And Suraj, one of the things we've talked about typically, and there's other services out there that physicians actually pay for leads. That's not the case here. But even those leads they pay for from other services, they would only -- even 40% of those would go unopened. So by our having the ambassador center, we've gone from an outsource to an in-source. By having that patient ambassador center, we're ensuring that all the leads are open, number one, which helps improve that patient interest to conversion to treatment; but two, as we have more touch points with them and better inform them, that improves the statistics all the way down the funnel and, hopefully, we'll be able to improve that. So that's what the focus of this ambassador center is today. As we get more color and have more metrics available that are more consistent, we'll be looking to share some of those with you. But I think we're early on in this process, but we're very encouraged by what we're seeing. And as you can imagine, just us controlling that process even more having it internalized helps us improve that.

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Suraj Kalia, Northland Capital Markets, Research Division - MD & Senior Research Analyst [18]

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Got it. And finally, gents, if I were to say, last year, for the 1.5 year, the FDA Dear Doc letter on saline-filled balloons, the impact on saline-filled balloons, and we can see the numbers, would it be fair just to say if the nav system was there earlier, you guys would have picked up all the business lost on the saline side? I guess, what I'm trying to say is, is the window -- again, was there an opportunity where you have the nav come in, you guys had enough momentum, unfortunately, the timing and everything -- just if you could characterize how you see the market vis-à-vis the Dear Doc letter?

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Kelly Huang, Obalon Therapeutics, Inc. - CEO, President & Director [19]

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Good questions. First, we have not seen an impact in interest due to the FDA letters on liquid-filled balloons. We're definitely thankful that the FDA has segregated the category of gas-filled balloons, in which Obalon is the only one separate from the risks that are being seen with the liquid-filled balloons. I think, Suraj, it's a -- from a share point of view, as you know the changes in the market with the ReShape Balloon going to Apollo and that being publicly stated to be sunset, there are some dynamics that still exist in the category to earn share. But at the end of the day, this is not Coke versus Pepsi, a share steal game. The biggest opportunity is to get people that -- or physicians that are not into the Obalon -- into Obalon as a therapy and get consumers that are interested in weight loss to understand that Obalon is like nothing else they've ever tried before. So we certainly do believe that navigation does enhance ease of adoption for physicians, but the bigger frontier of growth is beyond the current share that was developed by those other liquid-filled balloons.

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William John Plovanic, Obalon Therapeutics, Inc. - CFO & Secretary [20]

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Yes, the penetration rate in the market, as you know, the BMI of 30 to 40 is close to 69 million adults in the U.S. today, Suraj. And that's the real market opportunity for us.

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Operator [21]

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Thank you. And I'm not showing any further questions at this time. I would now like to turn the call back to Kelly -- Dr. Kelly Huang for closing remarks.

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Kelly Huang, Obalon Therapeutics, Inc. - CEO, President & Director [22]

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Yes. Thank you. It's an exciting time for Obalon with the start of our next-generation launch. We look forward to continuing giving you guys updates on navigation and touch, combined with the real-world safety and weight loss published results and with retail capabilities we're bringing to private practice. Again, I appreciate your time on the call and the questions. Have a great day, everyone.

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Operator [23]

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