U.S. Markets close in 4 hrs 25 mins

Edited Transcript of OBLN earnings conference call or presentation 24-Jul-19 12:30pm GMT

Q2 2019 Obalon Therapeutics Inc Earnings Call

CARLSBAD Jul 26, 2019 (Thomson StreetEvents) -- Edited Transcript of Obalon Therapeutics Inc earnings conference call or presentation Wednesday, July 24, 2019 at 12:30:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Robert Macdonald

Obalon Therapeutics, Inc. - Chief Retail Officer

* William John Plovanic

Obalon Therapeutics, Inc. - President, CFO, Secretary & Director

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Good day, ladies and gentlemen, and welcome to the Obalon Therapeutics Second Quarter 2019 Financial Results Conference Call. (Operator Instructions) As a reminder, this conference is being recorded. I would now like to turn the conference over to Bill Plovanic, President and Chief Financial Officer for Obalon. You may begin.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Thank you. Good morning, and welcome to Obalon Therapeutics Second Quarter 2019 Financial Results Conference Call. With me on today's call is Bob MacDonald, Chief Retail Officer of Obalon.

This morning, the company issued a press release detailing our financial results for the 3 and 6 months ended June 30, 2019. 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'd like to remind everyone that any statements made on today's conference call that express 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 expectation regarding the near- and long-term potential of its business. These forward-looking statements are based on information available to Obalon management as of today, July 24, 2019, 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-Q for the quarter ended June 30, 2019. 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 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 July 24, 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.

I will now review highlights of our commercial earnings to date and our new brand -- Obalon branded retail store model. I will then hand the call over to Bob MacDonald to highlight his key experience and perspectives on the Obalon branded store model. Following that, I'll review our second quarter financial results and specifics about our underlying business.

In the second quarter of 2019, we began to transition to a new commercial strategy, focusing primarily on the development and rollout of company-owned Obalon branded retail stores. These retail sites will be called the Obalon Centers for Weight Loss. I am pleased that we have signed a lease for our first center, and we expect our first store to be operational in the fall. We believe that this new focused retail store strategy will be able to more efficiently and effectively address the large population of adults in the U.S. who are frustrated with not being able to lose weight through diet and exercise alone and who are not interested in surgery. This new more focused commercial strategy has allowed us to streamline operations and become more efficient in our spending. In particular, in the second quarter 2019, we eliminated the very large expense of fielding and supporting a direct sales force and transitioning to a centralized customer support model, focusing on private practice physicians that are committed to the Obalon approach. These more engaged physicians continue to have success, both clinically and financially without the need for direct field force support. Based on the first months of experience, we believe the introduction of the new navigation and touch products have further improved the easy use and the ability for physicians and their staffs to safely and effectively use the Obalon balloon independently. The change in commercial strategy and elimination of the direct field force has also allowed us to further reduce headquarter staffing. Product quality, patient safety and regulatory and legal compliance continue to be of paramount importance, and we believe we are sufficiently staffed in those areas.

I'd now like to provide additional detail on the new Obalon Centers for Weight Loss. The decision to transition to this new commercial model is based on over 2 years of commercial experience and data that we have collected in the United States. First and most importantly, the Obalon Balloon is performing commercially at least as well or better than it performed in our highly controlled pivotal clinical trial, which is very different than other approved products like the liquid-filled balloons. I'd like to emphasize that we have a well-functioning weight loss solution that has been proven to be both safe and effective for patients. The data from our commercial registry in over 1,400 patients has been published and presented in several scientific forums. These data demonstrated that patients on average lose more than 21 pounds or about 10% of their total body weight, which according to studies conducted by the National Institute of Health is deemed to be clinically meaningful. Aesthetically, this translates into a reduction in dress or pant size of approximately 2 to 3 sizes. The upper quartile of the patients in our presented commercial registry data set lost 38 pounds in just 6 months or more than 16% of their total body weight, which translates into approximately 4 to 5 pant or dress sizes.

Second, as we have shared consistently, patient interest in the Obalon Balloon System for weight loss has been quite high. We've been able to generate this high level of patient interest efficiently with very modest spend through the effective use of digital and social media, which we own and manage with in-house experience. We continue to believe there are millions of adults who are frustrated with their inability to lose weight through diet and exercise alone and are desperate for a non-surgical solution that works. To date, our top-performing sites, who are committed to developing the capabilities for a cash-pay weight loss product like the Obalon balloon have demonstrated the ability to efficiently convert leads into 20 to 30 patient treatments per month per site with strong clinical effectiveness and safety. However, unfortunately, we learned that the majority of traditional private practices have not been equipped or willing to commit to developing the capabilities for an effective cash-pay weight loss business. We believe this has limited their ability to efficiently convert leads into Obalon treatment and in many cases, the physicians have tried to convert those leads into other treatments like surgery.

From a patient perspective, we believe price has been the biggest obstacle to converting interest into treatment with the Obalon balloon. Based on our secret shopping surveys, we believe the average price to the patients is still over $8,000, which is not much less than the surgical sleeve gastrectomy in some markets. Further, the majority of traditional private practices are not trained in basic sales fundamentals such as how to overcome price objections, and they most often lose the opportunity of conversion to treatment with the Obalon Balloon System. We believe that with our new business model, there's an opportunity to lower the price to patients and increase treatment volume while still providing a meaningful return. In a pilot we ran earlier this year with our physicians, we found that patient pricing at $6,000 was effective at driving increased volumes.

Now more specifics on the Obalon Centers for Weight Loss. The store is based on the aesthetic med spa marketing, selling and patient experience cash-pay model, but with the same traditional medicine rigor for patient safety and efficacy. Especially efficacies with standardization of the patient treatment experience. To drive this new business model, we hired Bob MacDonald, a proven leader with extensive experience in retail stores, and more importantly, prior experience operationalizing the Obalon Balloon System in a retail store setting. Bob has spent his career in retail, having worked with McDonald's for 10 years, Staples for 7 years and most recently Sono Bello, a chain of aesthetic retail medical sites, where he both expanded the company's national footprint and launched the Obalon Balloon System as a service line. Bob joined Obalon in late May as our Chief Retail Officer and has been hard at work getting our first store up and running.

I'd now like to turn the call over to Bob.

--------------------------------------------------------------------------------

Robert Macdonald, Obalon Therapeutics, Inc. - Chief Retail Officer [3]

--------------------------------------------------------------------------------

Thank you, Bill. I have worked with Obalon for almost 2 years now. First as a strategic partner when I was with Sono Bello and now as an employee. I'm very excited about the growth opportunity ahead of us. At Sono Bello, as Vice President of Growth, I was directly responsible for expanding the store base across the U.S. from 16 sites to over 40 sites, reaching an overall pace of approximately 1 store per month. I was also responsible for adding new service lines including, as Bill mentioned, the pilot for the Obalon Balloon System. The experience that I have operationalizing the Obalon balloon in a retail setting gives me high confidence that we can build a strong business around the technology. And I'm applying the learnings that I've gained across multiple locations as we build out the first Obalon Branded Retail Center.

I believe we have the foundation for creating a very efficient retail store model for the Obalon balloon and we're moving swiftly. We recently signed a lease for our first site and look forward to hosting our grand opening this fall for our first center. Our model for each weight loss center requires approximately 2,000 square feet of space, staffed with 4 to 5 employees. Fortunately, Obalon has already internally established and refined many of the key capabilities, particularly in generating patient interest, which we should be able to leverage immediately. Our internal digital marketing capability has been operating and refining direct-to-consumer or DTC practices for more than 2 years. And our internal call center has been staffed and functioning since the beginning of the year. We believe both of these capabilities will enable us to cost-effectively generate patient interest and most importantly convert that interest to Obalon treatments. Further, given the efficient store model that we're attempting to create, we believe there is ample opportunity to drive the price to patients lower and make Obalon -- the Obalon treatment center reachable to a higher number of patients. And of course, we will staff the Obalon Center for weight loss with trained sales professionals, who'll be trained to overcome and provide solutions to patient concerns regarding the Obalon balloon treatment including cost.

I look forward to sharing our progress on our first retail center and our expansion plans with you in the future. And with that, I'll turn the call back over to Bill Plovanic to review the financial results for the second quarter. Bill?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Thanks, Bob. Today, I'd like to share details on our financial results for the second quarter ended June 30, 2019. As a reminder, in the second quarter of 2019, we began the transition to a new commercial strategy, which is company-owned or managed Obalon Branded Retail Stores. As part of the new strategy, we streamlined operations, eliminated our direct field sales force, reduced staffing at our headquarters in San Diego, consolidated our facility footprint and phased out our earlier generation Obalon balloon product. All of which has had a significant impact on our financial results. Second quarter revenue was reported at $0.4 million compared with $2.7 million in the second quarter of 2018. All of the revenue in the second quarter of 2019 was from Reorder Kit sales. As a reminder, at the beginning of the second quarter, we transitioned to a centralized customer support model focused on higher volume physician customers. Cost of revenue was $0.7 million in the second quarter of 2019 as compared to $1.7 million in the second quarter of 2018. And gross profit for the second quarter was a deficit of $0.3 million as compared to a gross profit of $1 million in Q2 '18. Both lower volumes of manufacturing and sales, as well as several onetime events, impacted cost of goods sold in the second quarter of 2019.

R&D expense for the second quarter of 2019 totaled $1.8 million compared to $3.4 million in the second quarter of the prior year. The second quarter 2018 included costs associated with gathering a significant amount of clinical data to support our PMAS regulatory filing for the navigation system in the touch dispenser.

Additionally, the second quarter of this year included several onetime events associated with the reduction in workforce. We intend to continue to support development of our new product pipeline to expand our overall market opportunity.

SG&A expense for the second quarter totaled $4.3 million down from $7.3 million in the year-ago quarter. At the beginning of the second quarter of 2019, we eliminated our direct field sales force and employees at our San Diego headquarters. There were also significant legal expenses associated with the financial and strategic review process we undertook in the second quarter of 2019.

The operating loss for the second quarter decreased significantly to $6.4 million as compared to $9.6 million in the second quarter of 2018. Net loss for the second quarter of 2019 was $6.8 million or $0.25 per share based on weighted diluted average of common shares outstanding for the quarter. That's compared to $9.8 million or $0.57 per share in the second quarter of 2018. As of June 30, there were 35.6 million weighted average common shares outstanding.

During the second quarter of 2019, we raised $8.8 million in gross proceeds through a series of financings in which we issued approximately 11.6 million common shares at an average price of $0.76 per share. We also paid down about $15 million of debt outstanding with Pacific Western Bank and now have $5 million of debt remaining. The reduction of debt is expected to lower our annual interest expense burden by approximately $1 million per year.

As of June 30, 2019, we held $13.5 million in cash and cash equivalents. Yesterday, our stockholders approved an amendment to our restated certificate of incorporation that authorized a reverse split within a specific -- specified range. The actual range to be determined by our Board of Directors. Our Board approved a 1 for 10 reverse split, which we expect to be effective as of today. We expect our shares to begin trading on the split-adjusted price tomorrow, Thursday, July 25, 2019.

We're scheduled to present at the Canaccord Genuity 39th Annual Growth Conference on Thursday, August 8.

With that, my comments are complete. Thank you for your interest in Obalon. And we look forward to keeping you updated on our progress.

--------------------------------------------------------------------------------

Operator [5]

--------------------------------------------------------------------------------

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program, and you may now disconnect. Everyone, have a great day.