ReShape Lifesciences [RSLS] Conference call transcript for 2022 q4
2023-04-29 13:12:02
Fiscal: 2022 q4
Operator: Good afternoon, and thank you for joining the ReShape Lifesciences' Year-End 2022 Conference Call. I would like to turn the call over to Michael Miller from Rx Communications. Please go ahead.
Michael Miller: Thank you. Good afternoon, and thank you for joining ReShape Lifesciences' 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 question-and-answer session. As a reminder, this conference call as well as ReShape Lifesciences' 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 Lifesciences. Paul?
Paul Hickey : 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 would like to remind you of our 3 growth strategies or pillars for growth. The first is to operate our business with a disciplined metrics-driven mindset to ensure we have predictable in 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 search and efficacy 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 rightsized 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 Reshape's SAB with their unrivaled credentials and vast experience gathered through their commitment to fighting obesity. We look forward to leveraging our expertise and feedback on our growth initiatives and expect that will be -- they will be an 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 and alarming rates 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 7 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 health care delivery market is projected to be 95 billion worldwide by 2026, and the global weight loss in 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 9 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 if so, revised the outdated and overly restricted guidelines for treating obesity and related diseases. These updated 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 U.S. children and adolescence with obesity. And lastly, the recent adoption of GLP-1 agonist for weight loss and related big pharma marketing efforts have significantly increased the number of overweight and obese individuals who are seeking medical-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 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 growth 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. For 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 of 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 touch points 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 e-mail, 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 midyear launch will address prospective patient inquiries with the resources they need when they need it, via the channels that does 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 request 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, we're moving 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 outsourced 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 expansion, 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 tube 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 and 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, ReShapeCare 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 post-operative physician adjustments. Like the current Lap-Band, the Lap-Band 2.0 is adjustable post-operatively 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, well designed to alleviate discomfort from swallowing large pieces of food, thus minimizing post-operative 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 Lap-Band 2.0 will allow us to engage new surgeons and reengage many of those who have used Lap-Band historically. As excitingly, we have continued to advance the development of our Diabetes Bloc-Stim Neuromodulation or DBSN device, which uses a vagus nerve block technology platform combined with vagus nerve stimulation. This new dual vagus neuromodulation device selectively modulates vagus block and stimulation to the liver and pancreas to manage blood glucose in treatment of diabetes and 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, in Neural Technology. And was presented in an abstract during ObesityWeek 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 in 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 DBSN 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 we're 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 the BMI of 35 or more regardless of the presence, absence of severity of obesity-related conditions and note that it'd be considered for adults with a BMI of 30 to 34.9 in 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 in any patient with a BMI over 40. It bears repeating that the Lap-Band 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 Lap-Band 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 Lap-Band is a safe and effective weight loss solution and concluded that proper after care 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 Lap-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 we have recently had the honor 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 health care 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 and offshore property portfolio of 155 patents surrounding all of our products, including the Lap-Band ReShape DBSN device and ReShape Obalon 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 Obalon 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 9, 2023, we filed a patent infringement complaint against Allurion Technologies, Inc. in the U.S. District Court for the District of Delaware. The complaint seeks among other relief, damages for Allurion, alleged infringement of our 520 patent, and an amount not less than a reasonable royalty. This matters in early stages, and we are unable to predict this 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 a 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 onetime adjustments. This dramatic shift was necessary and sets the stage for ReShape's path to winning. Now 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?
Thomas Stankovich : Yes, I am, and thanks, Paul. And once again, thank you all for joining our webcast this morning. As a reminder, a full discussion of our financials is available in our press release and 10-K. As we transitioned auditors in the middle of 2022 and during the course of our audit for 2022, we discovered a material misstatement, which occurred during [indiscernible] related to our merger with Obalon in June 2021. And this statement we made to directors and officers of insurance, which was incorrectly classified as an asset. The amount which was incorrectly classified as an asset totaled $1.9 million, and we corrected in the statement in our 2022 10-K of all periods presented. Before I discuss some of our financial details, I want to share some perspective on the necessary transition we have done to become a more disciplined organization and to show our path to becoming cash flow positive and profitable. Our discussion today will focus primarily on our full year 2022 financial results. Additionally, we will also highlight the great strides we have made during the second half of 2022 as we focused our business strategy and significantly reduced costs, which will serve as both our launch pad for growth and path to profitability. As Paul mentioned earlier, we significantly changed our business model to become a more disciplined, sustainable and scalable organization. During the second half of 2022, we pivoted our marketing strategy which has significantly reduced our sales and marketing expenses quarter-over-quarter. We also reduced our G&A and R&D expenses in order to operate more efficiently and reduce our cash earnings. To give you more perspective and before any significant onetime adjustments, our overall operating expenses for the first half of 2022 were $18.1 million compared to $13 million for the second half of 2022. That's a reduction of $5.1 million or 27.9%. This is a significant reduction in our cash burn which will pave the way for ReShape to become profitable sooner. Following our 2 recent financings, we believe we have sufficient cash on hand to reduce profitability within the next 18 months. Moving on to other key financial metrics for the year ended December 31, 2022. Our revenue totaled $11.2 million for the year ended December 31, 2022, which represents a contraction of 17.4% or $2.4 million compared to the same period in 2021. The decline was primarily attributable to the reemergence of COVID early in 2022. Nevertheless, we saw sequential growth in each quarter during 2022 in our U.S. business. Our U.S. revenue for the first half of 2022 was $4.2 million versus $4.1 million for the second half of 2022, an increase of $900,000 or 22.3%. Gross profit for the year ended December 31, 2022, was $6.8 million compared to $8.3 million for the year ended December 31, 2021, a decrease of $1.5 million or 18.5%. Gross profit as a percentage of revenue for the year ended December 31, 2022, was 60.5% compared to 61.4% for the same period in 2021. The decrease in gross profit margin is primarily due to a decrease in sales, as revenue decreased by 17.4%, with the largest decrease in revenue in the U.S., which has a higher gross profit margin than our international sales. During the first half of 2022, our gross profit margins were 58.2% compared to 62.6% in the second half of 2022 as our U.S. revenues began to increase. Sales and marketing expenses for the year ended December 31, 2022, increased by $5.2 million or 58.5%, to $14.1 million, compared to $8.9 million for the same period in 2021. The increase was primarily due to increase in advertising and marketing costs, an increase in payroll and related travel expenses and expenses related for the development of the ReShapeCare platform, all totaling an increase of $6.1 million. This increase was offset by a decline in stock-based compensation expense, commissions and other related costs of $900,000. During the first half of 2022, our sales and marketing expenses were $9.4 million compared to $4.8 million in the second half of 2022, a decrease of $4.6 million or 48.9%. General and administrative expenses for the year ended December 31, 2022, decreased by $7.1 million or 28.5% to $17.4 million compared to $24.3 million for the same period in 2021. The decrease is primarily due to a decrease in stock-based compensation expense, a reduction in consulting and professional fees totaling $10.4 million. This decrease was primarily offset by accrued litigation expenses and severance costs totaling $3.4 million. During the first half of 2022, our general and administrative expenses were $9.6 million compared to $7.7 million in the second half of 2022, a decrease of $1.9 million or 19.4%. The Research and development expenses for the year ended December 31, 2022, increased by $200,000 or 7.3% to $2.5 million compared to $2.3 million for 2021. The increase is primarily due to an increase in consulting and professional services related to the development of ReShape's Diabetes Bloc-Stim Neuromodulation device and payroll-related expenses. Our R&D expenses for the first half of 2022 were $1.5 million compared to $1 million for the second half of 2022, a decrease of $0.5 million or 30%. We ended the year 2022 with $3.9 million of cash and cash equivalents and remain debt free on our balance sheet. Additionally, in February and April of 2023 we completed 2 financings totaling $12.6 million. Based on our available cash resources and the 2 financings we recently completed, we believe there is sufficient cash on hand to fund current operations into 2024. With that, I will now turn the call back over to Paul.
Paul Hickey : Thanks, Tom. Before we open the call up for Q&A, it is important to reiterate that we will continue to develop and offer a portfolio that is differentiated from our competition by offering transformative technologies that consists of a selection of patient-friendly, non-anatomy changing, lifestyle enhancing products, programs and services that provide alternatives to more invasive bariatric surgeries and to help patients achieve healthy durable weight loss. We have made significant progress executing our growth pillars to drive revenue and thus, a predictable path to profitability. We reduced operating expenses and rightsized investments in quality regulatory and finance, so we can invest in growth initiatives, including R&D and marketing. We are continuously improving our marketing systems and bringing critical components in-house to ensure optimal lead generation, lead nurturing and lead conversion, while further reducing lead generation costs. And finally, we will work closely with our world-class scientific advisory board to continue our plan for success in a global market that is changing in historic fashion to normalize safe and effective treatments for obesity. This concludes our prepared remarks. So now we'd like to open the call to your questions. Operator?
Operator: [Operator Instructions] The first question will come from Anthony Vendetti of Maxim.
Operator: [Operator Instructions] Okay. That does conclude today's Q&A session. I would like to turn the conference back over to Paul Hickey for closing remarks. Please go ahead.
Paul Hickey : Well, thank you. I hope you recognize our enthusiasm and share our excitement for the road ahead, given the substantial growth opportunities we have before us and the progress we've made developing and executing our strategies. We believe wholeheartedly that the benefits offered by the FDA approved minimal invasive, safe and effective Lap-Band and our current suite of weight loss solutions will support our growth and most importantly, help those who are fighting obesity. In closing, I want to thank our employees, Board members, customers, consultant advisers, suppliers, existing and new shareholders through continued support of ReShape as we progress on our mission to become the premier physician-led weight loss company. I look forward to continuing to engage with our stakeholders, health care partners and shareholders.
Operator: This concludes today's conference call. Thank you for joining. You may all disconnect.
