Good afternoon, ladies and gentlemen and welcome to Apollo Endosurgery Second Quarter 2022 Results. At this time all participants have been placed on a listen-only mode and we will open the floor for your questions and comments after the presentation. It is now my pleasure to turn the floor over to your host, Matt Kreps. Sir, the floor is yours..

Thank you, Matthew and thanks, everyone, for participating in today's call to discuss Apollo's second quarter 2022 financial and operating results. Joining me on the call are Chas McKhann, Chief Executive Officer; and Jeff Black, Chief Financial Officer. Today's call will include slides to accompany the audio presentation.

For those of you joining us by telephone only, you can download a copy of the slides at our Investor Relations site, ir.apolloendo.com, under Events and Presentations.

Before we begin, I'd like to caution listeners that comments made by management during this conference call will include forward-looking statements within the meaning of federal securities laws, including Apollo's major outlook and Apollo's plans for timing -- for product development and sales.

In addition, there is uncertainty about the continued spread of the COVID-19 virus and the ongoing impact it may have on our operations, the demand for our products, global supply chains and economic activity in general. These forward-looking statements involve material risks and uncertainties and Apollo's actual results may differ materially.

For a discussion of risk factors, I encourage you to review the company's most recent annual report on Form 10-K and our most recent Form 10-Q. The content of this conference call contains time-sensitive information that is accurate only as of the date of the live broadcast, August 2, 2022.

Except as required by law, Apollo undertakes no obligation to, revise or update any statements to reflect events or circumstances after the day of this call. Additionally, today's discussion will include certain non-GAAP financial measures which we believe provide an additional tool for evaluating the company's core performance.

Management uses these metrics on its own in its own evaluation of continuing operating performance and as a baseline for assessing the future earnings potential of the company.

Included in the press release today with our financial results and corresponding 8-K filing are supplemental tables reconciling non-GAAP figures to their closest GAAP comparable. Now, I'd like to turn the call over to Chas..

Thanks, Matt and good afternoon thank you, everyone, for joining us. On today's call, I'll cover highlights of our Q2 performance. Jeff will then cover our financial results and I'll come back and talk to you in more detail about our recent milestones and launch plans for the Apollo ESG and the Apollo REVISE devices.

So starting on Page 3 of our deck, our strategy has been to pursue large market opportunities and build an organization that is primed to capitalize on them. And I'm pleased to say that our recent performance has been good validation of this approach. Q2 was a solid quarter for us.

We demonstrated revenue of $19.3 million in reported sales and just under $20 million in constant currency.

This performance represents a really nice step-up compared to our recent sales levels and the growth has come ahead of two very recent and important catalysts that we've just announced in the last month, the FDA market authorization for the Apollo ESG and Apollo REVISE devices and publication just last week of the MERIT study in The Lancet.

So turning to Page 5, where we've listed both constant currency growth on the left and then GAAP growth on the right. In Q2, we achieved 20% growth in constant currency and 16% year-on-year growth on a GAAP basis. Once again, our growth has been well balanced across both products and geographies.

On a GAAP basis, ESS grew 23%, with strong growth in the U.S. of 22% and international growth of 24%. Our IGB franchise grew 6% on a reported basis, 7% in the U.S., 5% outside the U.S. so again, nice balance across the business and across geographies.

As with any U.S.-based company that has a significant presence in Europe, foreign exchange has presented a headwind, it's important to note that Apollo unusual for a med tech company of our size has just under 45% of our sales from outside the U.S. and more than half of that is in Europe.

Many of you will know that a year ago, the euro is at $1.20, it's now at $1.02. And so it is a significant impact. But again, we're pleased with the reported 16% and the 20% year-on-year growth from a constant currency standpoint.

So again, I'll come back to you with an update from a business and strategic standpoint but let's allow Jeff to walk through the financials.

Jeff?.

Thank you, Chas and thank you, everybody, for joining us today. I'll spend a few minutes with a financial update give a little commentary on the rest of the year guidance and some discussion about some medium-term targets.

First off on Slide 7, just starting off of revenue today again, as Chas said, we reported another quarter of strong year-over-year growth across the whole product portfolio. It's our fifth consecutive quarter of double-digit growth. This was the largest revenue quarter on record for Apollo on book of GAAP on a constant currency basis.

We grew 18% in the U.S. We're continuing to see the impact of our planned investments. Growth is led by adoption in our endobariatric accounts which Chas will dive into later. We're seeing the benefits of sales force expansion, increased sales force productivity, the continued strength in Orbera on the heels of enhanced marketing efforts.

We saw procedural volumes improved throughout the second quarter. There have been some lingering COVID effects but nowhere near to the extent that we saw at the beginning of Q1. We're still seeing some staffing shortages in some hospitals, particularly in academic hospitals, where the -- core GI business is typically very strong.

We grew 9% OUS on a constant currency basis again, strong demand in both direct and distributor markets and some competitive wins for both OverStitch and Orbera in some key accounts. We also saw foreign currency headwinds, as Chas mentioned, particularly for the euro which had a nearly $600,000 impact on our year-over-year Q2 growth.

And as Chas mentioned, because international sales represent more than 40% of our overall sales we're disproportionately impacted by negative foreign currency impacts compared to similarly sized med tech companies that typically do not have such a large OUS footprint.

In other revenue, while not material, was impacted by our planned wind down of our Apollo Care program for Orbera which was outsourced to third-party beginning in 2022. Overall, we're again pleased with our revenue performance in the second quarter and our ability to continue to expand adoption across the portfolio.

Moving to revenue guidance on Slide 8, we continue to expect 2022 revenue in the $73 million to $75 million range, cognizant of potential global recessionary impacts lingering pandemic headwinds and most significantly foreign currency pressures from the strengthened dollar, particularly for the euro which currently represents nearly half of our OUS revenue.

Our guidance implies fiscal year 2022 growth of 16% and 19% and second half year-over-year growth of about 17% which is essentially flat sequential growth against first half on a GAAP basis. Some of this can be attributed to Q3 seasonality which is typical in our business and we're seeing some of it play out in July.

But the biggest impact is foreign currency headwinds. To put this in perspective, the euro foreign currency rate is down 11% since the beginning of 2022 and we've seen similar pressures in most of our OUS geographies.

So, on a full year basis we expect foreign currency headwinds of up to $2.1 million in the second half of the year and $3 million on a full year basis. And guidance then on a constant currency basis now implies fiscal year '22 growth and second half '22 growth in the low to mid-20% range.

Moving to Slide 10 on non-GAAP OpEx as we look at our -- my apologies, gross margin on Slide 9. As you can see, we're on track with our margin expansion targets. Gross margin improved by 190 basis points versus the first quarter -- of the second quarter of last year.

On a constant currency basis, our gross margin improved by 320 basis points to just over 58%. Sequentially, gross margin improved 50 basis points over the first quarter. We saw gross margin expansion on our ESS product line from the impact of 2021 OverStitch COGS improvement projects. We saw improved overhead efficiencies.

We also saw some price increase impact for both OverStitch and X-Tack. Major drivers of overall gross margin expansion will continue to be product mix, improved overhead absorption and direct COGS improvement programs focused primarily on OverStitch.

We continue to navigate supply chain and manufacturing scale up complexities but we remain confident in our ability to drive blended gross margin to the mid-60% range in the medium term.

Now moving to Slide 10 on OpEx as we look at operating spend profile, we think it's important to exclude non-cash stock-based compensation to get a clearer picture of our non-GAAP core operating expense run rate. As we previously said, 2022 is an investment year.

In the near term, we're focused on building capabilities following historical underinvestment in the business, the most significant area being sales and marketing in the U.S.

For example, in the second quarter, our non-GAAP sales and marketing OpEx ran about 45% of revenue which reflects our planned investments and growth initiatives, primarily in building out our sales channel as we prepare for the launch of Apollo ESG and REVISE products.

Our other focused areas of planned investment are in R&D, medical education, clinical reimbursement, product development and again, COGS improvement. And on the G&A side, we'll continue to thoughtfully invest in infrastructure and staff to properly support the business.

As we stated, 2022 is an investment year for us with a primary focus on building out our commercial infrastructure in the U.S. to support growing interest and demand for our technologies, especially Apollo ESG and REVISE. But that said, we are modulating spend in light of the changing environment.

The more future focused initiatives are now a lower priority. We're setting a very high bar for these kind of investments. For example, we're taking a much more conservative view of investments in longer-term clinical and R&D pipeline initiatives that may not be necessary to support our core business today.

While these are all elements that are ultimately critical for longer-term prospects, we have significant flexibility as to how much and when we fund these initiatives. So far in 2022, we've not made any long-term commitments to fund these types of initiatives.

In fact, in the first half of 2022, we are well below our OpEx and CapEx spend plans while still on target with our revenue plan. Importantly, we have the ability to modulate spend as appropriate and we're well positioned from a balance sheet perspective to make these investments.

With that on Slide 11, addressing our balance sheet in the fourth quarter of last year, we reinforced our balance sheet with $75 million in equity issuance and a new credit facility that will provide up to an additional $65 million in available capital over the next few years.

At the end of Q2, we had $140 million in cash and committed cash, including $75 million in cash and equivalents and access to another $40 million over 2023 and '24 based on revenue milestones which are well below our base case expectations.

We saw total cash use in the second quarter down by more than $2 million compared to the first quarter which is indicative of our disciplined use of capital even as we continue to make growth investments.

We have a multiyear run rate at [indiscernible] our plan with an eye toward investments to take advantage of near-term opportunities in front of us. In terms of 2022 outlook, we expect to end the year with $125 million in cash and committed cash, including more than $60 million in cash and cash equivalents.

This implies 2022 cash use of around $30 million which we anticipate is our high watermark for annual burn based upon our base case model. And that brings us to our medium-term business targets and commentary on our path to breakeven.

Moving to Slide 12 -- as we've highlighted today in the past quarters, we have the OpEx and CapEx flexibility to greatly enhance our EBITDA and cash burn profile once we've built our organization to scale.

And as you can see from the illustrative targets based upon our current base case model, we have a line of sight to positive EBITDA and cash flow breakeven business by the time we reach $150 million in annual revenue.

We'll be in a position to make strategic decisions as to whether we enhance investment for accelerating top line growth or more future-focused noncore initiatives or to more aggressively position the company for profitability.

But most importantly, based on our current base case model, we have the balance sheet and committed capital today to get us there. And with that, I'll turn the call over to Chas for our business and strategic update..

Thanks, Jeff. So in 2022, we have four overall strategic priorities. I'm going to spend the majority of our time today talking about the launch of Apollo ESG and Apollo REVISE given our recent announcements. But before I do that, let me comment on the other three.

First, around expanding our core GI defect closure and fixation business that's our OverStitch and our X-Tack products in that area. We've had a good quarter and good progress.

Many of you know that in May, we had a very productive Digestive Disease Week meeting and that I think it included more than 100 different presentations about our products and that the X-Tack device was featured very prominently in that. And some of the first data that's come out on X-Tack after just one study that was published last year.

And so building on that, we saw a 16% sequential growth in the quarter with X-Tack and we do anticipate that the awareness generated at DDW and that those presentations are then published and that will continue to help support continued interest and adoption of X-Tack.

And then furthermore, that there are lots of opportunities still for OverStitch across a whole range of applications in defect closure and fixation. On Orbera, Orbera continues to perform well and has been a meaningful growth driver in our business for the last 18 months.

We have successfully implemented co-marketing programs for Orbera in a number of our target accounts and MESA [ph] provided significant incremental growth for Orbera.

And we also view these as essentially pilot programs where learnings from what's worked and what's been most successful can be applied to Apollo ESG and Apollo REVISE and I'll come back to that. And we've also observed that Orbera has done particularly well in integrated practices that are offering a range of both Orbera, ESG and revision procedures.

And we believe that has a sustainable element to it. And then on advancing the organization and Jeff already talked about this, right we are building the right capabilities that we think we need to really take advantage of these opportunities. We're doing it in a very targeted way.

We're reviewing every addition in headcount, line item detail and only investing in the ones that we think are critical but we are making great progress in building our key capabilities in the organization. I am very pleased also to welcome Sharon O'Keefe to the Apollo Board of Directors which we announced just about a month ago.

Sharon has extensive experience in leading large medical centers and for nine years served as the President of the University of Chicago Medical Center. She is a thoughtful, experienced healthcare executive and she will bring a new perspective to Apollo Board and we are very excited to have her.

So moving now to the launch of Apollo ESG and Apollo REVISE, first, let's start with the news that we've announced over the last month, two important milestones that literally have been years in the making. On July 12, Apollo received marketing authorization from the FDA for the Apollo ESG and Apollo REVISE products it was via the de novo process.

A couple of things to highlight 1 is the BMI range for the clearance of 30 to 50. That is a wide range and helps us allow us to treat potentially many, many patients who suffer from obesity. And so we're very pleased with that.

Also, this de novo decision came even faster than we anticipated and we are very grateful to our reviewers at the FDA for their responsiveness and an interactive process throughout the process. And then on Thursday, just this past week, the MERIT study, a randomized controlled trial of ESG procedure was published in The Lancet.

And I think the quote on the right side of the page which comes directly from the publication, is an excellent summary. For those who don't have the slides in front of you, I'll read it and the implications of all the available evidence.

The MERIT study proves that ESG is scalable and can be offered in outpatient -- endoscopy practices by surgeons or gastroenterologists with an excellent safety profile without mortality and with predictable conservatively managed adverse events. And so the publication in Lancet is a big deal and one that we're very excited about.

Many of you may know that recently, The Lancet was -- basically took over the leadership position as the highest impact factor journal in the world and so it's an honor to be published in it and all due credit to the investigators in the study. As you see on this page, there are some quotes from Dr. Abu Dayyeh [ph] from the Mayo Clinic and Dr.

Wilson from UT in Houston really highlighting some of the overall benefits that were observed in the study and of the ESG procedure. Dr. Abu Dayyeh highlights not only the weight loss benefits but the study also highlighted meaningful improvements in comorbidities such as diabetes, hypertension and metabolic syndrome. And Dr.

Wilson highlights the fact that we now have a safe, effective and durable procedure that can be performed by both GIs and surgeons. We are very grateful to both Dr. Abu Dayyeh and Dr. Wilson and the entire clinical investigator group who works on MERIT. This was not an easy study to complete.

Most of it was performed during the height of the COVID pandemic just a few years ago and we congratulate them on their publication and we are very, very thankful for the work that went into it. So I'd like to take a step back and put into context now these two announcements.

For more than two decades, engineers, researchers, venture capitalists have been working on developing new endoscopic approaches for weight loss. It's not an exaggeration to say that 100s of millions of dollars have been invested in pursuit of a less invasive, safe, effective and durable treatment for weight loss.

And as you can see on Slide 18, ESG is the first and only procedure that fully delivers on this promise. Let me say a word about the Orbera intragastric balloon because it's an outstanding product and it continues to play a growing role in the treatment of weight loss.

And Orbera's role is increasingly important in an integrated setting of care within an integrated endobariatric practice. But that being said, when you think about a full package of -- and the value proposition, only ESG offers what you see on the page.

That being an FDA authorization in this case, for both primary and revision procedures, Level 1 evidence with the MERIT study in The Lancet, an endoscopic approach that same day, no incisions and with a fast recovery period, proven effectiveness with 49% excess body weight loss in MERIT.

And 15% to 20% total body weight loss in a global published literature which by the way, now has more than 10,000 patients that have been studied in ESG procedures.

A very good track record of safety with consistently around the 2% rate of adverse events, serious adverse events -- and as highlighted in The Lancet publication, these events typically can be managed very conservatively and in durability, two years in MERIT and up to five years in the published literature.

And so again, that's why there's so much excitement now about the authorization and the study back-to-back. And physicians who've been working on this, as I said, for literally a decade or more, are incredibly excited by these two developments.

So if anyone on the call isn't familiar with ESG, it is a suturing procedure in -- on the stomach, reducing the stomach volume as well as delaying gastric emptying which results in the benefits I just mentioned. We're going after and addressing a large patient population, more than 100 million people in the U.S. have a BMI over 30.

But importantly, there are only about 200,000 primary bariatric procedures, traditional bariatric procedures performed in the U.S. each year. That result -- that translates, sorry, into a 0.2% treatment rate. We recently conducted market research with more than 1,100 people and confirm something that would seem intuitively pretty obvious.

The biggest reason people don't consider bariatric surgeries is fear, fear of side effects, fear of complications. But the value proposition of ESG is fundamentally different.

In the same survey we presented information about the ESG procedure and approximately 2/3 of patients are interested in the procedure and you can see the reasons why in terms of no surgical cuts, significant weight loss, durability. 57% would likely see a doctor to talk more about it.

And the preference and overall participants expressed a clear preference for ESG over traditional surgeries. These surveys findings are consistent with the experience of physicians who are already early adopters.

And what they tell us is that when patients are treated with both options, ESG or traditional surgeries, there is a true benefit for the ESG procedure. But furthermore and probably even more importantly, many patients who would not even consider a traditional surgery are now contacting these practices and wanting to learn more about ESG.

And so with ESG, there's a substantial opportunity to grow the size of the pie of people who seek intervention. I'd like to directly address recent questions about the potential impact of weight loss medications on our endobariatric business.

Recently, there have been important developments in new weight loss medications, including first semaglutide for Novo Nordisk which has the brand name of Wegovy as well as trazefetide from Eli Lilly which is currently only approved for diabetes but we do expect that in the coming months, it will be a clear for weight loss as well.

These new medications are a substantial step-up compared to traditional weight loss drugs. And they are widely anticipated to become blockbusters. But as with any treatment, there are some downsides. The new drugs are expensive -- well more than $1,000 per month and they often are not covered by insurance.

They can have tolerability issues and side effects. And we know from decades of experience, the compliance on long-term medication is often very challenging for patients. But again, we do expect them to have a major impact but recall the size of the problem. More than 100 million people and 40% of the adult population in the U.S.

have a BMI over 30, having new treatment options, including these medications as well as ESG is a big step forward. And we also anticipate that the increased focus on obesity provided by companies like Novo Nordisk and Eli Lilly will prompt many people to consider whether to take action and to evaluate their treatment options.

And when they do, they're going to learn more about ESG as well. The potential of combination therapy of ESG plus one of these new medications is very exciting. The study shown on Slide 21 was presented at DDW 2021, so a little more than a year ago and was just recently published.

It was a randomized controlled trial for one arm with CDSG [ph] and the second arm received a combination of ESG and a short course of semaglutide. The ESG arm alone performed very well with 18.7% total body weight loss. In combination, the total body weight loss was 25.2%.

That's comparable to what is achieved typically with a traditional bariatric surgery without all of the downsides of undergoing a full surgical -- traditional surgical procedure.

We are already aware of other physicians who are conducting similar studies of combination therapy for both ESG and revision procedures and so we'd expect to see more data in the future. And also, some of our customers are already incorporating GLP-1 medications into their treatment paradigms of patients who receive an ESG.

Turning now to revision procedures, this also represents a big opportunity for us. Over a 10-year period, 1.4 million people in the U.S. underwent a primary bariatric surgery in the U.S. And over time, the body accommodates and studies have shown that up to 1/3 of people who receive a bariatric surgery may be candidates -- for a revision procedure.

Traditionally, this has involved another invasive surgical procedure with all of the costs and risks associated with the primary procedure. But despite this, revision surgical procedures are the fastest-growing segment of the traditional laparoscopic surgical market.

Now with the Apollo REVISE device, physicians will be able to alter the anatomy using a suturing technique and be able to regain many of the original benefits in an incision-less and typically same-day procedure.

In a study published last year out of Brigham and Women's Hospital in Boston, an endoscopic approach to revision procedures demonstrated similar effectiveness to a surgical procedures and this was studied by the way, up to five years but showed substantial improvements on adverse events and especially serious adverse events.

So the potential value proposition is very clear. So turning now to Slide 23, so we've just recently received the FDA market authorizations but early adopting physicians have already started to embrace the procedures and prove their viability in real-world clinical settings. What you see on Slide 24, the top 10 private practices in the U.S.

that are focused on endobariatrics and the top 10 academic centers where the majority or the entirety of their procedures are endobariatric. As you can see, the growth in these practices in the past 18 months has been substantial as both surgeons and GIs begin to incorporate endobariatric procedures into their clinical practice.

The academic centers have grown by 28% in the last year. The private practices have grown their volumes by over -- by 60%. And furthermore, if you look at the average annualized sales across these 20 accounts in the first half of 2022, the annualized sales is about $600,000.

As we look at this group, we see that there are numerous recipes for success, private practice and academic, surgeon or GI or a combination of both. Some are primarily cash pay. Some are using prior authorizations which I'll come back to as we talk about market access in a minute. So there are multiple potential models for success going forward.

I will say replicating these successes will take some time. Many factors need to come together to create a successful practice, a skilled and well-trained physician.

Staff who can provide excellent patient care both before and after the procedure and a practice infrastructure that is effective in identifying and managing patients in all of the key requirements for success.

These 20 institutions and others like them in our key international markets already provide an excellent starting point and give us the confidence as we move forward. Slide 25 shows visual examples of some of the accounts that are already beginning to educate patients about endobariatric procedures, including ESG and revisions.

These are publicly available screen shots from their websites but many of these practices are already using sophisticated marketing efforts using channels like Facebook, Instagram, Twitter, TikTok, YouTube as well as traditional radio and print ads.

Through these collective efforts as well as co-marketing programs from Apollo, patients will be -- have an opportunity to learn and become increased awareness of ESG and endoscopic procedures and awareness and understanding will continue to grow.

Slide 26 shows a summary of the different activities associated with our launch plans, including our marketing and medical education initiatives, training for physicians, readying our sales team and targeting them from a sales effort and then a range of reimbursement and market access initiatives -- that are ongoing.

These activities are well underway and we do anticipate them contributing to our growth both later this year and into 2023 and beyond. Highlighting some of the key activities among our sales organization, one of the big changes that we've made is we've now added a new role into our sales team that we call regional endobariatric managers.

This is a group that now complements our existing market development managers -- sorry, traditional sales reps. And the REM role really complements the traditional sales rep role by focusing on supporting new and emerging practices and that can incorporate Orbera ESG and revision procedures.

And they're really focused on all of the different aspects of market development, of identifying patients, how to share best practices and helping grow and develop which is a different set of skill sets but one that's incredibly important in terms of how we will develop this over time.

And then we're also enhancing our sales team effectiveness through enhanced training, customer relationship management and marketing support. Moving on to reimbursement and just market access, incredibly important to sustaining growth, importantly, we have already had existing models that are working as you see in the growth on the prior slide.

Among the top 20 accounts, some exclusively use a cash pay model and their substantial growth is very good evidence of the high interest level and willingness to pay among patients.

And we've been making channel checks with these accounts, especially in light of the broader macroeconomic environment and we continue to hear reports of strong interest and demand even in today's uncertain economic environment.

Something we're watching closely but we're getting good feedback from the people who are talking to patients every single day. Other accounts also pursue prior authorizations with insurance companies for both ESG and revisions and often are getting coverage on a case-by-case basis. Achieving broader coding coverage and payment will take time.

We have three primary areas of engagement, especially now with the both MERIT study and the FDA authorization and SAM [ph] first is the facility coding and payment. There are potential opportunities for new technology codes with Medicare and we will be pursuing those and we'll provide an update as we move forward.

CPT codes are how physicians get paid and we are engaging the leading GI and surgical societies in the CPT coding process. Our objective is to have a successful Category 1 CPT code during the upcoming annual cycle which will result in a new Category 1 CPT code being effective January 1, 2025.

But again, still work to do with the societies because I think we've mentioned this before, the AMA-CPT panel in the surgical and GI societies will really drive that process. And then thirdly engaging payers, coverage will build over time. As I mentioned, we already have seen success in some cases on a case-by-case basis.

With the new market authorizations as well as with The Lancet publication, we will engage in efforts now to improve the coverage of both ESG and revisions. In the meantime, moving on to Slide 29 -- pardon me, we do still have a very viable cash pay model.

And we just try to showing on this slide that it really is a win-win for both patients and physicians. Patients have very good treatment options that can be tailored to their needs with Orbera, with ESG or with revision procedures.

And again, these can be in the context of both, a dedicated GI-based endobariatric practice or an integrated program that's offered by surgeons. For physicians, it is a chance to differentiate their practice, a chance to grow their practice and the practice economics can be very attractive as well.

So in summary, with the recent market authorization and The Lancet publication, we are reiterating our medium-term growth outlook and adding a line of sight to cash flow positive business in the years ahead. And we are very excited about the impact that our products can have in improving patient care going forward.

So with that, let me turn it back to Matthew and we'll open the call to Q&A..

[Operator Instructions] Your first question is coming from Chris Cooley from Stephens..

Congratulations on the solid quarter just a couple of quick ones for me. First Chas, just curious if you could help us maybe look into your crystal ball. And as we think about in particular, the Lilly results, how do you see this affecting the market from a channel perspective.

I guess, not only from a provider but also if we just think about the patient funnel, does this bring more patients into the patient funnel than over time, basically source from that for the surgical procedure? Does this -- I'm just kind of curious how you're thinking about that because in that study, the mean percentage weight loss was approximately 15% in six months.

So just kind of curious how you think that may or may not play out? And then secondly, maybe just -- I'll ask both my questions upfront for Jeff. I appreciate the focus on achieving profitability on the hand the plan that you've outlined here on today's call? Just curious, though, if you've kind of changed your views on the rep adds.

I think at DDW, you talked about getting upwards of 45 by calendar year-end. I noticed on Slide 27 and maybe this is just semantics, approximately 40 reps by year-end. I'm just curious if you're thinking about maybe modulating your headcount there a little bit.

I know -- in your prepared remarks at the outset you talked about more closely evaluating incremental hires going forward, just trying to triangulate that a little bit as well?.

Appreciate it. So on the weight loss medications, both semaglutide and then the Lilly results with tirzepatide, I think we're all speculating a little bit in terms of conversations of how this will play out.

But as we talk to physicians who again, are treating a lot of patients already, I think from a channel standpoint, it could play out at a couple of different time points.

As I mentioned, I do think you're going to see more people who are overweight to obese are going to revisit should I do something, right? And you're going to have the weight of very large pharmaceutical companies talking about that. And someone will get medications but someone will also learn about their options overall.

And we've already seen some examples of that our customers have. The second part that I did mention in my comments is patient compliance. Staying on a long-term injectable medication isn't easy. And we've just seen that across categories in -- for decades. So we absolutely expect they're going to have an impact, no question.

But on a relative scale of the number of patients, right now, our fraction of procedures is such a small fraction of the overall market that the opportunity to get even some lift out of a net effect of increased interest and then some patients who try these medications and -- look for something more effective, we think actually creates some really good opportunities relative to our scale.

Jeff?.

Sure yes Chris, thank you. And to your question on headcount and OpEx modulation, I think it's a combination of two things. It's just being very critical about every dollar of spend and every head count that we add.

But on the sales channel and on the commercial organization, it's really less about expense control, to be honest with you and more about the strategy around what is the right mix in the sales force, right.

And so, we're really -- we're in many areas, we're really doubling down on this REM role and piloting some REM roles and how they best interplay with the sales reps. And so, that may differ on a geography by geography basis. We may have situations where a sales rep has a broader coverage territory because they have an REM to support them.

We may have situations where because of geographic distance, we may have to add more sales reps to cover a more expansive geography and then supplement with more or less REMs. And so it's really more of a piloting around what's the right mix. And so it's less about, hey, let's say, five heads but let's get the mix right.

Anything to add to that, Chas?.

No, I think you summarized it well..

And if I could maybe just squeeze one other quick one in. I know during the first quarter, you received OverStitch. I'm sorry you received clearance in Japan for OverStitch. And we're going to -- obviously, you're working on timing and the dollar value there for reimbursement.

Are there any new updates that you can provide at this time for the Japanese market and I'll get back in the queue?.

No, so we got the clearance in January -- sorry in Q1, you're right. We've still -- as you may well know, Chris, from other companies you cover, having the right distributor in Japan is critical and thinking long-term how you approach it.

And so, we are actually still finalizing our distributor relationships in Japan which will end up impacting than what we expect on the growth trajectory..

Your next question is coming from Adam Maeder from Piper Sandler..

This is Simran on for Adam. Congrats on a great quarter and for the fulsome update on the business.

So I know it's very early days but what impact, if any, have you seen on ESG and OverStitch volumes since the FDA approval of the labeling change for ESG and REVISE? And then maybe as a follow-up there, how do we think about the adoption over the remainder of 2022 and maybe even '23 in both existing endobariatric accounts and then now new accounts kind of coming into the funnel?.

Yes, no I appreciate the question. I think there'll be a time -- let me back up. The interest level following the authorizations and especially -- and then the publication last week has been extremely high. There's a lot of excitement.

But there'll be a time lag from that to cases and people being treated, right? I mean if you think about the different elements I mentioned that come together through accelerating their practice, they take some time. And so, we do see that factoring into later in the year and then certainly, our momentum heading into 2023.

And so that's kind of the timeframe and we would expect to see an impact of moving from, as I said, a lot of interest to a real impact. And then it's also been offset -- the announcements have just come in the last month. And as Jeff mentioned, we have seen some summer seasonality.

And if any of you have traveled recently, airports are extremely busy, people are taking vacations. And we've seen that both with a number of our key customers. And so that's normal at this time of the year but I think maybe even a little bit more so this year. And that might cloud any immediate impact relative to putting the pieces together.

We really are thinking about this for the long-term as well. One of the things I meant to mention in my upfront comments is speed is not our most important thing in this next phase quality is, right? We want to make sure we get very good customers getting excellent outcomes because that will result in the most long-term sustainable growth..

Okay, perfect. And then -- maybe as my second question, can you expand on the international performance of the business? And I know both -- and Jeff had mentioned the FX headwinds. And even despite that, we saw pretty strong growth coming from that business.

So maybe talk about some of the underlying trends offsetting that foreign currency dynamic and even the trends that you saw in the direct versus distributor channel?.

Sure no, happy to. Yes overall, we had a really good quarter outside the U.S. And the ESS business which is primarily OverStitch outside the U.S., we only have X-Tack in a few countries cleared. We reported 24% on a GAAP basis and 35% year-on-year growth so just good continued adoption of OverStitch. Most of our business outside the U.S.

is for OverStitch is endobariatric but we are having a focus on also expanding core GI as well and the team is doing a nice job with that. Pretty good balanced growth between distributor and direct markets. And so, we're pleased with that. We also see good growth on the IGB side as well.

We've had some share wins on -- we're much more competitive outside the U.S. and Orbera really does have a great track record of tried and true. And so we continue to do well there. So we had a nice balance in our business and are pleased with how the performance went again, despite the FX piece.

And so, I don't over -- get too wrapped up in that it is what it is. The underlying fundamentals, we think, on the international side are very good. And then we are looking forward to X-Tack. No real changes on updates on that from an international CE mark.

We're still working through the MDR processes for regulatory and that's probably a 2023 event like versus 2022..

And Simran, just to add to that, just to give a little more color when you see our international performance, what you're seeing is growth in predominantly existing geographies. So we really haven't done a lot of expansion into new geographies and are yet seeing growth in new geographies.

So we're very encouraged by that because it is predominantly organic growth..

Got it. And then, if I could squeeze one quick one in there. Maybe any update on the NASH strategy? I know Jeff, you were talking about modulating spend -- in your efforts to do that. Some of the more longer-term priorities are kind of being put on the back burner for now.

So just what are your latest thoughts there any updates?.

Yes, I know that Jeff did allude to the fact that we really are focused on driving the core businesses. And we now are really looking at NASH as one of the key comorbidities associated with improvements in weight loss as well as things like diabetes and hypertension.

And so, we're really trying to look at -- as part of the integrated strategy that's going to maximize the utilization of our products. And originally, the NASH strategy started with Orbera but we really are looking at it in the context of ESG as well and especially ESG now with the clearance.

And so that is an area where we absolutely are doing a lot of homework working with thought leaders and hepatology community but also in the diabetology community and others to say which will have the greatest impact and therefore, what the clinical strategy would need to be.

So it's one that we're not rushing into a new clinical trial right now, especially given the broader economic environment..

Your next question is coming from Frank Takkinen, Lake Street Capital..

Congrats on the quarter and all the progress, I wanted to start off with reimbursement around ESG.

More specifically, just if there's any opportunity and apologies if I missed it, around establishing a temporary C code for the outpatient setting a little bit quicker than some of those other time lines that you can start generating data and maybe start to see some partial or one-off reimbursement in the outpatient setting while you await final coverage in the multiyear process?.

Yes, no, it's an insightful question, Frank and it's one that our reimbursement team is working through as part of the overall facility payment side of things. So I mentioned things like new technology codes but you're right, C codes could be part of that strategy as well. And we're working through those details right now..

Okay, helpful. And then just back to the marketing authorization. My sense there was a couple last things to complete like developing some new SKUs specific to ESG and REVISE.

One, can you provide an update on that? And then two, as it relates to that, can you talk to any potential pricing power for the weight loss indications and how that could impact gross margins over time?.

Sure, yes. So on the new -- there are new devices that were cleared the Apollo ESG and the Apollo REVISE devices. There is still some, frankly, kind of logistical elements that go into the packaging around those and being ready to ship that we would expect will still take a few months and probably be early in Q4 when we're shipping the new devices.

And that just aligns with what we expected the original time line would have been unusually FDA beat us to it but we were more than happy. So we can still train physicians. We can still speak to the procedure but the actual SKUs being available will be a few months.

And then we are also still finalizing the pricing strategy but we do expect they will be opportunity for some premium pricing that would help. But we're still working through the final pieces of that strategy because it will have long-term implications for things like reimbursement and others.

And as we get further along, we'll provide an update on that..

Okay.

And then just -- the second half of that, any comments on how it could impact gross margins over time?.

Well just that, I mean, the ability to have some pricing leverage would absolutely improve and help that and then as Jeff mentioned, the OverStitch and the components OverStitch are our primary focus areas of reducing costs as well.

So we've factored that into kind of our overall plans of getting into the mid-60s on gross margin but we'll work that as part of the overall mix as we go forward..

Your next question is coming from Matt Hewitt from Craig-Hallum..

Maybe first one and you touched on this a little bit in your prepared remarks but obviously, there was a ton of buzz around DDW for both OverStitch and X-Tack now that we're three months removed. I'm just curious, how has that kind of played out? Obviously, you've gotten the big approvals since then as well as the publication last week.

So maybe it's difficult to pull those two pieces apart.

But follow-through post DDW would be helpful?.

Yes, no, you're right, Matt. The interest level has been very high, increased awareness, especially for X-Tack as a new product and having podium presentations about it really for the first time in a big meeting just because it was one of the first really large in-person meetings has been exciting.

And that has played well and helps support the 16% sequential growth that I mentioned. And so our sales team is very much focused on building on that momentum and continuing going forward. And we have a balance, right, of now needing to be able to do that while also focusing on the endobariatric side as well.

So that will be an important thing that we're going to need to balance that is part of the rationale for the dedicated endobariatric manager roles. And so, we have a certain subset of our sales force that is 100% focused on the endobariatric side, while our reps are carrying the full bag..

Got it. And then maybe my second question, I think it was Slide 24, where you were talking about your top 10 private practice groups as well as your top 10 academic groups and the growth that they're seeing.

I guess that was one of the things that came up at DDW was that some of your top accounts are figuring out ways to navigate the reimbursement with preauthorization? As they get more adopt at doing so until you've got more formal coverage in place, is that something that kind of a road map that your other accounts can follow, especially now that you've got the formal labels.

But is that something where they can follow that road map and kind of get reimbursement kind of precharged even ahead of formal coverage?.

The short answer is yes, right. That is something -- that has -- what you heard in some of your conversations at DDW, people have been able to do that on a case-by-case basis really is some of the more sophisticated accounts who know how to do this, right and have been able to effectively navigate those conversations.

And they've been doing that independent of Apollo. We didn't have the labeling. So, we didn't have a team in place supporting those kinds of efforts. With the labeling, we can implement a team that can help support that and, for example, share best practices. It can even vary by payer, right.

Some payers will respond to certain things that really will make a difference in terms of whether a patient gets covered and learning that documenting it and helping people navigate it will be part of our strategy going forward..

Your next question is coming from Jeff [ph] from Cowen..

Chas, I wanted to just ask about the label for OverStitch ESG and just the BMI range of 30 to 50, how do you see your customer base and the future customers, physicians utilizing ESG and to BMI patients in between 40 and 50?.

I think it's a really interesting question of how it will play out. I think people, for the most part, currently assume that the sweet spot will be in the 30 to 40 range, i.e., the MERIT population and that's probably where we will start for the most part.

But there were data presented at DDW, as you may recall, by one of our customers that showed very good results in patients with the BMI over 40. I think it was consistently a 20% or more total body weight loss. And that was independent of any medications.

So one of the big speculative questions is whether combination therapies will really play a bigger role in that 40-plus range. And I certainly know some surgeons who think that it may well -- but I do think it will kind of go in that sequence.

There still is a belief that ESG is typically a little bit lower on the efficacy side but a really good safety profile and a lot of patient benefits will probably start more of a sweet spot in that 30 to 40 range and then maybe migrate up over time..

Great.

I mean what will be sub utilization that may already be of ESG in patients as a preliminary procedure to make a patient a better candidate for maybe a surgical sleeve?.

We have seen people think about a kind of bridge to surgery approach at times as well. I'm not sure how common that is. I mean we certainly have heard it a bit more anecdotally. And could that play out over time, possibly. I mean one of the benefits of ESG as you aren't cutting off future treatment options.

It's something that surgeons are very interested and know that they can do a sleeve in the future or do a bypass in the future if they choose to -- but I don't expect necessarily a bridge approach will be that widespread at least initially..

Okay, okay. And then just wanted to ask about how your team is planning on marketing durability of the ESG -- I think MERIT after two years there other publications provide a signal durability to be less longer -- up to five years.

How are you playing on marking them and just in the -- thinking about ESG revisions and how you see a path to potentially the potential for an ESG revision with an ESG procedure?.

Sure, yes. No, I appreciate the question. We have a lot of data out to two years. There was just a patient -- a study with 3,000 patients out of the Middle East with very good data out to three years and then there's limited data but some out to five years. So we're in that range.

I think our experienced customers who've already been doing this in advance of us talking about it, are careful not to promise it as a panacea and really emphasize the importance of the patient follow-up and patient management in the programs that they do and if they -- how they engage in that can really impact the durability.

But then, also, obesity is a chronic disease. And if people understand and expect that, then setting up the possible expectation that, yes, down the line, you need a retightening procedure. And we've got experience with that and good success with it. Or in the future, you may be a candidate for a surgical procedure.

These are often part of the conversations and I think we'll be part of how we market it as well..

Your next question is coming from Matthew Blackman from Stifel..

This is Colin on for Matt, just one quick one for me today, first of all congratulations on the recent approval and the strong quarter. I had a question on the midterm growth target of 20%.

Is that step-up largely ESG driven or do you also contemplate potential halo effect from ESG on the rest of the broader portfolio pull-through?.

Yes, no Colin, I appreciate that. As we've done our strategic plans, we like, as I mentioned on the call and what we've seen so far, a good balance across both products and geographies. And so I think there is a potential halo effect on -- from ESG and revisions on the balloon. And I mentioned that in terms of sustainable endobariatric practices.

We do still continue to see very good traction and growth with X-Tack and that is before the CE mark. So that can be an important growth driver outside the U.S., or especially the economic value proposition of X-Tack is very -- it fits very well with the medical systems.

But then having said all of that, I have said before, I think there is an opportunity, given the value proposition I mentioned for ESG to become a market-leading weight loss procedure -- that's not baked in -- I mean, that level of optimism isn't fully baked into that 20% number. I mean if we get to that, we'll be well ahead of that.

Just a matter of how long does it take to really put all the pieces together and untapped the opportunity. But given what we're already seeing in people connecting the dots and having good success with growth, we're excited about it.

So it's a little bit mix, very good opportunities with ESG and revisions but also balanced growth with other products as well..

That concludes our Q&A session. I will now hand the conference back to Chas McKhann for closing remarks. Please go ahead..

Just want to reiterate our thanks to everybody for joining us today and we look forward to further updates as the year progresses..

Thank you, ladies and gentlemen. This concludes today's event. You may disconnect at this time and have a wonderful day. Thank you for your participation..