ReShape Lifesciences Inc. (NASDAQ:RSLS) Q1 2023 Earnings Call Transcript May 15, 2023

ReShape Lifesciences Inc. beats earnings expectations. Reported EPS is $21, expectations were $-4.21.

Operator: Good afternoon, and thank you for joining the ReShape Lifesciences First Quarter 2023 Conference Call. I would like to turn the call over to Michael Miller from Rx Communications.

Michael Miller: Good afternoon, and thank you for joining the ReShape Lifesciences first quarter 2023 earnings call. I’m pleased to be joined today 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 period. He will then turn the call back over to Paul for some closing remarks, after which, we’ll open the call to a 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 NASDAQ, trading under the symbol RSLS. I will now turn the call over to Paul Hickey, President and CEO, ReShape. Paul?

Paul Hickey : Thank you, Mike. I’d like to thank all of you for joining us this afternoon for our first quarter 2023 earnings call. In the first quarter of 2023, we have continued to execute our strategies to become a sustainable and scalable organization on a path towards growth and profitability. Before I delve into our first quarter highlights, I’d like to briefly remind you of our three growth strategies or pillars for growth. Our first pillar is to operate our business with a disciplined metrics-driven approach to drive predictable revenue growth through a sustainable and scalable business model. Key to this first strategy is the revamping of our lead generation initiatives. The second pillar is to continue to expand our product portfolio and pipeline across the care continuum.

And our last pillar is to continue to validate our evidence-based weight loss solutions leveraging our scientific advisory board for key insights on strategic initiatives. I’m proud to say that during the first quarter, we had many successes, in particular, before onetime adjustments, we significantly reduced operating expenses by 43% as compared to the first quarter of 2022, allowing us to invest in our growth initiatives, including marketing and R&D. Additionally, these cost reductions, combined with our laser focus on executing on our growth pillars to drive revenue, put us in a strong position to achieve our goals. Before I further detail our highlights and upcoming initiatives, I’d like to mention the enormous market opportunity before us.

The global multibillion dollar obesity market opportunity remains largely untapped. Currently, 2.5 billion people or more than 30% of the global population is considered overweight or obese, a figure that’s expected to grow by 50% by 2030. The global weight loss and obesity management market is expected to rise an estimated value of $300 billion, representing a substantial compound annual growth rate of 6.7% from 2019 through 2026. Drilling down a bit, the overall bariatrics surgical device market alone is projected to reach $2.8 billion worldwide by 2025, with the U.S. portion accounting for $1.8 billion in the same time frame. Additionally, with 50% of adults in the U.S. trying to lose weight every year, we believe our differentiated suite of weight loss and metabolic health solutions is well positioned to address the entire weight loss continuum.

Moreover, according to the FDA, approximately 70% of American adults ROB server weight, resulting in serious health issues and tremendous costs. It’s important to remember that weight loss is tied to a dramatic drop in an individual’s cancer risk that can help lower blood pressure and manage diabetes. The most recent development in obesity market is the media and recent consumer adoption of GLP-1 agonist for weight loss. The related big pharma marketing efforts have significantly increased the number of obese individuals who are seeking medically managed weight loss. While in the past, obesity has been a sensitive topic and treatment has not been normalized, we are pleased to see a shift in perception as well as a greater awareness and acceptance of how critical obesity care is for both adults and children.

Given the known limitations of behavioral modification, 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 a safe, effective and durable solution providing long-term weight loss. Now let me turn back to the discussion of our recent highlights and growth initiatives. Based on the cost reductions I previously mentioned, we remain on path to profitability, with the balance sheet bolstered by two capital raises this year totaling $12.7 million in gross proceeds. These funds will allow us to invest in our growth drivers in order to expand awareness of our evidence-based product portfolio, including the Lap-Band.

We are steadily increasing visibility for the Lap-Band through our highly targeted direct-to-consumer marketing campaign, which has already helped yield higher-quality and lower-cost patient leads in specific markets that align with our surgeon advocates. Through our experience, we know the primary driver of Lap-Band surgeries is patient engagement. As I mentioned on our last call, we are strategically targeting key touch points in the patient’s decision process for surgery including developing an improved patient-centric website experience, which we’re on target to launch in the third quarter. This will also be combined with the launch of a marketing automation initiative 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.

We are building these core competencies in-house, including our call center to align with the marketing automation and lead nurturing efforts. Even when considering the new technology, implementation and headcount associated with these efforts, we believe we can save money while ensuring ongoing optimization and nimble marketing to responsive to the market. In summary, we’re improving our marketing efforts to better address patient needs with the intent of increasing conversions on the website driving more brand engagement and ultimately, more Lap-Band surgeries. At the upcoming ASMBS meeting in June, we will have the first full meeting of our recently formed Global Scientific Advisory Board comprised of internationally recognized experts and surgeons in the obesity and metabolic disease fields.

ReShape’s SAB provides us access to an extensive and unparalleled knowledge base as well as relationships and insights that will be invaluable as our SAB members provide feedback on our growth initiatives. We expect that each member will be integral in helping us expand access for patients to safe and effective treatments for durable weight loss. This is critical as we continue to execute our disciplined approach to drive revenue and expand our product pipeline. To that end, one of our newly launched products is the redesigned calibration tubes with 3 new sizes, which are used in a broad range of rate procedures such as laparoscopic sleeve gastrectomy and gastric bypass. We expect to reship calibration to add incremental new customer revenue this year.

It is important to reiterate this product is used in procedures other than the Lap-Band and therefore, provides a great opportunity for us to increase future revenues. Further, in the coming weeks, we intend to submit a PMA supplement to the FDA for the next-generation enhanced Lap-Band 2.0, which was developed with physician feedback to improve the patient experience. Similar to our current Lap-Band, the Lap-Band 2.0 is adjustable postoperatively to increase or decrease the opening of the band in order to optimize an individual’s comfort, thereby improving the therapy effectiveness. At the same time, a unique feature of the Lap-Band 2.0 is an enhanced band reservoir technology that serves as a relief valve designed to alleviate this comfort from swallowing large pieces of food that may require in-office patient band adjustments.

We expect feedback from the FDA by year-end and if approved, we believe based on discussions we’ve had with physicians that there will be broad adoption by existing and new surgeons. As I’ve noted in the past, surgeons I have spoken with about the improved product believe the Lap-Band 2.0 will allow us to engage new surgeons and reengage many of those who have used the Lap-Band historically. At the same time, we continue to engage with health care professionals to expand awareness and use of personalized treatments, including both our proprietary Lap-Band and the HIPAA-compliant novel weight management program, ReShapeCare to ensure that patients can achieve durable weight loss goals, improvements in obesity-related commodities and quality of life.

Additionally, we continue to engage several large self-insured employers to provide reshape care to the employees in order to positively impact overall employee health and thus reduce employers’ health care costs. The reception from our discussions have been very positive. As a reminder, ReshapeCare weight management program supports healthy lifestyle changes for all persons, not just individuals who qualify for Lap-Band surgery. We look forward to sharing updates on this exciting program in the future. Well, one of our most compelling pipeline products is our proprietary Diabetes Black Stim Neuromodulation, or DBSN device. The DBSN dual Vegas nerve neuromodulation selectively modulates vegablock and stimulation to the liver and pancreas respectively, to manage insulin and blood glucose levels.

We had the opportunity to present compelling preclinical evidence on the DBSN at the recent Keystone Symposium on type 2 diabetes, demonstrating that this technology may be able to reduce diabetes dependent — diabetic patients, dependence on medications in a very individualized manner. As a reminder, the DBSN has been funded with non-dilutive NIH grants, and we’ll continue to collaborate with leading researchers and industry-leading strategic corporate partners, while seeking additional NIH grant support. We believe that if approved for commercial use, the DBSN device will further enhance our differentiated medical device offerings. Now before I wrap up my opening remarks, I want to remind our listeners that one of reshapes many assets is our strong intellectual property portfolio of 155 patents surrounding all of our products, including the Lap-Band ReShape DBSN device and ReShape Obalon balloon system.

We have worked diligently to strengthen our IP position, most recently evidenced by the noticeable allowance from the U.S. patent office for an additional patent covering the ReShape Obalon Balloon System. As always, we will continue to build offensive mode around our product portfolio and commercialization efforts and also take offensive action when it is appropriate. I would now like to turn the call over to Tom Stankovich to provide a recap of our financial performance. Tom?

Tom Stankovich : Thanks, Paul. And once again, thank you all for joining our webcast this afternoon. As a reminder, a full discussion of our financials is available in our press release and 10-Q. Before I discuss some of our financial details, I want to point out that before onetime adjustments, our $4 million or 43% reduction in operating expenses reported in the first quarter of 2023 as compared to the first quarter of 2022 and was consistent across all expense categories and is evidence of our focus on achieving greater operating efficiencies. These reductions, combined with our expectation for increased revenue resulting from our targeted digital media campaign focused on geographies near bariatric surgery centers that sell the Lap-Band system and the recently launched and redesigned reshape calibration tubes are expected to positively impact revenue for the remainder of 2023 and move ReShape closer to cash flow breakeven.

Moving on to other key financial metrics for the first quarter ended March 31, 2023. Our revenue totaled $2.3 million for the three months ended March 31, 2023, which represents a contraction of 6.3% or $200,000 compared to the same period in 2022. The primary reason for the slight decline is a decrease in sales throughout Europe. Our expectation that revenue will continue to increase through the remainder of 2023 and as we focus on a targeted digital media campaign near bariatric surgical centers that sell the Lap-Band system and have fully launched the three new sizes of calibration tubes. Gross profit for the three months ended March 31, 2023, and 2022 was $1.2 million. Gross profit as a percentage of total revenue for the three months ended March 31, 2023, and with 53.5% compared to 49.9% for the same period in 2022.

The increase in gross profit percentage is due to the company becoming more efficient and continuously looking for further cost reductions within our manufacturing processes. Sales and marketing expenses for the three months ended March 31, 2023, decreased $2.5 million or 53.5% and to $2.2 million compared to $4.7 million for the same period in 2022. The decline is primarily due to a decrease of $2.4 million in advertising and marketing expenses as we have reevaluated our marketing approach and moved to a targeted digital marketing campaign, resulting in a reduction of costs. There were also reductions in sales personnel and stock-based compensation, partially offset by increases due to the development of the ReShapeCare platform. General and administrative expenses for the three months ended March 31, 2023, decreased by $1.2 million or 30.7% and to $2.7 million compared to $3.9 million for the same period in 2022 before onetime adjustments of $1.7 million for professional services related to our fundraising activities in February 2023.

The decrease is primarily due to a decline in stock-based compensation and payroll expenses, along with a decreased amortization costs and rent. There were also many miscellaneous reductions in G&A expenses as we continue to see work on efficiencies and cost reduction efforts. Research and development expenses for the three months ended March 31, 2023, and decreased by $300,000 or 39.2% to $500,000 compared to $800,000 for the same period in 2022. The decrease is primarily due to a reduction in payroll expenses along with consulting and clinical related costs. We ended the quarter with $9.1 million of cash and cash equivalents and remain debt free on our balance sheet. As we continue in 2023, we anticipate our revenues increasing steadily and continue our control and reduction of operating expenses, and we believe there is sufficient cash on hand to fund our current operations into 2024.

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

Paul Hickey : Thank you, Tom. Before we open the call up for Q&A, it’s important to reiterate that we are committed to 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 executing on our plan for success in a global market that is changing in historic fashion to normalize safe and effective treatments for obesity. As Tom detailed, we have significantly reduced operating expenses across all categories, so we can invest in growth initiatives. We’re laser focused on executing on our growth pillars to drive revenue with an expanded portfolio of transformative technologies that consists of a selection of patient-friendly, not anatomy changing lifestyle enhancing products, programs and services to treat obesity and metabolic diseases across the entire care continuum.

This concludes our prepared remarks. So now we’d like to open the call for your questions. Operator?

Q&A Session

Operator: Certainly. [Operator Instructions] And our first question will come from Jeremy Pearlman of Maxim. Your line is open.

Operator: [Operator Instructions] And I’m showing no further questions. I would now like to hand the call back to Paul Hickey for closing remarks.

Paul Hickey : Thank you. Well, I hope we’ve been successful in relaying the progress we have made towards rightsizing organization to be a sustainable, scalable company and how excited we are to remain excited to remain about the future. We’ll continue to work diligently to build our commitment to provide evidence-based personalized devices and therapeutics, including the FDA-approved minimal base Lap-Band. I want to. Thank our employees, our board members, our customers, vendors, existing and new shareholders for your continued support of ReShape. It is truly an exciting time as we continue to solidify our position as a premier physician-led weight loss and metabolic health solutions company. I look forward to further engaging all of our stakeholders, health care partners and shareholders. Thank you.

Operator: And ladies and gentlemen, this concludes today’s conference. Thank you for participating. You may now disconnect.