On May 4, 2020 Apollo Endosurgery, Inc. ("Apollo") (Nasdaq: APEN), a global leader in less invasive medical devices for gastrointestinal and bariatric procedures, reported financial results for the first quarter ended March 31, 2020 (Press release, Apollo Endosurgery, MAY 4, 2020, View Source [SID1234556957]).
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First Quarter 2020 and Recent Highlights
•First quarter U.S. OverStitch Endoscopic Suturing System ("ESS") sales increased 25% to $3.8 million
•Implemented cost reduction initiatives to preserve liquidity in response to the COVID-19 pandemic, which are expected to save more than $7 million in cash during the second quarter
Todd Newton, CEO of Apollo, said, "The first two months of 2020 started very well for Apollo, particularly in respect of ESS demand in our direct markets. However, the COVID-19 pandemic and resulting actions brought an unprecedented decline in the allocation of global healthcare resources for elective or deferrable medical procedures, including those that use our products, and the impact on our March sales was significant. We expect the second quarter of 2020 will continue to be very challenging. In response, we have implemented aggressive cost reduction measures for the second quarter to preserve capital to the maximum extent possible, while maintaining the flexibility to respond to demand signals and positioning the Company to thrive again as procedures return."
U.S. ESS product sales increased 25% to $3.8 million for the first quarter of 2020. Outside the US ("OUS"), ESS product sales decreased 12% (8% in constant currency) to $3.1 million for the first quarter of 2020 primarily due to the onset of the COVID-19 pandemic delaying distributor orders scheduled to ship in March. OUS ESS product sales in direct markets, excluding Brazil which we transitioned from a direct market to a distributor market in early March, increased 11% (15% in constant currency). Worldwide, ESS product sales increased 5% (8% in constant currency) to $6.8 million for the first quarter of 2020.
U.S. IGB sales decreased by $0.6 million for the first quarter of 2020 and OUS IGB product sales decreased $0.2 million, or 8% (5% in constant currency), for the first quarter of 2020 primarily due to the COVID-19 impact in our direct markets which offset an increase in IGB distributor orders.
In total, U.S. Endoscopy sales increased 4% to $4.7 million for the first quarter of 2020. Worldwide Endoscopy product sales decreased 4% (2% in constant currency) to $10.4 million for the first quarter of 2020. ESS product sales represented 66% of total Endoscopy sales for the first quarter of 2020, compared with 60% for the first quarter of 2019.
Total GAAP revenue reported in the first quarter of 2019 included $2.3 million related to transition services that we rendered in that period related to the Surgical product line that we divested in December of 2018 compared to $0.2 million in the first quarter of 2020. As a result, total GAAP revenue reported for the first quarter of 2020 declined by $2.5 million compared to the first quarter of 2019.
Gross margin for the first quarter of 2020 was 53%, compared to 55% for the first quarter of 2019 when we realized gross margin on the continuing transition services rendered on the Surgical product line. Gross margin realized on our Endoscopy products increased 124 basis points in the first quarter of 2020 compared to the first quarter of 2019.
While total operating expenses, as reported, increased $2.5 million for the first quarter of 2020 compared to the first quarter of 2019, this is due to a one-time settlement gain of $5.6 million settlement gain that reduced operating expenses in the first quarter of 2019. Excluding the one-time settlement gain, total operating expenses decreased $3.1 million for the first quarter of 2020 and our loss from operations decreased by $1.5 million, or 18%. This reduction in recurring operating expenses was primarily the result of lower direct to consumer advertising, lower selling costs such as compensation and travel, and lower clinical trial costs. Net loss for the first quarter 2020 was $10.3 million compared to $2.8 million for the first quarter 2019.
Cash, cash equivalents and restricted cash were $24.0 million as of March 31, 2020.
COVID-19 Response
As a result of the COVID-19 outbreak, a number of countries, particularly countries in Europe that comprise the majority of our OUS sales and the United States, implemented a variety of public health interventions in March to reduce the risk of disease transmission and conserve healthcare resources for addressing the community health needs of COVID-19. These measures also to a large degree paused patient access to elective or deferrable procedures, including those that use our products.
In response, Apollo has taken several interim actions to preserve cash while maintaining customer support and critical growth projects. We initially reduced 2019 cash bonuses, implemented compensation reductions across our workforce, reduced or delayed inventory purchase commitments, and cut operating expenditures across the company. We took additional actions in mid-April, including the furlough of approximately 90 employees across our global workforce and capping annual compensation rates at $100,000. The objective of these temporary cost reductions is to keep our cash use during the second quarter of 2020 at the same level we were expecting prior to COVID-19.
While taking these steps, we have maintained sufficient commercial resources in key markets to support essential customer needs and monitor product demand trends. We are also proceeding with critical growth projects, including the MERIT trial and other reimbursement initiatives, new product development efforts for suturing in the lower GI tract, and select projects expected to improve critical aspects of our supply chain.
Conference Call
Apollo will host a conference call on May 4, 2020 at 3:30 p.m. Central Time / 4:30 p.m. Eastern Time to discuss operating results for the first quarter ended March 31, 2020.
To participate in the conference call dial 844-369-8770 for domestic callers and +1-862-298-0840 for international callers. A live webcast of the conference call will be made available on the "Events and Presentations" section of our Investor Relations website: ir.apolloendo.com.
A replay of the webcast will be made available on Apollo’s website, www.apolloendo.com following the event.