Obalon Therapeutics, Inc.

William Plovanic - CFO Andrew Rasdal - CEO

Rick Wise - Stifel Kyle Rose - Canaccord Genuity Ryan Zimmerman - BTIG

Thank you. Good morning and welcome to Obalon Therapeutics' fourth quarter and full year 2017 preliminary unaudited revenue results and business update conference call.

I am Bill Plovanic, Chief Financial Officer for Obalon Therapeutics'. With me on today's call is Andy Rasdal, Chief Executive Officer of Obalon.

This morning, the company issued a press release detailing preliminary unaudited revenue results for the three months and full year ended December 31, 2017. This release can be accessed through the Investor Relations section of the Obalon website at obalon.com.

You can also access the webcast of this call from there. Before we get started, I would like to remind everyone that any statements made on today's conference call that expresses belief, expectation, projection, forecast, anticipation or intent regarding future events and the company's future performance maybe considered forward-looking statements as defined by the Private Securities Litigation Reform Act.

These forward-looking statements are based on information available to Obalon management as of today and involves risks and uncertainties, including those noted in this morning's press release and Obalon’s filings with the SEC. Such forward-looking statements are not guarantees of future performance.

Actual results may differ materially from those projected in the forward-looking statements. Obalon specifically disclaims any intent or obligation to update these forward-looking statements except as required by law.

And also note that the preliminary unaudited results we are presenting are subject to final closing in review procedures of our independent auditors and the final results may differ from the preliminary results as a result of those procedures. The archived webcast will be available for one year on the company's website obalon.com.

For the benefit of those who may be listening to the archived webcast, this call was held and recorded on January 5, 2018, since then Obalon may have made announcements related to the topics discussed, so please reference the company’s most recent press releases and SEC filings. And with that, I’ll turn the call over to Obalon’s CEO, Andy Rasdal.

Thank you, Bill. Good morning everyone.

Thank you for joining us today. On this call, I will briefly discuss highlights of our Q4 and full year ended revenue results and commercial experience, afterwards we will briefly answer questions.

2017 was a transformational year for Obalon and I am very pleased with the success we have achieved at Obalon in our first year of U.S. commercialization.

We grew the business over the full year and finished with a strong Q4. For the fourth quarter preliminary unaudited revenue was approximately $3.9 million, up approximately 400% from $772,000 in the fourth quarter of 2016.

Preliminary unaudited U.S. revenue was approximately $3.1 million, an increase of over 50% from the $2 million in Q3 2017.

Overall preliminary unaudited revenue for the full year 2017 is expected to be $10.1 million, up roughly 200% from the $3.4 million in 2016. Perhaps even more encouraging was the continued improvement in several areas we believe important for growing a sustainable franchise over the long-term.

In the U.S. Q4 2017 was our highest quarter ever for new account sales, reorders from existing accounts were the highest of any quarter to-date and for the first time, reorder revenues exceeded revenues from new account sales in Q4 2017.

According to our commercial registry, Q4 has the highest number of new patient starts, the greatest number of balloon placements and the largest number of accounts treating patients of any quarter to-date. International revenue was approximately $800,000 in Q4 2017 or about 21% of revenue as we continue to fulfill our initial stocking order for the six month gen 3 balloon to our distributor in the Middle East.

We continue to believe our greatest opportunity for creating values meaningfully executing in the U.S. and we will continue to make the U.S.

our highest priority for 2018 and beyond, our current plans do not have us expanding beyond our existing international distributor in the Middle East. We are very encouraged with the revenue and patient volume performance in Q4 2017 and it was slightly counter to our belief that interest in seeking weight loss treatment would slow substantially over the holiday period.

While patient demand was the highest of any quarter in 2017, we believe some accounts may have purchased ahead in anticipation of higher patient demand associated with the New Year. As you would expect, we are running a new year’s resolution weight loss promotion.

At this time we are not able to project what impact these dynamics will have on new account sales or reorder volume in Q1 2018. For the Navigation PMAs filling, as is not unusual, we have received a major deficiency letter from the FDA.

In the letter the FDA asked us for addition clinical data and we are working to determine the best and most efficient means to provide such data. Because this was not a rejection, once we provide a complete response we would expect to be back on the review clock.

At this time we do not believe the additional clinical data requested would require longer term follow-up as such things as weight loss or weight loss durability. Finally we’d also plan to use this opportunity to combine both the Navigation and Touch into a single system, which we believe will provide further improvements in safety and ease of use.

The current market for the Obalon balloon system is in its infancy in terms of development. We are encouraged by our progress and level of commercial success in our first full year of U.S.

sales. Our experience continues to reinforce our belief that there is significant transfers in the unique Obalon's swallowable gas-filled balloon, because it solves a very large important problem, and provides for strong economic outcomes to providers.

We will continue to make the investments we believe are required to develop the market to its potential and create a valuable and sustainable business franchise. I continue to be very optimistic about the future for Obalon.

I would now like to hand the call over to the operator, operator will you please now open the line for questions.

Good morning Andy, good morning Bill and congratulations on a really terrific fourth quarter. Let me start with just a bigger picture question.

How sustainable this -- how seasonal is this, you talked about a couple of dynamics going into the year. Can you give us a little more perspective Andy on your high level thoughts there?

Is the first quarter -- I mean, likely to be seasonally much weaker than the fourth or again give us any perspective would be great.

Yes, sure, Rick. Actually if I could take that, listen, we're building a new category here.

There is no prior path to follow we're very pleased with the success we've had. We've had the new account growth, the patient growth, the accounts placing, everything is growing.

We've had successfully stronger quarters. And as we go into this, I think it was interesting we said on the last conference call, we didn't know what the last -- what the holiday period would look like, and we ended up having a very strong finish to the year.

So I think from our standpoint, we're still building that history upon, which we can provide any future guidance. And when we have a solid footing and understand what the actual ramp looks like more than happy to provide guidance.

But we just don't have enough history yet.

So you probably won't then, even with the fourth quarter finalized and 12 month of commercialization. You probably won't be giving us more detailed guidance for 2018.

At this time Rick, I need to have enough history. I don't think one year of history is enough to predict the future off of.

Got you. Turning to the sales force, clearly the initial experience is positive.

Clearly the team is being very productive your sales and marketing team. Andy just some updated thoughts about what are your plans from here, your thoughts about further expansion.

I assume that there are more productive gains ahead. Can you talk about that?

Yes, sure. I think we -- a lot of learning, a lot of pilot programs throughout the year, which I think we’ve been able to learn from and then optimize to become more targeted, more efficient more effective.

I think every day the sales force becomes more knowledgeable. Certainly we added those practice development managers into the sales force in Q3.

It would appear that they begin to have good impact based on the patient flow that we saw in Q4. So we're encouraged and I think every quarter goes by, I think we’re little more confidence that we have a repeatable more sustainable model.

And so I think we'll begin to expand the sales force when we think it makes financial sense and will create the appropriate value in return for that. But I don't have any specific guidance on the timing or the extent of that at this time.

Okay. Just one last one for me, it went by a little quickly the request for data from FDA on the navigation system.

Can you just flush out your comments a little more there? Again it went by quickly, what do you think you're going to need to do to give us any perspective on possible timelines and how critical -- obviously navigation system seems like a terrific product.

How critical is getting that taking care of expeditiously, how critical is that to the 2018 outlook or not? Thank you.

Yes, sure, Rick. Thanks.

I think first and most important; we believe the product we're selling today commercially is a very strong offering and that there continues to be a strong interest and demand. I continue to be very pleased with both the clinical and technical performance of this product.

I think it's performing unlike anything that has been in the market before or is currently in the market and that continues to be encouraging. So -- and it's not as if this is our very first generation of product ever launched.

So this is essentially third generation of balloon for us already. So I think we feel strongly.

No question we're excited about the potential for not only navigation, but the ability to combine it into touch. In terms of the clinical data, essentially it's going to be some more balloon deployments.

The data we will have to provide is essentially acute deployment data. We intend to leverage some of our higher volume commercial centers to rapidly collect that data hold together our response and as quickly as we can get back into on the review clock with them.

It was not a rejection so we don't have to start over. As you know that deficiency letter is the primary mechanism the FDA has to request additional information or obtain additional answers to questions.

But again as we've said previously, we don't control the FDA timing and I'm not going to try to predict what their timing will be.

Thanks, and congrats on the excellent finish for the year.

Yes, thanks, Rick.

Great. Thank you very much for taking the questions.

Can everyone hear me all right?

Yes. Good morning, Kyle.

Good morning, Kyle.

Good morning, gentlemen. So I just want to echo ricks positive comments as far as the strong close to the Q4, so hats off from that standpoint.

Wanted to talk a little bit about the upside, I mean, you touched on a little bit as far as potentially maybe a little bit of stocking in to prepare for the Q4 or for the Q1 revolution push? And I just wanted to see if you could try to flush that out a little bit as far as how you think about Q4 to Q1 seasonality and whether or not we should it's fair to think about a slowdown in the Q1 just given there were some potential for stocking in the Q4?

And then also just you talked a lot about the Sono Bello partnership or customer agreement that came on in the Q3. Did you see any of that in the Q4 and just kind of how we should think about that relationship moving into 2018?

Yes, Kyle. I'll start with Sono Bello, so Sono Bello as we mentioned they became a customer in Q3.

We're very pleased, they have started to treat patients, but they were -- as we've expected but they were not a meaningful contribution to Q4. So they are up and running, they are treating patients we’re very pleased with the partnership thus far.

In terms of seasonality, I go back to our comments on last quarter's conference call or Andy's comments of -- we didn’t know what the back half the quarter would look like and we were pleasantly surprise it was very strong and fourth quarter was our strongest month and our strongest quarter. I just can't predict what Q1 is going to look like, typically Q1 is very solid for patient flow, but we need the accounts to continue to treat patients.

So, we'll be monitoring this, but I can't provide you any guidance and what that's going to look like at this point in time.

Okay.

Yes, and I think the only thing I would add Kyle is there wasn't -- it wasn't just sort of revenues right that surprised us during the fourth quarter. It was literally having the most number of accounts treating, the most number of patients treated in that timeframe would have been counter to what we would have the seasonality which off course makes a little reticent to predict what Q1 maybe.

Certainly I just have to turn on the TV to see number of weight loss ads and health club ads. So I think we're encouraged, but we've never been through this with accounts in place, this would be our first quarter of the year where we come in with the accounts up and running.

That's fair, that make sense. And just -- you touch in a little bit more on that utilization and you gave a lot of positive metrics in the Q4, I mean, everything's going in the right direction, but I just wanted to see are there any discernible trends that you've seen as far as the utilization in your account base?

As you moved through 2017, I mean, are the roll the accounts doing more patients or is there high density in some regions versus other regions, just trying to understand how that utilization pattern has happen starting into Q1 and then translating into the Q4 where we finally saw the reorder rates exceed the new account starts?

Yes, I think well again I think hit the thing that would make us again what we tried to say since we began this is we're trying to build a sustainable model based upon reorder and utilization not simply creating stocking order into new accounts and moving on. And so, I think Q3 and especially Q4 begin to validate that perhaps we're getting some of the right approaches.

It’s still the point though candidly where I can’t comment any specific trends, any specific geographical trends or we're still in really and relatively limited number of markets. There is nothing they still tend to be a fair amount of -- our metrics still have a fairly wide range and the mean and the median don't necessary lie across each other.

I think the trend we do see is I think we see our PDM role beginning to have the impact and to becoming a little more efficient and making sure that we drive the utilization within accounts.

And lastly and I'll hop back in queue. Just you are one year in obviously it feels like the registry will be a powerful tool moving forward.

Just wanted to see when you expect we might be able to start seeing some of that real world registry data and when that will better inform metrics moving forward?

Yes, I think we're figuring out what is the best vehicle and form to have that data presented or published. For sure, our history has been that we would prefer to do that in a valid scientific forum presented by clinicians rather than just simply put out a marketing white paper.

And I'm not -- we're not sure what the best meeting for that will be. But we're certainly pursuing that.

Great, thank you very much. Congrats on a strong Q4.

Thanks, Kyle.

Thanks.

Thanks for taking the questions. Can you guys hear me okay?

Yes, Ryan. Good morning.

Good morning, Ryan.

Good morning. Fully echo the sentiments congrats strong end of the year.

Andy you've just touched on it briefly on the various roles amongst your sales force. You added some additions to help with account utilization through the year.

And I'm just wondering if you could expand on that a little bit further and talk about other opportunities amongst your various geographies where you maybe haven't backfilled those roles or infill those roles to support the more hunting type sales reps. And how should we think about those other new on sales roles into next year?

Yes, just as you know we have really three distinct roles. We're really pleased that I think we're the only company that fully staffed a product specialist role.

Because anytime you launch a new and novel technology like this say you never want to take anything for granted and make sure that the product is implemented in a manner which is of course safe and effective and more importantly that as you get through the first five or six months of launch patients were actually losing weight and reinforces everybody's experience with the product. So that contingent of folks is full.

We always had and we called our account executive managers who you would refer to as the hunters, who are prospecting qualifying and targeting new customers and then the practice development manager I commented on previously to work hand-in-hand to organically drive patient flow and utilization through those practices. Obviously that appears to have begun to gain traction and in Q4 and we're pleased with that highest number of patient flow.

The AMs [ph] appeared to be pretty productive in Q4 substantial increase of course over Q3 and the highest quarter ever. So I think we like more or less the model we have, but as you I think noted your comment there is geographies for instance like New England that we are essentially just absent from.

And I think we'll begin to pounder the question, when we have the repeatable model, does it make expense to extent financially to reach into those territories.

Okay, appreciate the color there. And then just want to talk a little bit about DTC and some of the marketing that you've done.

I mean, you've had pretty good if not really good social media metrics that you've done earlier in the year that has driven fills your pipeline and your funnel. Just if you could talk a little bit about kind of the social media pipeline, the funnel that you're filling, the promotions that you've done through the back half of this year.

And what that impact may have been from your perspective on the success of the fourth quarter?

Sure. I think as we've said, every day I continue to be amazed by the interest and the potential impact of social media and digital media.

We continue to be very measured and targeted in any spend. I would say without question all of our metrics have showed one that interest continues to be very high at just a general patient level.

The nice thing about the digital media and as I think I mentioned before, we don't outsource that to an agency we decided before we launched the product that we’d create and hire that expertise in-house. The team we have doing that is just exceptional and the nice thing is the feedback is very quick anytime you launch any kind of social media or digital campaign the results were almost immediate, which has allowed us to sharpen our focus and make that become more efficient.

And I think as we do the full quarter call, we'll talk about the overall top-line metrics at that time how the year and the quarter finished out. But every indication again is it continues to be very strong.

Okay. And then just lastly for me and you think about I know we have talked about trends a bit I mean, if I can just dig a little deeper.

When you talk to your clinicians some of your best account users and you had clearly success with new account this quarter. What resonated with them, was it the clinical trial, was it the ease of use of the product, I mean, what sticks out in your mind that's driving new account growth over this past quarter that really stuck out the physicians.

If you could pinpoint something?

Well I think it was hard to talk to them, because we had them so busy at the end of the year, Ryan. But I think anecdotally as we go in it’s one, in terms of the accounts that have had experience now, they have happy patients who didn't have any adverse events or significant intolerance or system reactions, which I think was encouraging.

The ease of use, the convenience that the product offers enables them to make it efficiently incorporated into their practice. And I think increasingly those customers are pleased with our financial outcomes from this -- from the Obalon product.

I think for new customers, I think we are getting to a point now where we are starting to get some momentum where the existing customers are starting to talk about their successes and that's flowing out now to the new account acquisition. I don't want to take anything away from the hard work of our executive account managers in getting new accounts.

But I think this is now creating some sort of organic momentum within each of the specialties they are sharing some of their positive experience and that's helping us to move it forward.

Thank you guys for taking the questions.

Thanks, Ryan.

Great, this concludes today’s call, thank you for your participation.