Allurion Technologies - Q4 2023

Transcript

Michael Toomey (Head of Investor Relations)

Good morning, and thank you all for joining us today. Earlier today, Allurion Technologies, Inc. issued a press release announcing financial results for the quarter ended December 31, 2023, and describing the company's recent business highlights. You can access a copy of the announcement on the company's website at www.investors.allurion.com. With me on the call today are Shantanu Gaur, Founder and Chief Executive Officer, and Chris Geberth, Chief Financial Officer. Shantanu will begin the call by discussing the quarter's business and operational highlights. Chris will then provide a review of our financial results, and we will close the call with a question-and-answer session.

Before we begin, I would like to inform you that comments mentioned on today's call may be deemed to contain forward-looking statements made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995, including but not limited to: the financial outlook for 2024, the market and demand for our products and elective procedures, the impact of cost reduction initiatives on cash burn and runway, and the ability to compete with GLP-1 drugs or use the Allurion Program in combination with GLP-1 drugs. Actual results may differ materially from those expressed or implied as a result of certain risks and uncertainties. These risks and uncertainties are described in detail in our Securities and Exchange Commission filings, including our most recent 10-Q filed on November 14, 2023. Our SEC filings can be found through our company website at investors.allurion.com or the SEC's website.

Investors are cautioned not to place undue reliance on such forward-looking statements, and Allurion undertakes no obligation to publicly update or release any revisions to these forward-looking statements. Please note that this conference call is being recorded and will be available for audio replay on our website at allurion.com under the Events and Presentations section on our Investor Relations page shortly after the conclusion of this call. Today's press release and supplementary financial data tables have been posted to our website. With that, I will turn it over to Shantanu.

Shantanu Gaur (CEO)

Thank you, Mike, and good morning, everyone. Revenue in the fourth quarter of 2023 totaled $8.2 million, and revenue for the full year 2023 totaled $53.5 million, in line with our pre-announcement in early January. While our fourth quarter results reflected macroeconomic headwinds in certain markets leading to what we believe were temporarily lower reorder rates as distributors and certain accounts adjusted their inventory levels, these markets appear to be stabilizing, and we are seeing improving demand. Our global market checks affirm our expectation that we will see continued improvement throughout 2024. Given this, we are guiding revenue in the range of $60 million-$65 million, representing growth of 13%-23%. Notably, for the full year 2023, procedural volume, which we estimate through new app user data, increased by 30% compared to 2022.

This growth showed strong consumer demand for the Allurion Program, which, despite significant reductions in overall marketing spend, we expect to continue in 2024. In addition, we recently completed strategic cost reduction initiatives, right-sizing our business ahead of a pivotal 2024. This included a reduction in force, which we expect will reduce our cash burn to approximately $30 million for the full year. These actions, as well as our recent debt paydown, are intended to increase our operational and financial flexibility, position the company to navigate an evolving economic landscape, and extend our financial runway for sustained future growth.

Chris will provide additional details on our fourth quarter performance and our outlook in a moment, but I would like to provide additional details on our most important near-term initiatives: the Audacity FDA trial, our post-market clinical pipeline, capitalizing on the increased market opportunity we believe GLP-1s provide, and the expansion of the Allurion Virtual Care Suite as a B2B SaaS offering. As I reflect on Allurion's fourth quarter, only our second quarter as a publicly traded company, I am proud of the milestones we have achieved in the past 12 months. In October, we completed enrollment in our Audacity trial, a randomized, pivotal controlled trial designed to support a pre-market approval application, or PMA, for the Allurion Balloon to the U.S. Food and Drug Administration. We completed enrollment two months ahead of schedule after receiving unprecedented interest from U.S.

subjects, and the interest we observed for the Audacity study amidst the pervasive interest in GLP-1s and anti-obesity medications further underscores just how massive we believe the market opportunity is. We will be providing further updates on the Audacity trial and our PMA submission on future calls. In addition, throughout 2023, we presented several scientific studies that demonstrate the transformational nature of the Allurion Balloon. For example, in a 5,000-patient study, the largest gastric balloon study of its kind, results showed patients lost 14% of their total body weight four months after balloon ingestion. In a separate 522-patient study, results showed patients maintained 95% of their weight loss 16 months after initial balloon ingestion. Allurion has also approved for a second balloon treatment. With a two-balloon program, the results are even more impressive. In an initial study, our patients were able to achieve 23% weight loss after 12 months.

Taken together, these results underscore the significant and sustainable weight loss that can be achieved through the Allurion Program without expensive surgery or drugs. Importantly, we have demonstrated the Allurion Program can be used effectively in combination with GLP-1 drugs. Results from two recent studies of more than 100 patients showed an approximately 18% weight loss in just four months and approximately 19% weight loss at eight months. We also see tangible catalysts that we expect will increase the scope of the patients we are able to assist. Today, broad awareness of the Allurion Program remains relatively low. Our data show that approximately one-third of our patients previously tried GLP-1s before starting on Allurion. Additionally, 45% of our surveyed healthcare providers have stated anti-obesity medications boost awareness and interest in the Allurion Program.

While GLP-1 drugs may have contributed to the short-term headwinds we faced in the second half of 2023, we believe that new anti-obesity medications can be a powerful driver of patient demand in the long term, since studies show over two-thirds of patients who have started one of these new drugs discontinued it within the first year, leaving them to search for a second-line therapy. We believe our weight loss program is further amplified when combining the balloon therapy with Allurion's holistic behavior change program. To deliver this program at scale, we have developed a suite of digital tools, including our proprietary Virtual Care Suite, or VCS, which is an AI-powered remote monitoring platform that continuously monitors patients and facilitates clinician intervention through secure messaging and telehealth. This allows patients to stay on course with their weight loss objectives.

Integrated with the Allurion mobile app and connected scale, the VCS provides real-time patient data, with 82% of providers reporting higher patient engagement, 87% reporting increased patient accountability, and 88% reporting improved efficiencies in their practice. The program comprises over 100 modules, covering topics such as healthy eating, exercise, sleep, and stress management. These modules are delivered to patients throughout their balloon journey, providing comprehensive support for sustained lifestyle changes. With last year's introduction of Coach Iris, a personalized, AI-powered 24/7 weight loss coach, we are now seeing even better results throughout a patient's weight loss journey and are happy to report that in-app sessions for the platform are up over 60% year-over-year, with over 4.1 million total app sessions in 2023.

To support this growth, we have begun to commercialize our digital platform with a B2B SaaS model that calls upon large weight loss clinics in need of a solution to manage high volumes of patients. In January, we announced three exciting commercial agreements, with Weight Doctors, Germany's largest weight loss clinic chain with 12 locations and more than 2,000-patient already onboarded onto the VCS. Transform, the U.K.'s largest aesthetic and weight loss clinic chain with 16 locations; and Lazeo, France's largest aesthetic and weight loss clinic with 135 locations, all of which signed for 2024. Turning to the long-term opportunities, obesity is a massive worldwide epidemic. The growing prominence of GLP-1 drugs is a strong indicator of just how large the market for weight loss solutions is, with analysts projecting $50 billion of revenue by 2030.

We continue to be excited about the buzz that GLP-1 drugs are bringing to weight loss therapies, creating interest among patients to seek medical weight loss options and driving more patients toward the Allurion Program. Bottom line, we believe we are just scratching the surface of this massive obesity market. With that, I'd like to turn the call over to Chris Geberth, Allurion's Chief Financial Officer, for a full review of our financials. Chris?

Christopher Geberth (CFO)

Thank you, Shantanu, and thank you all for joining the call today. Fourth quarter revenue totaled 8.2 million, a decrease of 57% from the fourth quarter of 2022, as we shifted our marketing spend to more efficient channels, sought deeper penetration in key markets, and focused on reducing our channel inventory from earlier in the year. Gross margins in the quarter were 78% compared to 79% the same period a year ago. Sales and marketing expenses of 10.7 million decreased by 4.2 million, or 28% for the quarter, driven largely by reductions in spending as we shifted our focus to reducing cash burn. Research and development expenses increased by 339,000 to 6.1 million in the quarter as we continue to invest in the FDA Audacity trial.

General and administrative expenses of 15.4 million increased by 10.7 million, driven by $7 million in accounts receivable reserves and $3 million in stock-based compensation and public company expenses. Loss from operations for the fourth quarter increased by 15.6 million to 25.7 million compared to 10.1 million in the same period in 2022. The increase in loss from operations was driven by a $9 million less gross margin due to low revenue and increased accounts receivable reserves and stock compensation expense, partially offset by a reduction in sales and marketing expenses. As of December 31, 2023, we had cash and cash equivalents of 38 million, an increase of 30.4 million from December 31, 2022, as a result of the completion of the business combination with Compute Health in August 2023 and partial paydown of debt in December 2023.

Revenue for the full year ended December 31, 2023, was 53.5 million compared to 64.2 million in 2022. As previously discussed, Allurion's business combination with Compute Health closed later than planned, and as a result, we delayed sales and marketing initiatives during the year. We began to reinvest in the middle of the third quarter, and we believe that those investments will lead to procedural volume growth in future quarters. With that, I would like to turn the call back to Shantanu for some final thoughts before we begin the questions and answers portions of the call.

Shantanu Gaur (CEO)

Thank you, Chris. I expect 2024, the 15-year anniversary of Allurion's founding, to be a pivotal year for the company. Earlier this month, in a study published in Lancet, researchers concluded that over 1 billion people, or one-eighth of the global population, now suffer from obesity. This is a stark reminder of how much opportunity lies ahead of us. We have launched several exciting initiatives to expand distribution of the Allurion Program globally, advance our artificial intelligence platform, and most importantly, improve patient outcomes. More recently, we have taken the steps we believe are necessary to set our business up for long-term success and sustainability. We are entering 2024 with a solid foundation in pursuit of our mission to end obesity around the world. With that, I would like to begin the questions and answers portion of the call. Operator, please open the call for questions.

Operator (participant)

question, please press star followed by the number 1 on your telephone keypad. If you would like to withdraw that question, again, press star one. Your first question comes from the line of Matt Taylor from Jefferies. Please go ahead.

Matthew Taylor (Analyst)

Hi, good morning. Thanks for taking the question. I wanted to, I guess, start with a question on Q1 and phasing, given the first quarter's almost over. Could you talk a little bit about the trends that you're seeing in Q1 and relative to your $60 million-$65 million guidance for the year? How do you expect that to land through the year?

Shantanu Gaur (CEO)

Yeah, thanks for the question, Matt. So far, in Q1, we're seeing sustained growth in new app users, which is our estimate of procedural volume, despite a significant reduction in several expenses related to marketing spend. We're actually starting to see now some of the patients who may have churned off GLP-1s in the second half of last year re-enter the funnel, similar to what's being observed in other weight loss therapies like bariatric surgery. So we expect some of the destocking that we had discussed previously to continue into Q1 and Q2 with some distributors who did not reorder at the end of last year or in Q1 beginning to reorder in Q2. So, from a revenue perspective, we obviously expect Q1, because of the destocking, and Q2 to be on the lighter side with increasing revenue as we move throughout the year.

Matthew Taylor (Analyst)

Can we expect that gross margins basically follow the top line, so you'd also expect gross margin improvement through the year?

Shantanu Gaur (CEO)

Sure. Hey, Matt, it's Chris Geberth. So, we expect gross margin to be between 77%-79% for the year, but we will be able to manage that throughout each quarter. And it will be a little less in Q1 and a little more in Q4, but we have scaled our operations accordingly so that we can, we can maintain a, a decent margin throughout the year.

Matthew Taylor (Analyst)

Gotcha. And maybe I'll just do one follow-up. I would like to ask more about the spending reductions and the focus on cash burn. It sounds like you're having some success there, but obviously, there's a trade-off, as you alluded to, with less marketing spending. I guess, can you talk about how you're able to try to balance those two things in terms of being able to continue to drive the top line, but also with an eye to costs and lowering the cash burn?

Shantanu Gaur (CEO)

Yeah, when it comes to lowering cash burn, a lot of the initiatives that we took were around reducing the variable expenses that we have in sales support and marketing, which will ebb and flow with revenue growth or decline. We also were able to right-size other departments inside the business, including our digital team, and you know, you'll see reductions in our G&A spend as well. And so the part of our commercial model, which is a mixture of DTC marketing but also stimulating B2B organic growth at our accounts, gives us a fair amount of flexibility in terms of the variable expenses that we have at our disposal to turn on and off as we react to different trends in different markets around the world.

Matthew Taylor (Analyst)

Great. Thank you very much.

Operator (participant)

Your next question comes from the line of Ryan Zimmerman from BTIG. Please go ahead.

Ryan Zimmerman (Analyst)

Good morning. Can you hear me okay?

Shantanu Gaur (CEO)

Yeah, we can hear you just fine, Ryan. Good morning.

Ryan Zimmerman (Analyst)

Oh, good. Thanks for taking questions. Just follow up a couple quick ones from me. You know, as you guys think about and, you know, pursue this B2B, excuse me, model, with some of the software programs you develop, how much of that is contemplated in the 60-65 million this year in guidance?

Shantanu Gaur (CEO)

Right now, none of that is contemplated in the guidance. It's a relatively new form of business for us, even though we have been leveraging that software to drive better and better results for our balloon patients over the past several years. On a, you know, go-forward basis, we expect that the B2B SaaS business that we are building be able to serve not just balloon patients but also patients going through bariatric surgery and GLP-1 drugs. As we mentioned in the call earlier, we've just begun to sign commercial agreements related to the Virtual Care Suite in a B2B SaaS model.

And so at this time, you know, we're really looking to experiment with that in a commercial setting to see how the data actually helps us drive better and better patient outcomes across a, you know, a breadth of different weight loss options, and then consider how it could actually drive top line in years to come.

Ryan Zimmerman (Analyst)

Okay. So reading between the lines and those comments, Shantanu, it's fair to assume, it sounds like, that you're not gonna ramp, you know, spending would be very modest for these efforts in 2024. I just, you know, I asked that in the context of the reduction in cash burn and also, you know, kind of, you know, moderating some of the growth initiatives that you're pursuing.

Shantanu Gaur (CEO)

Yeah, absolutely. One of the beauties of our digital platform, and our SaaS business is that we can be highly focused, and leverage all of the software that we've already built over the past several years to support our balloon patients. So a lot of that infrastructure, a lot of the technology and software, and frankly, a lot of the customers that we would target, we already know very well because they're using our balloon every single day. So this is a type of business inside Allurion that can leverage a lot of what we've already built, which again will bode well for us from a expense standpoint but also in terms of recurring revenue and gross margin; it could be a big driver in the future.

Ryan Zimmerman (Analyst)

Yeah, certainly. And then just last one for me. If you could talk a little bit about the user base, particularly physician customers in some of the markets where you've had a lot of success. And you know, the reason I wanna ask about that is because given the dynamics we saw in the fourth quarter with the distributors, you know, how did some of those high-end users, some of your top users, navigate the fourth quarter? Did you see, you know, kind of binary outcomes with, say, the top users and the broader customer base? I'm just wondering kind of how, you know, distributors aside, you know, what you're seeing in the end markets, particularly with some of your key customers in certain markets in the Middle East or India and so forth, and just kind of reflect on how they navigated some of the GLP headwinds.

Shantanu Gaur (CEO)

Yeah, it's a great question, and it really is context-specific. You know, many of our customers today are bariatric surgeons, and they certainly saw a drop in their bariatric surgery volume, as GLP-1s grew in prominence in the second half of 2023. Some of our bariatric surgeons were able to pivot to more Allurion Balloons over that period. Others just saw a drop of demand across the board, so their surgical volumes and their balloon volumes dropped. In other countries, it was mostly driven by macroeconomic headwinds where patients across the board were just pursuing cash-pay procedures on a much lower basis. And so it's really context-specific. It's difficult to identify any you know trends that would you know be applicable globally.

What we can say is that coming out of Q4 and the trends that we've seen so far in Q1, particularly in January and February, it's clear that some of those patients who were trying GLP-1s have churned off and are now looking for other options, whether it's our balloon or bariatric surgery. And, you know, that is consistent with the growth in procedural volume that we're continuing to see, as we turned into 2024.

Ryan Zimmerman (Analyst)

Very helpful. Thanks for taking the question.

Shantanu Gaur (CEO)

Thank you.

Operator (participant)

Your next question comes from the line of Keay Nakae from Chardan Capital Markets. Please go ahead.

Keay Nakae (Analyst)

Yes, thanks. A couple questions. Chris, when we think about the G&A line going forward, you know, what sort of a nominal level there you're expecting in 2024?

Shantanu Gaur (CEO)

Sure. Thanks for the question. If we look at G&A, and you'll see in our press release, it's just we have a significant amount of bad debt we took this quarter, as well as some, some stock comp related to the deal that will not recur in, in the future. So just at a high level, if you look at what I—what I said about G&A, I would remove those items and stick to more of a trend of that $5.5-$6 million a quarter.

Keay Nakae (Analyst)

Okay, great. Then, in terms of VCS and, you know, the initial use of that with the clinics you announced earlier this year, talk about maybe two things. One, with those first set of clinics, you know, what's the economics associated with that? And then what are the opportunities in some of the other territories where you're currently at to enter into similar agreements?

Shantanu Gaur (CEO)

Yeah, in terms of the initial commercial agreements we've signed, those are sort of classic SaaS business agreements where clinics are paying us on a per patient per month type of model. We won't go into the pricing now 'cause these are, you know, early-stage commercial agreements. But what we are seeing is that as these clinics expand their own weight loss practices, you know, they are, you know, expanding into bariatric surgery, they're expanding into GLP-1s, they're expanding their underlying Allurion Balloon business, and more and more patients ramp on to our software, we have an opportunity to generate, you know, potentially a significant amount of recurring revenue.

Keay Nakae (Analyst)

You know, the second part of that question, the opportunities on the geographies and maybe even looking out a little further, what are the opportunities, you know, once you enter the U.S. for integrating them?

Shantanu Gaur (CEO)

Yeah, we believe the opportunities abound, when it comes to our, our B2B SaaS business. If you think about it, you know, we have an existing base of business, with accounts all over the globe using our balloon. Many of those accounts are going to end up using, GLP-1s or introduce other weight loss therapies. So, as I was, mentioning earlier, we have an opportunity right in front of us with the customers that, are currently using our balloon and are well known to us, not to mention, new markets, like the United States where, if anything, compared to any of our existing markets, GLP-1 usage is much higher. And therefore, there's a greater need for software like ours to help manage these patients, at that are coming at high volumes, to seek care in these clinics.

I do believe that, in the future, the digital platform, much like our balloon was several years ago, could allow us to land and expand in many of these accounts, and that may end up driving our balloon business down the road versus the other way around.

Keay Nakae (Analyst)

Okay, great.

Operator (participant)

We have no further questions in our queue at this time. With that, that does conclude today's conference call. Thank you for your participation, and you may now disconnect.