Allurion Technologies Inc. (NYSE:ALUR) Q4 2023 Results Earnings Conference Call March 21, 2024 8:30 AM ET

Company Participants

Michael Cavanaugh - Investor Relations, ICR Westwicke
Shantanu Gaur - Chief Executive Officer
Chris Geberth - Chief Financial Officer

Conference Call Participants

Matthew Taylor - Jefferies
Ryan Zimmerman - BTIG
Keay Nakae - Chardan Capital Markets

Michael Cavanaugh

Good morning. Thank you all for joining us today. Earlier today, Allurion Technologies Incorporated 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 revision 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 Presentation 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.

And with that, I will turn it over to Shantanu.

Shantanu Gaur

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 preannouncement 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 to $65 million, representing growth of 13% to 23%.

Notably, for the full year of 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, rightsizing 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 pay down, 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 control trial designed to support a pre-market approval application, or PMA, for the Allurion Balloon to the US Food and Drug Administration.

We completed enrollment two months ahead of schedule after receiving unprecedented interest from US 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 submissions 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 is 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 drug. Results from two recently studies of more than 180 patients showed an approximately 18% weight loss in just four months and approximately 19% weight loss at 8 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 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 patients already onboarded on to the VCS; Transform, the UK'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 who seek medical weight loss options and driving more patients towards 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?

Chris Geberth

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, saw 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 $9 million less gross margin due to low revenue, an increase in 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

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.

Question-and-Answer Session

Operator

[Operator Instructions]. Your first question comes from the line of Matt Taylor from Jefferies.

Matthew Taylor

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

Shantanu Gaur

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. And 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 de-stocking that we had discussed previously to continue into Q1 and Q2, with some distributors who did not reorder at the end of last year in Q1 beginning to reorder in Q2. So from a revenue perspective, we obviously expect Q1, because of the de-stocking, and Q2 to be on the lighter side with increasing revenue as we move throughout the year.

Matthew Taylor

Can we expect the gross margins basically follow the top line and to also expect gross margin improvement through the year?

Chris Geberth

We expect gross margin to be between 77% and 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 we can maintain a decent margin throughout the year.

Matthew Taylor

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 cost in lowering the cash burn?

Shantanu Gaur

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'll see reductions in our G&A spend as well. And so, part of our commercial model, which is a mixture of DTC marketing, but also stimulating B2B organic growth in 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.

Operator

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

Ryan Zimmerman

Just follow-up – a couple of quick ones from me. As you guys think about and pursue this B2B model with some of the software programs you've developed, how much of that is contemplated in the $60 million to $65 million this year in guidance?

Shantanu Gaur

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 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 gone to sign commercial agreements related to the Virtual Care Suite in a B2B SaaS model. And so, at this time, we're really looking to experiment with that in a commercial setting, see how the data actually helps us drive better and better patient outcomes across a breadth of different weight loss options, and then consider how it could actually drive top line in years to come.

Ryan Zimmerman

Reading between the lines on those comments, Shantanu, it's fair to assume it sounds like that you're not going to ramp – spending would be very modest for these efforts in 2024. I ask that in the context of the reduction in cash burn and also kind of moderating some of the growth initiatives that you're pursuing.

Shantanu Gaur

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

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 the reason I want to ask about that is because, given the dynamics we saw in the fourth quarter with the distributors, how did some of those high end users, some of your top users navigate the fourth quarter? Did you see kind of binary outcomes with, say, the top users and the broader customer base? I'm just wondering kind of how – distributors aside, 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

Yeah, it's a great question. And it really is context specific. 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 trends that would be applicable globally. But 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 turned off and are now looking for other options, whether it's our balloon or bariatric surgery. And that is consistent with the growth in procedural volume that we're continuing to see as we turned into 2024.

Operator

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

Keay Nakae

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

Chris Geberth

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

Keay Nakae

In terms of VCS and 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, what's the economics associated with that? And then, what are the opportunities on some of the other territories where you're currently at to enter into similar agreements?

Shantanu Gaur

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 because these are early stage commercial agreements. But what we are seeing is that as these clinics expand their own weight loss practices, they are 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 potentially a significant amount of recurring revenue.

Keay Nakae

And the second part of that question, the opportunities on the geographies and maybe even looking out a little further, what are the opportunities once you enter the US for integrating them?

Shantanu Gaur

We believe the opportunity is abound when it comes to our B2B SaaS business. If you think about it, 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 that are coming at high volumes to seek care in these clinics.

So 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.

Operator

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