Apollo Endosurgery's (APEN) CEO Todd Newton on Q4 2017 Results - Earnings Call Transcript

Apollo Endosurgery (APEN) Q4 2017 Earnings Conference Call March 1, 2018 4:30 PM ET

Executives

Lee Roth - SVP, The Ruth Group, IR

Todd Newton - CEO

Stefanie Cavanaugh - CFO

Analysts

Charlie Eidson - Craig-Hallum Capital Group

David Solomon - ROTH Capital Partners.

Suraj Kalia - Northland Securities

Operator

Good day and welcome to the Apollo Endosurgery Fourth Quarter 2017 Results Conference Call. Today's call is being recorded. And at this time, I would like to turn the conference over to Lee Ross of The Ruth Group. Please go ahead, sir.

Lee Roth

Thanks, Matt, and thank you everyone for participating in today's call. Joining me from the company are Todd Newton, Chief Executive Officer; and Stefanie Cavanaugh, Chief Financial Officer.

Before we begin, I would like to caution listeners that comments made by management during this conference call will include forward-looking statements within the meaning of Federal Securities Laws, including Apollo's financial outlook and Apollo's plans and timing for product development and sales. These forward-looking statements involve material risks and uncertainties, and Apollo's actual results may differ materially. For a detailed discussion of the risk factors, I encourage you to review the annual report on Form 10-K filed today, March 1, 2018 with the Securities and Exchange Commission.

The content of this conference call contains time-sensitive information accurate only as of the date of this live broadcast, March 1 2018. Except as required by law, Apollo undertakes no obligation to revise or otherwise update any statement to reflect events or circumstances after the date of this call.

During this conference call, we will be discussing certain non-GAAP financial measures. While we believe this information to be helpful in understanding Apollo's financial performance, it is not meant to be considered in isolation or as a substitute for the comparable GAAP metric. These measures should only be read in conjunction with Apollo's condensed consolidated financial statements prepared in accordance with U.S. GAAP. A reconciliation of the non-GAAP financial measures to the GAAP measures can be found in today's press release, which was posted to our website and furnished to the SEC on Form 8-K.

With that said, it's now my pleasure to turn the call over to Apollo Endosurgery’s CEO, Todd Newton. Todd?

Todd Newton

Thank you, Lee and good afternoon everyone. On today’s call I will begin with a brief comment followed by a detailed financial review from Stefanie. And I’ll then return for a discussion of our key initiatives for 2018, before opening the call for some questions.

With today’s call and the filing of our 10-K this afternoon, we closed 2017, which was an important year for Apollo Endosurgery. For all real purposes, we introduced the company for the first time to public market institutional investors with our equity offering in July. At that time, we told investors that we were close to an important inflection point, when our Endo-bariatric product sales and their growth would eclipse our declining surgical product sales, and we would begin to produce overall revenue growth.

That inflection point occurred in the third quarter and continued here in the fourth quarter. So we are very pleased to report fourth quarter total revenues increased 5% and our Endo-bariatric product sales increased 29% versus the fourth quarter of the prior year. We had a number of moving parts in our business, but cutting through it all, the increase in product sales was due to increased sales of OverStitch, in all of our markets.

As we look at our business exiting 2017, we see a far healthier business, with our growing Endo-bariatric products accounting for 60% of total revenues in the fourth quarter. And we look to build on this momentum in 2018 and further drive this mix shift through our products sales.

Internationally, we feel particularly good about our business, which contributed more than half of our total revenues in the fourth quarter. In these markets our fourth quarter Endo-bariatric product sales were three times larger than our surgical product sales and increased 64% over the fourth quarter of 2016.

In the U.S. market, we have yet to hit the same inflection point. We had hoped to be at this inflection point by now in the U.S., but we had to rebuild our U.S. Orbera sales momentum following the FDA's letter to healthcare providers back in mid-August of 2017. As a result, our declining surgical product sales still exceed Endo-bariatric product sales in the fourth quarter in United States. But we think we are making progress on rebuilding the Orbera momentum, and remain very confident that this same inflection point is approaching for our U.S. business.

And I’ll talk more about that later, but first I’ll turn the call over to our CFO, Stefanie Cavanaugh, to give more details on our fourth quarter and full year financial results. Stefanie?

Stefanie Cavanaugh

Thank you, Todd and good afternoon everyone. Starting with the fourth quarter revenue results, as Todd mentioned, total revenues for the fourth quarter 2017 increased 5% compared to the fourth quarter of 2016, from $15.3 million to $16.1 million. This was primarily driven by an increase in Endo-bariatric revenue of 29% from $7.6 million to $9.8 million.

Excluding the effect that U.S. Orbera starter kit sales had on comparability, total revenue increased 9% for the fourth quarter. Outside of the U.S. Endo-bariatric sales increased more than 64% in Q4 2017, from $3.8 million to $6.3 million, mainly from increased sales of OverStitch in our direct markets and the increases in both volume and pricing from the introduction of Orbera365.

In the U.S. total Endo-bariatric sales were $3.5 million in the fourth quarter of 2017, compared to $3.7 million in the fourth quarter of 2016. Excluding Orbera starter kit sales, U.S. Endo-bariatric sales in the fourth quarter were $3.3 million compared to $3.1 million in the fourth quarter of 2016, representing an increase of 8% which resulted from increased adoption and utilization of OverStitch.

Total surgical sales shifted from 50% of total revenues in the fourth quarter of 2016, to 38% of total revenues in the fourth quarter of 2017, on lower gastric banding procedure volumes, particularly in the U.S. and our commercial efforts to shift our revenue mix to our growing Endo-bariatric product. In total dollars worldwide surgical sales decreased 20% to $6.2 million from $7.6 million in the fourth quarter of last year.

Moving to the full year revenue results, total revenues were $64.3 million, just under 2016 revenue of $64.7 million. Excluding the effect again that U.S. Orbera starter kit sales had on comparability total revenue increased 5% for the year.

Our U.S. Endo-bariatric sales for the year increased 32% from $16.4 million in 2016 to $21.6 million this year primarily due to higher OverStitch sales. In U.S., Endo-bariatric product sales excluding the Orbera starter kit sales increased 20% to $13.5 million from $11.2 million as a result of higher Orbera product sales in the first half of 2017 as well as growing OverStitch sales throughout the year.

Surgical sales for the full year 2017 were $27.6 million compared to $32.3 million in 2016. In United States our surgical sale decline rate was 20% for the year due to the reductions in gastric banding procedures. Outside the United States, surgical sales only decreased 5% as we have been successful in capturing greater market share, especially in Europe that mostly offset the worldwide trend of declining gastric banding procedures in 2017.

Now let's discuss gross margins, for the full year gross margin was 62% in 2017 and 61% for 2016. The key takeaway here is that in 2016 gross margin was lowered by higher inventory impairment charges, while 2017 gross margin was lowered as we successfully shifted to a higher percentage of our revenues coming from Endo-bariatric product sales and furthermore within that portfolio of Endo-bariatric revenue a greater percentage of OverStitch sales. Both of these items offset each other to result in a 1% improvement in total gross margin.

Gross margin in the fourth quarter of 2017 was 58% compared to 62% for fourth quarter 2016. The result in the fourth quarter was also impacted by the mix of the Apollo manufactured products sold, which resulted in more overhead charge to cost of goods sold compared to 2016 when we were depleting the buffer inventory we purchased as a part of the planned transition from Allergan to Apollo.

Total operating expense were $15.2 million for the fourth quarter 2017 compared to $17.2 million for the fourth quarter 2017 when we had higher general and administrative expenses due to transaction cost related to the Lpath merger. For the full year total operating expenses were $62.2 million compared to $60.2 million in 2016, reflecting our commitment to sales and marketing efforts that drive Endo-bariatric product adoption throughout our key markets.

Interest expense was $1 million for the fourth quarter of 2017 and $4.5 million for the full year 2017 compared to $11.3 million for the fourth quarter of 2016 and $18.2 million for the full year of 2016. The reduction in interest expense for both the quarter and the year was due to non-cash charges associated with the convertible notes exchanged for common stock in connection with the Lpath merger in 2016.

Our net loss for the fourth quarter 2017 was $7.3 million compared to $19.7 million for the fourth quarter 2016. Our net loss for the full year 2017 was $27.3 million compared to $41.2 million for the full year of 2016. Finally, we ended 2017 with cash, cash equivalents and restricted cash of $31.4 million. During 2017 we raised $33.6 million from our equity offering in July 2017, which was offset by $22.2 million of cash outflow.

Within this $22.2 million of cash outflow, $9.8 million represents nonrecurring cash payments, including $7 million for a nonrecurring principal reduction and $2.8 million on nonrecurring costs associated with initial regulatory filings and government -- corporate governance activities required of us as a new public company in early 2017. The remaining $12.4 million includes $3.8 million for interest payment, $2.1 million for capital expenditures and the balance represents recurring cash outflows from our operating activities.

One last note, we filed a Shelf Registration Statement in December 2017, which permits us to offer up to a maximum of $50 million of our common stock and we entered a sales agreement to sale up to $60 million of our shares in an aftermarket program. At this point we have not sold any shares under this Shelf.

That concludes our financial update. And I will now turn it back over to Todd.

Todd Newton

Thank you, Stefanie. Before I open it up for questions, let me highlight what you can expect from us in 2018. First, we are going to continue to prioritize medical education. Demand for OverStitch was especially strong during the fourth quarter in all of our markets as we saw increased adoption in Core GI applications, bariatric revisions as well the ESG procedure. And medical education was key for this adoption.

In 2017 we conducted training events in 75 U.S. cities with many of these events leveraging our mobile learning center. During the year, we trained more than 530 U.S. physicians along with 250 Allied Health staff members. And in addition, we trained about 330 physicians in markets outside the United States on OverStitch. In 2016, we were mostly conducting Orbera training, but still training just over 240 U.S. and close to 170 non-U.S. physicians on suturing. The results of our medical education efforts was to both increase our overall OverStitch customer base through introductory training. That brought us new users, and provide advanced medical education programs to existing OverStitch users to support their progression through advanced suturing procedures.

In the U.S., we increased our OverStitch customer base by 12% in 2017 and more importantly grew accounts that order OverStitch every month by 33% over 2016. And we have another full schedule in place for 2018 to continue these educational efforts and we are always looking to improve our curriculum. One change we are making in 2018 is to better meet physician demand for training programs that shorten the length of time necessary for a user to progress from basic training with OverStitch to advanced suturing procedures, especially with regards to the ESG procedure.

Which brings me to our second priority for 2018, which is we're going to continue to support the development of ESG. About two thirds of our OverStitch procedures performed outside the United States in 2017 were ESG cases, and in the United States the number of physicians offering ESG more than doubled during 2017 from just over 21 physicians in 2016 to now close to 60. We expect that the number of U.S. physicians offering ESG will continue to rise during 2018 and our goal is to exit this year with 100 such physicians.

We think this level of user base will begin to demonstrate a critical mass of users that will be needed to support a case for ESG reimbursement along with level 1 clinical data. And we expect to see progress on the ESG clinical development front, from a number of efforts including the MERIT trial. The MERIT trial as most of you know is an investigator-led study being conducted by the Mayo Clinic.

And we entered into a collaborative research agreement with the Mayo Clinic at the end of October of 2017. This was a prospective randomized multi-center trial specific to the ESG procedure that includes a two year follow up period with the goal of generating long term clinical data to support the establishment of reimbursement coverage.

The study will be conducted at up to eight sites and is expected to enroll 200 patients. To-date we understand that four of the eight sites have IRB approvals in place and have completed contracting with Mayo, and three sites have begun patient screening, with one site enrolling and performing procedures. As a reminder though, this is an investigator led study, and we are not privy to detailed info from statistics and results.

In addition to MERIT, we are pursuing other clinical programs around the world to build the clinical library for ESG. In Europe for example, we intend to fund multi-center and multi-country registries that will capture both bariatric and traditional GI Case experienced using OverStitch. And in other countries we are responding to request for grants from investigators who want to demonstrate the effectiveness of ESG in specific patient populations.

Third in 2018 we plan to rebuild market momentum for Orbera in the United States. There was undoubtedly a reset to the U.S. enterogastric balloon market following the FDA's Letter to Healthcare Providers in Mid-August, and the ensuing negative media attention. Orbera reported implant volume which was down following the letter, as we expected. And in the fourth quarter of 2017 implants approximated 820 compared to 1,100 in the fourth quarter of the prior year. Most of this decline was in October and November, and in December we began to see improving implant volumes that continued into January.

For the year Orbera implant volumes were approximately 4,300 in 2017 versus approximately 4,040 in 2016, an increase of 7%. But it was clearly a tale of two halves in 2017 for Orbera, with strong growth in the first half and a disrupted market in the second half. As we managed to follow up from the FDA letter, the one thing that we were able to do fairly well was to keep the confidence of our physician customer base in the product.

We have been able to do that because of Orbera’s long standing clinical evidence supported by more than 277,000 distributed balloons and over 230 peer-reviewed publications that describe its safety and efficacy. And the clinical evidence of Orbera has increased even further since the beginning of the fourth quarter. In October of 2017, a Brazilian Enterogastric Balloon Consensus Paper was published based on close to 42,000 balloon procedures of which more than 78% were Orbera procedures. This consensus paper confirmed the strong efficacy and safety experience of enterogastric balloons, and especially Orbera.

Last month, the American Society of Metabolic and Bariatric Surgery or the ASMBS, also added enterogastric balloons to its list of approved procedures, which is another strong endorsement of Orbera’s safety and efficacy. And as we announced this week, the first Orbera U.S. post approval study was published in clinical Gastroenterology and Hepatology, which is a peer-reviewed journal published on behalf of the American Gastroenterology Association.

This study presented real world clinical results from eight different centers in the U.S., showing patient outcomes since Orbera’s approval, and we think the data was really strong both in respect of safety and efficacy. We are leaning hard into additional clinical evidence development for Orbera. We think Orbera is a medically relevant therapy and we are currently planning to support six research grants from various investigators that will evaluate Orbera's value proposition within patient populations with various disease states, that we think can benefit from its best-in-class non-surgical weight loss. As the investigators complete their studies, we hope to have more information to share with you.

Also on the clinical front, we are making good progress on our Orbera post approval study, which was a requirement from the FDA following their approval of Orbera back in August of 2015. This study is designed to evaluate 255 patients treated with Orbera from 10 to 20 clinical studies sites. Patients will be followed for one year. This is obviously an expensive obligation for us, and I am pleased to report that we have closed to 210 patients currently enrolled at 12 clinical sites around the United States, and based on current enrollment rates we expect to finish enrollment by the end of our third quarter here in 2018.

Probably the most important indicator of our customers' confidence and their willingness to start to move on from the impact of the FDA communication, is that towards the end of 2017 they started again to spend marketing dollars on patient education. As of the end of the year we had a number of active reengaged co-op marketing campaigns for Orbera with our higher volume customers. And we think that is a key factor behind the improving implant trends, I mentioned that we have seen in December. And that is a source of our confidence that our momentum is improving.

To update you on our typical Orbera operating metrics, just to be complete, as of the end of 2017 we had over 900 trained US physicians on Orbera and 41% of the accounts have used their starter kit inventory of 10 balloons, and have now reordered product. We expect to train probably another 50 US physicians on Orbera during 2018, which should raise our total trained US physician count to about 950 by the end of the year.

Fourth, we expect to introduce new products this year. As you all know we received CE Mark for ORBERA365 in August and commercial sales began in most European countries during the fourth quarter. The fourth quarter was not a full quarter for ORBERA365 but the initial response has been very positive with about a third of our traditional Orbera customers purchasing ORBERA365, and at a higher price, reflecting the increased value of a long Indwell time.

Our goal in 2018 is to expand ORBERA365 into other international markets. And additionally in November, we received FDA clearance for OverStitch Sx, which is a single channel comparable version of OverStitch that we think will also enhance visualization and maneuverability for the physician. The Sx will enable physicians as well the user of endoscoping suturing technology with the majority of scopes on the market.

Scopes in many hospitals and surgery centers already are in them [ph], thus eliminating a major capital equipment purchase equipment for dual channel endoscope that many new accounts either had to make or would have to make in order to use the current OverStitch product. We expect Sx will meaningfully expand the addressable market of OverStitch. We will have a number of remaining to do product launch but we remain on track with our stated goal of introducing Sx in the United States and European markets by mid-2018.

Fifth, we're going to continue to work towards stabilizing our U.S. surgical sales. While we slowed the rate of our U.S. surgical sales decline in the first three quarters of 2017 the fourth quarter demonstrated more volatility than we anticipated, indicating we still have work to do in order to achieve stability. Similar to 2017 our efforts in 2018 will focus on providing excellent customer service to the group of physicians actively utilizing and achieving great results from the lap end device with their patients.

To that end, we elected to carve out of our U.S. field sales organizations a specialist team, whose sole focus will be surgical product sales in 2018. Similarly the rest of our U.S. sales organization will be dedicated to the endo-bariatric product portfolio in their territories. And we think the time is right for this type of field realignment.

Last, just to talk about improving our gross margins. As we discussed many times before we have identified a number of projects within our comprehensive program that will lead to margin expansion and maximize the potential of our in-house manufacturing investment. At this stage, this is an execution exercise for us. In 2017 we completed the first two parts of the program with the transfer of the OverStitch Helix to our manufacturing facility as well as the first step in a comprehensive suture cost reduction plan that will -- with the expansion of our ISO certificate to include anchor needle production. In 2018, we expect to complete the transfer of the OverStitch since to our manufacturing facility as well as implement various cost improvements to Orbera.

Before we open for Q&A, let me share our outlook for 2018 to help you set some financial expectations. We believe our historical results in 2017 are the best indicator for what to expect in 2018. We believe our 2017 Endo-bariatric growth excluding U.S. starter kit sales should represent a reasonable expectation for growth for Endo-bariatric products in 2018. The caveat to this statement is the pace at which we're able to regain momentum for Orbera in United States, especially in the first half of 2018, we think our U.S. Endo-bariatric product sales will have a comparability challenge as we compare a momentum rebuild period here in the first half of 2018, with the high momentum period from back in 2017.

But if we are successful as we think we will be at rebuilding momentum, this challenge of comparability should start to reside in the second half of 2018. We also believe our surgical product sales decline rate experienced in 2017 is the best estimate to provide you for 2018 performance.

For gross margin. We don't expect to see realization of our gross margin improvement projects until 2019. Even for those improvement projects, we expect to complete in 2018, we anticipate selling out inventory at our historical cost-to-good sold through the majority of 2018 and in some cases we make buy in inventory in order to protect us in the event that the project takes longer to complete than expected.

In fact we anticipate our gross margin may continue to trend down similar to our 2017 experience due to our sales mix changes that Stefanie spoke to earlier. In 2017 54% of our endo-bariatric product sales worldwide related to Orbera and 46% related to OverStitch, whereas in 2016, 71% of the worldwide Endo-bariatric sales were Orbera and 29% was OverStitch. The shift in product sales mix just underscores the importance our margin improvement focus.

Finally our cash used in 2017 excluding the nonrecurring items as Stef reported was about $12.4 million. For the most part, this is our baseline for 2018 because we are going to continue to aggressively pursue our efforts to drive both our Endo-bariatric product adoption. In addition we estimate we will invest roughly $4 million to $5 million in our margin improvement programs, a large portion of which will be capital expenditures and incurred in 2018.

In addition, we expect to use cash this year for our clinical initiatives such as the MERIT trial. We expect the total cost in the MERIT trial will be somewhere around $3.5 million but how much we spend in 2018 will of course depend on enrollment rates and we hope this enrollment -- this trail enrolls as quickly as possible so that we can get to the results as quickly as possible.

And with that we'll not open the call up for some questions. Operator, please proceed.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] And at this time we will go first to Matt Hewitt with Craig-Hallum Capital Group.

Charlie Eidson

Hi, this is actually Charlie on for Matt today. Thanks for taking my questions.

Todd Newton

Hey, good afternoon, Charlie.

Stefanie Cavanaugh

Hi, Charlie.

Charlie Eidson

First, you mentioned that 33% increase in OverStitch orders for weekly users that seems like a very relevant statistic. Does this means that the ESG procedures have becoming a big portion of those physicians procedure volume or I mean is there a lot of room to run there, I'm just trying to get a sense for how much more we could see going forward?

Todd Newton

Well, good question Charlie. So, the number I was mentioning the 33% improvement is related to OverStitch accounts that are now ordering the product every month. And essentially that's a U.S. statistic portion also keep their remind. And the other think I would tell though you there is that ESG while it is picking up phase in United States, the majority of our business in United States with OverStitch is still using it for the more traditional GI applications. And that would also include Endo-bariatric revisions. So ESG is something that we really excited about, we've see it moving fast, so I think a lot of this increase in just as much the ordering pattern is recurring ordering pattern relates to just more and more use of OverStitch for its historical applications.

Charlie Eidson

Okay, okay that's great. Second, the U.S. lap and specialist team, it's really interesting I think it might be something that could be effective. Will this result in additional sales hiring on the other on the Endo-bariatric side to maintain growth rates or are you just kind of shifting of shifting people over?

Todd Newton

Yes, right now I would say it's initially going to be a shift over. As we go we'll assess of course whether not it make sense to increase our representation in the field. But today it's more big shift and carve out, if you will and we don't anticipate an immediate increase in the number of U.S. field sale trucks.

Charlie Eidson

Okay, okay, well thank you. That's it for me.

Todd Newton

Thanks Charlie.

Operator

At this time we move to David Solomon with ROTH Capital Partners.

David Solomon

Hey guys. Thanks for taking my questions. Just kind of want to start off on the OverStitch and then move on to the Orbera and then the Lap-Band. So first on the OverStitch, just regarding the Sx, just want to clarify as we have in our -- with respect to first half, is it potentially push back into second half, I mean you said mid-2018? And then just also on the training for OverStitch, which kind of doctors are you seeing training and which ones are you are seeing going for the ESG and right to ESG?

I know you would mentioned that in the past versus going and learning the more simple procedures? And you seeing a number of general surgeons training on the OverStitch and getting all the way through to ESG training or is it mainly the advanced adopt the business? And I'll hold off until you answer those.

Todd Newton

Yes, thank you for leaving a discussions [ph] what's happening David. So, first of all I think our comment about Sx was that we expect this to be introduced by mid-2018. We are really not trying to foreshadow any big difference from what we've been saying before. So, I wouldn't anticipate that we're trying to message anything there. As it relates to OverStitch and the training, what we typically see is that most of our training is probably directed towards gastroenterologists, that has been traditional. We are seeing a lot more interest in training from bariatric surgeons though particularly around again the buzz if you will that has been created around the ESG procedure.

General surgeons I would say, not so much, I would say most of our focused training will be with either gastroenterologists or bariatric surgeons.

David Solomon

Okay that's helpful. And I apologize, I implied bariatric when I say general. So then with Orbera, just kind of curious given the balloon space is getting a little bit more crowded these days, is part of the reason that it's slow to grow back the other balloons out there or are you loosing docs to the other balloons or is it just sheer balloons in general. Because the ASMBS statement was it covered all balloons, and obviously the data that we've seen, especially the most recent data points Orbera being superior. So I'm just kind curious what you guys see going on there?

Todd Newton

Yeah, that's also a good question. We were trying to address that somewhat in our comments today. The biggest driver I think we felt in the fourth quarter was that in the aftermath of the FDA communication. A lot of accounts just simply did not want to be spending their marketing dollars, in through the headwinds if you will of that FDA communication.

We saw that willingness to promote the product and educate patients come back in the later part of the fourth quarter. And that's why I think we saw the improving implant volumes in December. With this kind of product being especially that it’s a cash pay market. Just the willingness and the ability to spend marketing dollars is very important to driving demand. And when that ticket gets turned down flow of interest in patient declines. And that's exactly what we saw after the FDA communication.

David Solomon

Okay, that's helpful. Just a couple more, one on the surgical side, just kind of curious, are you seeing those surgeons hiring faster than you expected, or are they moving on to other procedures. And then just want to clarify you just say that you're moving sales people from endo-bariatric into surgical?

Todd Newton

Yes, I wouldn't say that we're moving them out of endo-bariatric. I'd say that what we have had before is we had a U.S. sales force that we expected to represent the entire product portfolio. Now in 2018 we think the time is right to put together a small little team from that group that will focus in a dedicated fashion at the surgery product portfolio. And then that will lead the rest. It also be more pure play focused on endo-bariatric. So we think that greater attention will be beneficial to both product portfolios.

David Solomon

Okay, that's great. And just one more on switching back over to the OverStitch side, just wanted to get a sense of what the looming steps are to get that Sx launch U.S. and ex-U.S. and thanks again for taking my questions?

Todd Newton

And on that the biggest thing and there is a lot of detailed steps. But I'm going to kind describe it as one step. The big thing is we just need to complete product validation. And that involves a number of smaller steps with respect to component manufacturers and as well as our own manufacturing facilities when it comes to assemblies. And so it is just an effort that requires time to complete all those types of efforts. Because once we've launched this product our intention is that it's ready to go. It's going to be a product that is reliable and works when it's opened up every time. And we want to be beyond any of the, let's call, any kind of engineering type snags by that time.

David Solomon

Great. That’s very helpful. Thanks for taking my questions.

Todd Newton

No problem.

Operator

[Operator Instructions]. At this time we'll move to Suraj Kalia with Northland Securities.

Suraj Kalia

Good afternoon Todd, good afternoon Stefanie. So Todd can you hear me all right?

Todd Newton

Yes.

Suraj Kalia

Okay. So Todd, admittedly you guys took double whammy in FY17, one is with the Dear Doc letter on Orbera and the second one was the Abraham [ph] paper on lap-band. But considering these two negative events, you guys still came out at par with FY16. So kudos on that. I guess Todd my first question is, I know if the number I got was 820 Orberas for Q4, the question I have is how did the U.S. versus OUS split look within this 820 on a year-over-year basis. And I am curious, why OUS the trend line is different than what the US is, why are those surgeons of why haven’t they freaked out as much as the U.S. surgeons.

Stefanie Cavanaugh

So if I understand your question, we gave you the implant volume of 820. That number is the US only statistic that we started tracking early on because we wanted to track sort of the usage rate, not just starter kit revenue number. So, we haven’t been reporting the OUS piece. The OUS, I think your question is, why have they not reacted or pull back like the US, and the short answer is that they have been selling the balloon for a very long time outside the United States and are very comfortable with its safety profile and did not give did much weight to the FDA letter.

The media did not, so take hold of this FDA letter outside the US. We didn’t experience pull back. And so that 820 implant volume, circling back to your original, if I heard the question right, is US only.

Suraj Kalia

Got it. In terms of the Abraham paper, Todd, is there a way you can quantify the impact on the surgical side of the equation and the reason I ask is you guys are going to stem the declines as fast as you can. Obviously the Abraham paper came out, there was a bunch of other pieces -- papers countering that point. I am just curious what was the impact of, and how long I guess what I am trying to understand as, how further can we go before we start stabilizing.

Todd Newton

Yeah, I wish I had that crystal ball Suraj, and let’s put it this way, as best we can as we segment our US surgical customer base. It's probably about 50% of our revenues now that are coming from the physicians that we feel like are -- as dedicated to lap band as we are and then there is that other 20% of our surgical sales it tends to be accessory sales and that's surgical but it's not really lap band specific, and that’s fairly stable, we’re really seeing that be a fairly stable number.

It's really the other 30% that represents this customer group of what we would probably term as infrequent lab band users. And I think what we are just simply seeing is that group because lap band is not a major part of their practice, they continue to move to other procedures and that’s also one of the more difficult pockets of revenue for us to, to really know how we are going to better stabilize it.

Suraj Kalia

Got it. Todd, in terms of your post approval study that was recently published, one of the data points that really I thought was interesting, and I don’t know if this is chance or we have a more deeper understanding of how the correlation, but the way I have read it said in your post approval study, there was a correlation between the use of SSRIs and the 16% IGB ex-plant rates. I guess what I am curious is as you guys try to put the marketing – and reengage the physicians, post the Dear Doc letter and all that. How do you think this post approval study and the lessons learned from this, can help you guys change the trajectory and/or increase the rate of production?

Todd Newton

Yeah, well first of all, I think the study that you are referring to, just to be clear that really wasn’t our post approval study, but it is the first study that we have seen published on I'll call it the real world experience using Orbera since the FDA approval. And we think the information in that study was very encouraging. And I think we're seeing that the authors mentioned that the complication rates were very low. Obviously we expect to use that study to answer questions when we have them from different accounts, as to what can they expect, they dedicate themselves more to a balloon program using Orbera.

I think there is a lot of interesting information in that study. And that's one of the things that we find to be very interesting in this market altogether is that. We learned different things as we go and the findings in that study we will certainly be looking at how can we better use those findings for various education programs that we try to put on.

Suraj Kalia

Got it. And final question Stefanie. I was trying to make notes as fast as I could. Gross margins for FY18, did I hear that right that the improvements will only show up in FY19 and FY18 we should expect it to be roughly the same level as FY17? Any additional color would be great. Thank you for taking my questions?

Stefanie Cavanaugh

You are correct Suraj, you heard that right. We would expect 2018 to continue to experience the same pressure that we'd experienced in 2017. And we expect once we get the gross margin improvement projects complete that results will start to bear fruit in 2019 numbers.

Suraj Kalia

Thank you.

Stefanie Cavanaugh

Thank you Suraj.

Operator

That concludes the question-and-answer-session. I will turn it back over to Todd Newton for any additional or closing remarks.

Todd Newton

Yes. Well thank you, operator. And in closing, we want to thank you for your interesting in Apollo Endosugery today. And should have any questions or follow up please contact the Ruth team listed today in our press release. Thank you very much.

Operator

And again this does conclude today's call. Thank you all for your participation.

Comments

[GibraltarAssetMgmt]

no reason to buy until late 2018