Q4 2020 Pulmonx Corp Earnings Call
Good afternoon, and welcome to Beaumont explored quieter and full year 'twenty 'twenty earnings conference call. At this time, all participants are in a listen only mode, where we'll be far from debating a question and answer session towards the end of today's call either.
A reminder, this call is being recorded for replay purposes.
I would now like to turn the call over to Brian Johnston from the heel Martin group.
You introductory comments go ahead.
Thanks, operator.
Good afternoon, and thank you all for participating in today's call joining me from harmonics third one French President and Chief Executive Officer, and Derek Some Chief Financial Officer.
Earlier today <unk> released financial results for the quarter and year ended December 31, 2020, a copy of the press release is available on the company's website.
Before we begin I'd like to remind you that management will make statements. During this call that include forward looking statements within the meaning of federal Securities laws, which are made pursuant to the safe Harbor provisions of the private Securities Litigation Reform Act of 1095.
Any statements contained in this call that relate to expectations or predictions of future events results or performance are forward looking statements. All forward looking statements, including without limitation those relating to our operating trends and future financial performance the impact of COVID-19 on our business and prospects for recovery expense management expectations for hiring growth in our.
Organization market opportunity guidance for revenue and gross margin and operating expenses commercial expansion in the product pipeline development are based upon our current estimates and various assumptions. These statements involve material risks and uncertainties that could cause actual results or events to materially differ from those anticipated or implied by these forward looking.
Statements.
Accordingly, you should not place undue reliance on these statements for a list and description of the risks and uncertainties associated with our business. Please refer to the risk factors section of our public filings with the Securities and Exchange Commission, including the quarterly report on form 10-Q filed with the SEC on November 13th 2020.
This conference call contains time sensitive information and is accurate only as of the live broadcast today March <unk> 2021.
<unk> Corporation disclaims any intention or obligation, except as required by law to update or revise any financial projections or forward looking statements.
Whether because of new information future events or otherwise with that I will turn the call over to Glenn.
Thanks, Brian.
Good afternoon everybody.
Welcome to our fourth quarter and full year 2020 earnings call here with me today is Derrick sung our Chief Financial Officer.
Today, I would like to share a few highlights and contextualize, our fourth quarter results before turning to our outlook and strategic priorities for 2021.
'twenty 'twenty was a major milestone year for pulmonic and I'm very proud of the progress that our entire team has made in building commercial momentum and beginning our journey as a public company.
Despite the turmoil caused by the Covid pandemic, we were able to scale our organization grow our commercial footprint and execute on a public financing that has put us in a strong position to drive our growth initiatives forward once the pandemic subsides.
We achieved full year worldwide revenue of $32.7 million and grew our business in the U S by over 50% despite ongoing pressures from the pandemic.
The fourth quarter demonstrated that while COVID-19 continues to be a constantly evolving challenge our business remains resilient.
In Q4, we recorded world wide sales of $9 8 million.
The quarter started strong as we recorded our highest month of sales in the company's history in October, but the global resurgence of Covid in the back half of the quarter reversed our momentum has locked down measures and increased hospitalizations inhibited our ability to schedule procedures.
Despite the transient pressure of Covid all signals continue to indicate that the underlying clinical need and demand for our zephyr valve solution remains strong and we believe that the COVID-19 related slowdown in our business will reverse once the pandemic subsides.
We are seeing hospitals work with patients who have had their procedures delayed due to COVID-19 by either rescheduling them to a later date or placing them on a waitlist to be scheduled as soon as the hospital allows despite the limitations on procedures interest and Zephyr valve treatment remains strong.
As we continue to advance patient screenings through strategy.
And the volume of calls to treatment centers and visitors to our website are well above pre COVID-19 levels.
We also continued to see new hospitals, starting to use that for valves illustrated by the addition of 13 new treatment centers in the U S. In Q4.
Through the full year 'twenty 'twenty, we expanded total U S treatment centers, well over 50% and ended the year with 148 centers.
On the reimbursement front, we continue to make inroads with Blue Cross Blue Shield Association, securing positive coverage policies from Highmark, the fourth largest blue Cross Blue Shield plan, which covers approximately 5 million lives and the Blue Cross Blue Shield of North Carolina.
Zephyr valve procedure was also moved out of the investigational category by medical mutual of Ohio, a plan that covers over 1.5 million lives. As a reminder, approximately 75% of our U S. Patient population is covered under Medicare, which typically pays for our out of our.
Our medically necessary solution, leaving.
About 25% of our patients covered by commercial plans.
Within this latter category, even commercial payers without positive coverage policies have been approving pre authorization requests for zephyr valves and around 95 per cent of cases, thus, while we don't expect that reimbursement will be a significant barrier to adoption of our treatment we.
Do celebrate our commercial policy wins, because they reduce the waiting period to treatment for our patients and validate the clinical acceptance of our therapy.
Although the COVID-19 driven pressure on impact on procedure volumes extended through the first two months of this year. We believe the overall outlook for 'twenty 'twenty, one remains positive given strong and consistent indicators of demand for our Zap Zephyr valve treatment and the promise of a full vaccine rollout by.
The second half of this year.
As such we expect full year 'twenty 'twenty, one revenue to be in the range of $46 million to $50 million, representing a 41% to 53% growth over 2020.
Our business remains uniquely sensitive to the impact of Covid given that our procedure requires a three night inpatient stay are pulmonologists customer customers remain at the forefront of the Covid response, and our patients remain at high risk with their severe respiratory conditions. Accordingly, we expect can.
<unk> negative impact from Covid through the first half of the year, but we are optimistic that the rollout of the vaccine will alleviate COVID-19 related pressures in the back half of the year looking beyond the near term. We're forging ahead in several with several initiatives that we believe will fuel our future growth chiefly we intend to focus on.
Furthering the strategic expansion of our U S commercial infrastructure to enable us to target more of the approximately 500 high volume hospitals, performing interventional pulmonary procedures since our last call. We've added three U S territory managers, bringing our U S territory manager total to 45.
Looking forward to the rest of this year, we plan to continue building out our U S sales organization by increasing the number of regional directors from six to nine and by expanding the total number of territories to 55 by the end of this year.
With this expanded sales force we are targeting to open over 50, new treating centers in the U S. In 'twenty 'twenty, one, bringing our total number of centers to at least 200 by the end of the year. We also expect that the activity levels of our existing centers will meaningfully increase as the pandemic subsides.
In the back half of the year.
We also continue to build our international sales capabilities and intend to add at least five sales reps and two managers outside the United States, bringing the total number of quota carrying reps outside the U S to 33 by the end of 'twenty 'twenty. One these investments in our commercial organization should allow us to <unk>.
Better access geographies and increased market development activities as conditions normalize, while we see an incredible opportunity to develop and capture the existing market for severe emphysema patients who are candidates for our Zephyr valve. We also remain focused on driving future growth by investing.
<unk> and new technologies to broaden the patient population that can be treated with our products.
In particular, we are furthering the clinical development of Ara seal a polymeric foam that is designed to be delivered via a bronchoscope to a targeted region of the lung to treat selected emphysema patients with positive collateral ventilation, who are currently not eligible for zephyr valves. This.
Group of patients represents approximately 50% of all severe emphysema sufferers, who are otherwise eligible for an intervention and thus could significantly increase our addressable market.
I am pleased to share that in December we received designation of Arris seal as a breakthrough device by the U S food and drug administration.
While we are still a few years away from potential commercialization of Arris seal. The breakthrough designation will provide prioritized and potentially accelerated review by FDA and provides eligibility for Medicare coverage of innovation technology, Our M. C I T.
M C I T a new Medicare coverage pathway enables receipt of Medicare coverage as early as the same day as F. D. A market authorization for breakthrough devices and provides coverage for four years. This is particularly relevant as the large majority of our patients are.
Covered by Medicare.
In the meantime, we remain intently focused on moving ore field down the clinical pathway and securing the evidence we need to support coverage in the long term.
In summary, despite headwinds through 'twenty 'twenty, we grew our U S sales force by over 40% the number of U S treatment sites by over 50% and our U S revenues by over 50% looking.
Looking ahead, we believe we are well positioned operationally and financially to deliver high growth through 'twenty, 'twenty, one and beyond and to take the next step and established establishing ourselves as the global leader and trusted partner in the assessment and treatment of severe lung disease.
With that said I will now turn the call over to Derrick sung to provide a review of fourth quarter and full year financial resort results Derrick.
Thank you Glenn and good afternoon, everyone.
Total worldwide revenue for the three months ended December 31, 2020 was $9 $8 million, a 5% decrease from $10 $3 million in the same period of the prior year and a decrease of 8% on a constant currency basis.
U S revenue in the fourth quarter was $4 $9 million, a 4% increase from $4 $7 million during the prior year period.
The year over year increase in U S revenue reflects increased sales of Zephyr valves as we expanded our commercial footprint and drove adoption into new accounts offset by the impact of the Covid pandemic.
International revenue was $5 million, a 12 per cent decrease from $5 $6 million during the same period last year.
On a constant currency basis international sales decreased by 17% as COVID-19 impacted the ability of hospitals to schedule procedures.
Gross margin for the fourth quarter of 2020 was 72% compared to 71% in the prior year period.
With the timing of manufacturing related investments to support our growth and the impact of stock based compensation on labor costs. We expect 2021 gross margins to start out around 70% and to increase modestly throughout the year as we absorbed fixed cost overhead.
Across increasing production volumes.
Total operating expenses for the fourth quarter of 2020 were $16 $4 million.
A 41% increase from $11 $6 million in the fourth quarter of 2019.
Stock based compensation expense was $2 $3 million in the fourth quarter of 2020 and accounted for 45 per cent of the increase in operating expenses from the prior year period.
R&D expenses for the fourth quarter of 2020 were $2 $5 million compared to $1 $6 million in the same period of the prior year.
Aside from stock based compensation. The increase was primarily due to an increase in personnel and clinical study related expenses needed to support our product development and clinical research activities.
Sales general and administrative expenses for the fourth quarter of 2020 were $14 million compared to $10 million in the fourth quarter of 2019.
Aside from stock based compensation. The increase was primarily attributable to personnel related expenses in sales and marketing as we expanded our commercial operations as well as public company expenses related to the scaling of our general and administrative infrastructure.
Looking to 2021, we expect operating expenses to be in the range of $85 million to $90 million as we continued to build out our commercial operations invest in our <unk> clinical program and further scale our business.
We expect stock based compensation expense to make up about $9 million of our total operating expenses in 2021.
Net loss for the fourth quarter of 2020 was $9 $3 million or a loss of 27 per share as compared to a net loss of $4 $7 million.
Or a loss of $2 48 per share for the same period of the prior year.
And average weighted share count of $33 9 million shares was used to determine loss per share for the fourth quarter of 2020 and includes shares issued in connection with the closing of our IPO on October 5th.
We ended the year with $231 $6 million in cash and cash equivalents as of December 31, 2020.
Which includes net proceeds of $201 $4 million from our IPO.
Turning now to our revenue outlook for 2021.
As Glenn mentioned, we expect full year revenue to be in the range of $46 million to $50 million, which represents 41% to 53% growth over 2020.
This contemplates continued COVID-19 related pressures through the first half of the year with the impact being most pronounced in the first quarter.
While we do not plan to provide quarterly guidance on a regular basis given the unique circumstances related to the pandemic. We are forecasting our first quarter revenue to be in the range of eight to $8 $3 million.
This reflects the COVID-19 driven pressures, which extended through much of February but also include our expectation for a stronger March based on current indicators.
We expect continued sequential improvement in sales through the remainder of the year.
Assuming the pandemic further subsides and our expanding base of treatment centers returned to normalized activity levels.
With that I'd like to thank you all for your attention and we will now open up the call for questions.
Operator.
As a reminder to ask a question you will need to pass style. One on your telephone again bodies by one on your telephone keypad to withdraw your question first a donkey.
Your first question comes from the line of David Lewis from Morgan Stanley. Your line is now open.
Hi, Glenn and Derek this is actually Cecilia on for David.
Wanted to start off just asking about guidance.
What you're contemplating in terms of recovery in the U S versus ex U S as well as really the trends you've seen play out in those two regions through the first part of this year.
I'm, sorry, I was on mute.
Actually I mean, the the guidance part I'll ask Derek to talk about and the trends in the various regions I'd be happy to talk about after that so.
Derek the first part of the question was the guidance and you.
U S and.
O U S. How you see that breaking out.
Yeah, Hi, Cecilia sure so our guidance basically contemplates.
Can you pressure from Covid, but lessening throughout the first half of this year.
And.
Essentially contemplates.
A recovery in the second half of this year, so with the vaccine coming.
And the macro outlook, appearing to improve our assumptions here in our guidance are that we essentially kind of returned to begin a return towards normalcy in the second half of this year, both in the United States and outside the U S and that's sort of what's contemplated in our guidance.
So we've got to sit to talk about the trends that we've seen obviously when when we last spoke in early November we had about a month, we were about a month deeper into the European sort of uptick of Covid than we were here it's.
Really quite remarkable when you look at the shape of the curve and where we were on November the 10th.
So we we do then into Europe are pretty aggressively and some of the markets have started to pull back out.
You know places like France, and Switzerland have come out more strongly enough, France went went a sort of.
Was hit by the virus at least a month before us here, but.
But each of the countries is sort of pulling out differently, Germany is slow to pull out they are actually installed a a mechanism by which they want to make sure that they have at least 25% of their ICU capacity in reserve in the event. There is another wave, which is sort of an unheard of less.
We'll have capacity for example in the United States, where even in the worst case scenario, you're going to have probably two thirds of your beds full of just standard ICU patients and a third of them.
Full of Covid patients and they sold it to keep 25%. Just opened is a is going to it's going to take a little time to get back and going in Germany in the United States we it.
It was really quite remarkable we had assumed we saw this this wave coming we saw what was happening in Europe. We knew that it was going to happen here in the U S and so we anticipated the step down October to November to December and we had assumed that we would see a step up that.
That would look very much like the step down specifically in January February and March and what happened was we we sort of bottomed out and it carried into February.
Basically the first couple weeks of February so that's kind of the shape of the curve. It was not it was a little less E V shaped in a little more U shaped and we have some very encouraging.
More recent information as it relates to pulling out of that and it looks extraordinarily familiar to the last two times, we got hit with waves here in the United States.
Yeah.
Okay. Thank you that's helpful and I guess, if I could also ask just on your backlog and what you've seen in terms of dynamics trend versus.
Hence the late summer.
In the U S as well as if you could provide some additional color in terms of what youre seeing on the static trading trends recently thank you.
Well as far as backlogs and and so forth I mean, it's really we we had an immediate back well I'll just talk about the United States I mean, it's about 50% of our business everything else is spread out a bunch about a number of other countries and in some ways. All these countries are the are behaving the same as it relates to coal.
It's just a question of how quickly do they shut down and how quickly do they open back up but they're all sort of.
Similar.
General shapes, if you will so the the backlog is immediate so if if you shut down procedures and anybody who is is scheduled for a procedure either goes gets pushed out to a new date or gets put on a waiting list. So that when the hospital opens back up so that's a natural.
Part of the backlog and Cecilia as you had mentioned we also have strategy scans that had been running through and so this we've had an accumulating number of what we call strat ex Greenlight patients, which is patient said you know their C. T scan data has run through strat acts and there. There are candidates for then going into a procedure have.
A chartis proceed God execute at the front end and then.
In the great majority of cases valves thereafter place. So we have accumulated a bit of a backlog.
And we will be chipping away at that is as some of these accounts open up and we typically see that among the first patients treated as you might imagine at these accounts when they reopen or those that were rescheduled or postponed.
Great. Thank you for taking our question.
Yeah.
Your next question comes from the line of Bob Hopkins from Bank of America. Your line is now open.
Oh, great Thanks, and good afternoon.
You guys said you are at 148 centers I think right now just curious how many of those are up in running.
Right now and doing procedures.
That's a really good question.
And.
I'm going to answer it and just a second but before I do I want to just I want to clarify one thing that I said in my prepared remarks, where I actually.
I've got a daughter in North Carolina, and I said, North Carolina, and I meant North Dakota, So we bluecross blueshield of North Dakota.
Is where we are we had the the success.
So Bob you want you were wondering about active accounts its a really a good and insightful question and the last time, we spoke we were lumping that together on a on a quarterly basis and you may recall that sort of in the pre COVID-19 phase our active accounts, where those that that had done procedure.
<unk> bought product in a 90 day period. This COVID-19 situation is so dynamic and so sort of on a onetime basis, we've will talk a little bit about sort of what we saw on a monthly basis and in one case.
And a fractional months just to kind of give you a sense of how things moved across the year. So if you think about the pre COVID-19 phase at about 70%.
So in a given month in the pre Covid phase about 70% of our accounts would be active as per the definition that I just threw out.
And and then you know we bottomed out and are in an incredibly abroad.
Abrupt away in April where we had 4% of our accounts active so we never again saw that kind of bottom. So we we rebounded a little bit across the year in July we were back up to about 60%.
But it was always a bit muted because of this sort of COVID-19 overhang. If you will in December we dipped down to about half of what would be considered normal that the low thirties.
And as I mentioned, we had expected that we would see that in January as well and we saw it almost exactly it was literally 32 in December and 32% in <unk> of our accounts. We're active in January and we expected them to see a bounce back up a significant bounce back up in February and our average across February.
He was actually 33 again.
But we saw in console. So that's sort of the the reality is the accounts, where we're down at the bottom for a little bit longer but those were pretty determined accounts and we see them around the world like in France, where churn in a way and generating revenue is not too far off from plan, but we're doing it out of much fewer accounts than in the United <unk>.
States are we saw in the back half of February the Reengagement and re ignition of a number of these accounts. So though it was only 32 per cent of the accounts by in the back half of the month revenues, where we're way up they went went up by 30%.
For the back half of the month over the first half of the month or.
Or I should say the number of cases went up about 30 per cent of revenues went up a lot more than 30% because a number of the accounts, we're beginning to stock up for planned cases, but if you look at just case volume the back half of February was up 30% over the front half of February and as you probably know we have resolution on about two weeks.
A scheduling as we look out and if you look at this week and next week, it's another 34% bump off of last the prior two week period. So.
We're seeing a this is what I was.
Referencing before and each of the last two waves we've seen.
Pretty classical and steep ascent out from the bottom and across this four week period. The last two weeks of February and the scant actual scheduled cases this week and next you see it again.
Interesting. Thank you for that that's super helpful.
Ken It feels like.
You're almost back to levels that would suggest as long as you keep on the run rate of late February early March that's all you need to do to get to the guidance for this year.
I mean, I could be off there a little bit because you didn't give us the specific revenue numbers for.
Back out in front of half of February, but you know it feels like a nice recovery.
<unk>.
So one am I Directionally correct, there and to where are we right now in terms of number of of our active centers what is that percentage today I'm sorry, if I missed it in your response.
Died in February that the number of active centers in February was or the percentage was 33%.
So there were just reigniting those centers. So we still have you know if if if if the norm is 70% and we would expect a roughly a doubling as we go forward here of those centers being active to get sort of up into that range. I think the other thing that I think we talked about on the last call theres sort of two.
Two elements to this one is what proportion of our accounts are active and I. Just gave you those data and I can tell you that in every single case, they're they're down because of Covid. So there's not something else going on here and then you have this sort of standard overhang you may remember that our active account.
It's established accounts were running at about seven <unk>.
Procedures per quarter, once you get them up and running and that in the in this phase that we're in our established accounts are running at about four procedures per quarter. So we're not only looking to open up these accounts, but also to get them back up to sort of pre COVID-19 procedure levels.
And and and I think that's what we're that's what we started to see we saw that acceleration.
In the existing accounts in the back half of February and I expect you know we had a new account that Kai.
Kaiser account that are big Kaiser account actually that just did their first case today.
And we're going to start to see more and more of our existing accounts come back online and additional new accounts come online.
Well, that's great because the 32 per cent seems to be using it quite a bit that's impressive.
Anyway, thanks for the detail, but that's true.
Thank you very much.
Next question is from Rick Wise from Stifle. Your line is now open.
Good afternoon gentlemen.
Glen.
Just maybe let's think about it.
Talk to us give us some more color on the.
65 to 70 per cent accounts, who are not actors and my question really is.
And I'm sure you're engaged with them what are they saying to you.
Jim.
Are they giving you any indication of interest and what it would take to get them.
All this back online.
What do you sense is the hold up.
Maybe.
On your on the.
The net.
The non active dock and center yeah.
So one of the things you get so we're super sensitive to ICU capacity in ICU consumption and if you think about the shape of the curve you know sort of this.
Rick the last time, you that youre the guy that I spoke with last because you had a little conference. There was a few days after the last call and it was we were right on the sort of at the base of the mountain and we've gone all the way up that mountain in terms of sort of number of cases, and we've come back down almost to the exact same level when we spoke last but thing.
About.
A another curve that sort of pushed out and that's the ICU curve and so what happens is those beds tend to fill up and they're not going to empty out for some number of weeks. Afterwards. So a lot of these hospitals are trying to make sure. They they clear and have the ICU capacity and then they just have to restart their engine. So one of the questions might be.
What are the indicators well I think the best indicator is revenue, which is what I just I mean, basically we've seen I talked about cases in the United States, 70% of our businesses case is basically trunk stock. So it's you know our revenues reflect cases, but if you look at revenue as the numbers are even.
More impressive than the ones that I just shared with you I mean, if you look at the back half of February revenues were 80% higher than they were in the in the front half and that extra revenue was just stocking accounts, putting product on shelf getting ready for procedures and so forth. So.
The other things. So so so for me those are really important metrics, but theres a lot of other indicators that point in that direction. I mean, if you look at it you see an upward trend since the beginning of the year in terms of Strat ex accumulations you see an upward trend on the number of in were inbound calls into our <unk>.
<unk> centers, we see an increase since the beginning of the year again, an upward trend in web traffic where people are are are gathering information on the procedure.
As I mentioned, where you you know we we added some accounts, it's pretty pretty crazy time to be adding new accounts. We added 13 in the fourth quarter and and then like I said, just the case volume, which we can we have visibility to as we look forward. So.
Hum.
Great.
And I'm not sure. This is a relevant question given or it's answerable question, given it's still such early days, but just.
Just out of curiosity.
You clearly, you're calling out again and again Glenn that strikes is growing.
Gotta be iPhone growing more than it implants.
Is there a ratio of static implants that you'd want to share it.
It would typically we'd expect it to be more implant rates, but is it one and a half times normal or is that a way to think about it.
It's just so hard to give it that those data right now because of Covid and the and the faucet being turned on and off with regard to procedures. It's really hard to give you that information and you got delayed cases, and we are building algorithms that look at the very question that you know we've already built them, but they get they get blown up bike bye.
This week, we had three major mountains that hit us of Covid across 'twenty 'twenty. One so the data that comes out of this when you start saying well wait a minute. They we got the strategy scan and then they get hit by a wave in and basically everything froze for three months and then they had to reward them and you know does that mean that the normal.
Time between the strategy scan and treatment is seven months now it doesn't you know we don't know I should say, we don't know that's what it was when you had all those big delays in the middle but what you're asking for yes, where we are definitely I'm digging deep, but I think we're going to have to get some clear sort of runway out in front of us to be able to GAAP.
They're what I would consider it to be.
Good data.
Yeah.
Can't tell you the trend lines up on all of those things. So I feel you know it was when we when we last spoke.
Does really anxious about what was ahead and I feel infinitely more comfortable knowing that we're on the backside of this thing and I just saw it moments ago Biden, claiming that everyone's going to get vaccinated by the end of May who who knows whether that's going to happen, but the the point is is that I think we're headed in a positive direction in <unk>.
We've got a lot of indications that our business is lining up in that way.
Great. That's wonderful to hear two last quick ones I'll ask them at the same time.
So Derek doesn't feel left out.
I know you are anxious to give us gross margin guidance.
For 2021.
I mean that sort of thing myself.
Okay fourth quarter was a more.
Now pressured quarter than you might have expected your store.
Gross margin number.
I mean, why Wouldnt 'twenty, one be at that sort of fourth quarter rate.
If not better, but you know why would it be better.
Given higher volume than on my last I was just curious.
Yeah.
You didn't talk about weather, but.
To what extent did weather have an impact on your January.
February volumes, maybe not at all I don't know, but.
Thank you very much.
I'll take the last question first.
Staggering as that snow storm was and I'm sure. We lost a few cases as a result.
All my sales force is talking about is COVID-19 restarts and so forth so I.
I think it got it got muted a little bit by the impact of of Covid restarts, but I'm sure. We we probably postponed some number of cases in various different locations Derek gross margin.
Yeah, that's a great question, Rick So when we think about gross margins for 2021, there's a couple of important dynamics to consider so first off we were very happy to see our gross margin at 72 per cent, which I think is one of the highest levels that we've that we've ever seen in this last fourth quarter of 2020.
Moving into 'twenty 'twenty, one there are two dynamics of factor in one is that we're seeing any significant increase in stock based compensation expense. So that clearly flows through the Opex line as I mentioned and we're expecting you know $9 million of the Opex guidance that I provided to you to be.
<unk> accounted for by this noncash charge stock based compensation also flows into our Cogs through an increase in labor costs and that gets capitalized into inventory and then comes through the P&L as we sell our inventory so stock based compensation.
Expense related cost to labor dragged down our gross margins by about 1% next year.
And then on top of that we do have a couple of manufacturing related initiatives and investments associated with helping to automate our supply chain and helping to mitigate risk through second sourcing if you will.
And some of those expenses also hit our Cogs line next year. So that's the reason why we think we'll kind of start out at around 70% versus the 72 per cent that we saw last quarter, but we do then expect them to move up our gross margins.
Steadily.
By a point or so probably throughout the year as we continued to drive.
Overhead absorption.
Through our increased production volumes.
Thanks for all the color.
Next question is from Larry you'd be Glsen from Wells Fargo, you May ask your question.
Good afternoon, guys. Thanks for taking the question just a few from me here.
Derek on Opex.
I think even even when you adjust for stock based comp.
It's still the guidance was a little bit higher than we were modeling so could.
Could you could you give us kind of an apples to apples number the 85 to 94 for 2021 versus what it was.
Ex ex stock based comp you know adjusting for that you know.
Compared to 2020, and where is just color on where the incremental spending is going and I had a couple of follow ups.
Yeah, So it's low stock based comp.
Right.
In 2021 again.
Again, as I mentioned, I think that's going to be close to 10 million call it $9 million or so.
In in in contribution right. So absent that stock based comp it was you're talking kind of $10 million low risk.
70, $75 million or so, okay, Katy hi, and in terms of.
The stock based compensation in Q in 2020.
It was relatively low absent Q4, where we did see a significant contribution primarily from.
The E. S. P. P program and of course this is all related to kind of the very rapid appreciation of of.
Of our of our stock price. So again, you know I would take out about $9 million from our 2021, Opex and kind of that's what it would have been without this noncash charge now kind of in terms of where the Opex spend is going to go I would think about kind of a you know a.
Few million dollars step up sequentially between the $16 4 million that we did in in Q4, and what we think will do in Q1 and that kind of initial step up is again public company costs and incremental stock based comp charges.
And then I would expect to.
Do you see kind of a continued slight.
Slight increase in Opex through the remaining three quarters, a year and that Opex is it primarily primarily driven by an increase in personnel related expenses much of which is related to our commercial expansion of our commercial organization, our commercial infrastructure as well as some some G&A and then.
On the R&D front.
I spend in towards our clinical study costs associated with Erez seal again, increasing through the back part of the year I is a major driver for that for that expense.
That's very helpful and.
Just two last one last one from me here, what what are the next steps in Aerocele, just kind of a you know congratulations on the breakthrough status, but what's the path forward here and just lastly, glad any any update on the Japan. Thanks for taking the questions.
Yeah.
So with regard to Ara seal as we've talked about before we're executing a study in in Europe. When we last spoke.
I think we had maybe an ethics approval, we've got a number of them now we've got three sites that have been activated we've enrolled a.
A few patients already so we're we're often running on that trial. So that's our that's where we are we're also planning on submitting an IDE EE in the U. S. Later this year specific to Aerocele. So we're marching along that's something that we are very interested and excited about but its off on the hurt.
Eison upside.
<unk> sort of best case U S market entry at the end of 'twenty 'twenty four almost certainly 2025.
We certainly expect O U S. Before then but but probably sometime during 2024. So those are things that were that are out in front of us and we're working hard on.
With regard to Japan.
That too is something that we're very focused on I think we're on schedule as it relates to what we talked about probably the last time.
Which is to say that we are planning on submitting our application that P. M D. A.
Later on this year.
And we see ourselves commercial sometime probably.
Probably later in 'twenty 'twenty three.
Thanks for taking the questions guys.
Thank you Larry.
Operator are there any questions further questions.
Yeah.
Okay.
Yeah.
Operator, we have one more quick one Q.
Hello can you hear me.
Yes.
All right. Your last question is from Bill <unk>. Your line is now open.
Thank you.
Okay.
Excuse me Mr. Bill Giovanni you May ask your question.
Okay.
Yeah.
Uh huh.
Yeah.
So it's me Mel Levine, Inc. You May ask your question.
Yes, Hi can you hear me.
Yes.
Oh, great. Thanks.
Uh-huh dead space there just a point of just a question on clarification. Glenn is you mentioned that Youre seeing high volume at the centers that are active and I think that's really my only question really coming out of this is are you seeing patients that are transferring from one center to another in order to <unk>.
Get a procedure.
<unk> completed or are these your existing customers are just becoming more active.
It is it is certainly more of the latter than the former we do so we have seen the movement of patients from one center to another but often it's a center thats not doing procedures.
You know sort of not a not a treatment center going to a treatment center.
Which was actually what happened today at a Kaiser where they were from one Kaiser location and will move to another to have the procedure so that happens occasionally.
And in the military hospitals that often happens where they'll they'll go to one of the local hospitals, that's doing the procedure, but the higher volumes in existing centers. It may not be the right. It's possible that my resolution on number of accounts is not quite this where my resolution is on.
On revenues, but I and case volume, but all the indications.
Indications that I have suggest that existing accounts are doing more procedures, which kind of makes sense to me, they're just I think.
They just feel more confident as they move forward that.
That they're not going to there's not another wave that's going to hit.
And so there they're freeing up some some patients on the waiting list.
And what I mean.
Assuming.
Yeah and into your commentary that the average you know kind of four per quarter vs. Seven is that for the active centers are for an older centers because what I'm trying to share that is are you exceeding net seven if those active centers are doing eight or nine and so when we do get the opening back up what kind of what can that can true.
Range lead to.
Yeah. These these numbers are are probably relatively steady state numbers and what happens when you come out of here as you get these kinds of post wave this being the third I expect that those are going to be lumpy and we'll have to see that over time I expect that we will get back up to seven.
During this sort of reemergence I wouldn't be surprised that that if people poll.
Some number off of a waiting list.
That day, they may go above what they would normally do when they get back to steady state. So.
I don't think I have a real clean answer to your question.
Okay, well, great well, thanks for taking my questions I appreciate it.
You bet Bill take it easy.
I'll turn the call back over to you to Glenn for closing statement.
Great well I don't really have a closing statement, but I really appreciate everybody's interest and ongoing support and and we're very excited about what's out ahead. We've we have navigated through some pretty challenging situations and are very pleased with kind of the fundamentals that we see aligned as we move forward.
Thank you very much.
Ladies and gentlemen that concludes today's conference call. Thank you for participating you may now all disconnect.
Okay.
Okay.
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