Q3 2021 PROCEPT BioRobotics Corp. Earnings Call

November 4, 2021

Good afternoon, and welcome to pros that bio <unk> robotics third quarter earnings conference call.

Operator 2: Good afternoon, and welcome to PROCEPT BioRobotics' Q3 Earnings Conference Call. At this time, all participants are in a listen-only mode. We will be facilitating a question and answer session towards the end of today's call. As a reminder, this call is being recorded for replay purposes. I would now like to turn the conference over to Matt Bacso from Gilmartin Group for a few introductory comments.

Operator: Good afternoon, and welcome to PROCEPT BioRobotics' Q3 Earnings Conference Call. At this time, all participants are in a listen-only mode. We will be facilitating a question and answer session towards the end of today's call. As a reminder, this call is being recorded for replay purposes. I would now like to turn the conference over to Matt Bacso from Gilmartin Group for a few introductory comments.

At this time all participants are in a listen only mode.

He will be a question and answer session.

Towards the end of debased call as a reminder, this call is being recorded for replay purposes.

I would now like to turn the conference over to Matt Backfill from Gilmartin group for a few introductory comments.

Thanks, operator, good morning, and thank you for participating in today's call joining me from process by robotics, a resin that now CEO and Kevin waters CFO earlier today <unk> released financial results for the quarter ended September 32021, a copy of the press release is available on the company's website before we begin I'd like to remind.

Matt Bacso: Thanks, operator. Good morning, and thank you for participating in today's call. Joining me from PROCEPT BioRobotics are Reza Zadno, CEO, and Kevin Waters, CFO. Earlier today, PROCEPT released financial results for the quarter ended September 30, 2021. 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 1995. Any statements contained in this call that relate to expectations or predictions of future events, results, or performance are forward-looking statements.

And 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 1995 any statements contained in this call that relate to expectations or predictions of future events results or performance are forward looking statements.

Matt Bacso: All forward-looking statements, including without limitations, those relating to our operating trends and future financial performance, the impact of COVID-19 on our business, expense management, expectations for hiring or growth, market opportunity, revenue guidance, commercial expansion, and future product development and approvals, 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 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 final prospectus filed with the SEC pursuant to Rule 424(b)(4) on 16 September 2021, in connection with our initial public offering.

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 expense management expectations for hiring or growth market opportunity revenue guidance commercial expansion and future product development and approvals 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 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 final prospectus filed with the SEC pursuant to rule 424 before on September <unk>.

<unk> 2021 in connection with our initial public offering. This conference call contains time sensitive information and is accurate only as of the live broadcast on November four 2021 process, our robotics disclaims any intention or obligation except as required by law to update or revise any financial projections or forward looking statements.

Matt Bacso: This conference call contains time-sensitive information and is accurate only as of the live broadcast on 4 November 2021. PROCEPT BioRobotics 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 now turn the call over to Reza.

Because of new information future events or otherwise with that I will now turn the call over to Reza.

Thanks, Matt Good afternoon, and thank you for joining us I.

Reza Zadno: Thanks, Matt. Good afternoon, and thank you for joining us. I would like to acknowledge that this is our first earnings call since we completed our IPO and listed on Nasdaq in September, where we raised approximately $172.4 million in net proceeds. I would like to take this opportunity to say thank you to all those who participated in the offering and to those who invested in the company since. I would also like to again thank the entire PROCEPT team, our board of directors, and most of all, our patients and the clinicians who care for them. With all of your support, we are well-positioned to take the next steps toward our goal of making Aquablation therapy the standard of care for prostate enlargement or BPH. Moving to our quarterly revenue results.

I would like to acknowledge that this is our first earnings call. Since we completed our IPO and listed on NASDAQ in September where we raised approximately $172 $4 billion in net proceeds.

I would like to take this opportunity to say thank you to all those who participated in the offering and to those who invested in the company since.

I'd also like to again, thank the entire <unk>, our board of directors and most of all our patients and the clinicians who care for them.

With all of your support we are well positioned to take the next steps toward our goal of making a correlation therapy the standard of care for prostate enlargement or BPH.

Moving to our quarterly revenue results.

Reza Zadno: Our revenue for Q3 2021 was $8.7 million compared to $2.1 million for Q3 2020. In Q3, US AquaBeam system revenue was $5 million, US handpiece and consumable revenue was $2.2 million, and total international revenue was $1.3 million. We ended the quarter with a US install base of 75 AquaBeam robotic systems. We are very pleased with the commercial traction we have achieved following the recent Medicare coverage decision, which became effective at the end of 2020.

Our revenue for the third quarter of 2021 was $8 7 million compared to $2 $1 million for the third quarter of 2020.

In the third quarter U S equity beam system revenue was $5 million U S. Handpiece and consumable revenue was $2 2 million and total international revenue was $1 $3 million.

We ended the quarter with a U S installed base of 75 will be in robotics systems.

We are very pleased with the commercial traction we have achieved following the recent Medicare coverage decision, which became effective at the end of 2020.

While we are still very early in our commercial launch we believe our robust clinical data outstanding real world patient outcomes and rapid early adoption indicate that hospital surgeon and patient and see the benefits of a robotics system and that we are on the right path and our strategy is working.

Reza Zadno: While we are still very early in our commercial launch, we believe our robust clinical data, outstanding real-world patient outcomes, and rapid early adoption indicate that hospitals, surgeons, and patients see the benefits of our robotic system and that we are on the right path and our strategy is working. We are seeing strong utilization from existing customers, with even a few accounts having converted most of their respective procedures to Aquablation. On today's call, I want to provide some additional background on the company, and Kevin will later provide additional detail on our quarterly financial results and provide our Q4 revenue guidance. However, I first want to address two topics that have had a broad-scale impact across the medical device industry. First being COVID.

Yeah.

We are seeing strong utilization from existing customers with even a few accounts, having converted most of their respective procedures to aqua ablation.

On today's call I want to provide some additional background on the company and Kevin will later provide additional detail on our quarterly financial results and provide our fourth quarter revenue guidance.

I first want to address two topics that have had a broad scale impact across the medical device industry.

First being COVID-19, while we recognize the macro impact on elective procedures due to increased COVID-19 cases, and staffing shortages in the United States, we saw only a handful of customers affected and temporarily halt cases.

Reza Zadno: While we recognize the macro impact on elective procedures due to increased COVID cases and staffing shortages in the United States, we saw only a handful of customers affected and temporarily halted cases. That said, our ability to achieve our plan was relatively unaffected both on handpiece and system revenue. We continue to take proactive steps as this is an area we monitor very carefully. Second is the disruption associated with the global supply chain and its impact on medical device companies. Earlier in the year, we made the decision to increase our inventory levels, and we believe we have sufficient material on hand to meet current demand. We are also actively working with our manufacturing partners to ensure adequate product on hand in order to meet our growth forecast.

That said our ability to achieve our plan was relatively unaffected both on Handpiece and system revenue.

We continue to take proactive steps.

This is an area we monitor very carefully.

Second is the disruption associated with the global supply chain and its impact on medical device companies.

Earlier in the year, we made the decision to increase our inventory levels and we believe we have sufficient material on hand to meet current demand.

We're also actively working with our manufacturing partners to ensure adequate product on hand in order to meet our growth forecast.

While we do not expect supply chain issues to have an impact on our ability to meet our revenue plans, we continue increasing inventory levels for certain components to mitigate any future risk.

Reza Zadno: While we do not expect supply chain issues to have an impact on our ability to meet our revenue plans, we continue increasing inventory levels for certain components to mitigate any future risk. Before moving to our financial results, I would like to provide a brief introduction of our company to those who did not have a chance to hear our stories during the IPO roadshow. PROCEPT BioRobotics is a surgical robotic company with the mission to become the BPH standard of care. In the United States, there are approximately 40 million men impacted by symptoms of BPH, and we expect this number to keep increasing as the population of men above the age of 65 is expected to double in the next 10 years.

Before moving to our financial results I would like to provide a brief introduction of our company to those who did not have a chance to hear our story during the IPO Road show.

Pro set by Robotics is a surgical robotic company with the mission to become the BPH standard of care.

The United States. There are approximately 40 million men impacted by symptoms of BPH and we expect this number to keep increasing as the population of men above the age of 65 is expected to double in the next 10 years.

BPH is the number one reason men is it a urologist and almost all men suffering from BPH say it impacts their lives, whether it's waking up multiple times throughout the night to empty their bladder or completely avoiding social events altogether.

Reza Zadno: BPH is the number one reason men visit a urologist, and almost all men suffering from BPH say it impacts their lives, whether it's waking up multiple times throughout the night to empty their bladder or completely avoiding social events altogether. Out of the 40 million men impacted by symptoms of BPH in the United States, there are about 12 million who are actively being managed. Specifically, roughly 4.3 million are watchful waiters, 6.7 million are actively taking medications, while 1.1 million are pharmaceutical fallouts, and only 400,000 undergo some form of surgical intervention. As you can see, there is a significant unmet need and a very large market. The reason patients forego treatment is the dilemma they face with the trade-off between safety and efficacy. Legacy treatment options, including pharmaceuticals or surgical interventions, whether resective or non-resective, present trade-offs.

Out of the 40 million men impacted by symptoms of BPH in the United States, there are about $12 million or actively being managed specifically.

Specifically roughly $4 3 million are watchful wagers $6 7 million are actively taking medication why $1 1 million or pharmaceutical falloff and only 400000 undergo some form of surgical intervention.

As you can see there's a significant unmet need and a very large market.

The recent patients forego treatment is the dilemma they face with the tradeoff between safety and efficacy.

Legacy treatment options, including pharmaceuticals, or surgical interventions, whether it be effective or non respected present trail.

Reza Zadno: In most cases, the patient does not have a choice for treatment due to the prostate size and shape. For example, a patient can choose a less invasive or safer treatment option, but will most likely receive a lower impact of efficacy. Additionally, if a patient chooses a surgical intervention, he will experience a high level of efficacy and may be willing to accept sexual function side effects as well as potential incontinence issues. Based on the data supporting our FDA clearance and real-world experience, we believe our Aquablation therapy is poised to become the treatment of choice for BPH as it does not require compromising between safety and efficacy. Our robotic solution seamlessly integrates image guidance, customized treatment planning, and automated robotic surgery utilizing a heat-free water jet to prevent surrounding tissue damage.

And in most cases, the patient does not have a choice for treatment due to the prostate size and shape. For example, if patients can choose a less invasive or safer treatment option, but will most likely receive a lower impact of efficacy.

Additionally, if a patient chooses the surgical lead conversion he will experience a high level of efficacy and may be willing to accept sexual function side effects as well as potential incontinence issues.

Based on the data supporting our FDA clearance and real World experience, we believe Aqua ablation therapy is poised to become the treatment of choice for BPH as it does not require compromising between safety and efficacy.

Our robotics solution seamlessly integrates image guidance.

<unk> treatment planning and automated robotic surgery, utilizing a huge water jet to prevent surrounding tissue damage.

This innovation is the only FDA cleared technology that can consistently treat the entire range of cross the sizes and shapes and it is independent of the surgeon's experience.

Reza Zadno: This innovation is the only FDA-cleared technology that can consistently treat the entire range of prostate sizes and shapes, and it is independent of the surgeon's experience. The robotic aspect of the procedure enables consistency and predictability in surgical techniques and outcomes. We have compiled three core studies that demonstrate efficacy, safety, and durability across prostate sizes, shapes, and surgeon experience. This includes our WATER study, the only FDA pivotal study randomized against TURP, which is considered the historical standard of care for treating BPH. The study proved superior safety due to low irreversible complications and also superior symptom relief for prostates in the range of 50ml or greater. Following the study, we performed our WATER II study, which is the only prospective multi-center study successfully completed for large prostates between 80ml and 150ml.

The robotics expect of the procedure enables consistency and predictability in surgical techniques and outcomes.

We have compiled three core studies that demonstrate efficacy safety and durability across prostate sizes and shapes and surgeon experience.

This includes our water study the only FDA pivotal study randomized against <unk>, which is considered the historical standard of care for treating BPH.

This study proved superior safety due to low irreversible complications and also superior symptom relief for prostate in the range of 50 millimeters or greater.

Following this study we performed our water two study, which is the only prospective multi center studies successfully completed four large prostates between 80 and 150 milliliters.

Reza Zadno: Similar to water, we became the only treatment for large prostates with a low irreversible complication rate and significant symptom relief. Our third study, OPEN WATER, is the first multi-center all-comer study with real-world results that validates the Aquablation therapy safety and efficacy in prostates ranging from 20 to 150 milliliters. Aquablation therapy is clinically proven to consistently remove prostate tissue independent of prostate size, anatomy, or surgeon experience with a low risk of irreversible outcomes. Thus, we believe PROCEPT has cracked the code and offers the only solution for men suffering from BPH that is both safe and effective. Thanks to our robust clinical data, publications, and strong KOL and society support, we have made significant progress in all three parts of reimbursement, coding, coverage, and payment.

Similar to water, we became the only treatment for large prostates with a low irreversible complication rate and significant symptom relief.

Our third study open water is the first multi center all Commerce study with real World results that validate the Aqua ablation therapy safety and efficacy in prostate ranging from 20 to 150 millimeters.

Actual ablation therapy is clinically proven to consistently remove prostate tissue independent a prostate signs and absolute for surgeon experience with the low risk of irreversible outcomes.

Thus, we believe process has cracked the code and offers the only solution for men suffering with BPH that is both safe and effective.

Thanks to our robust clinical data publication and strong Kols and society support we have made significant progress in all three parts hub reimbursement coding coverage and payment.

Reza Zadno: On coding and payment, we have a unique water jet resection CPT code for the procedure that provides reimbursement to the physician and is mapped to an APC level that provides adequate reimbursement to the hospital performing Aquablation. On coverage, as of January 2021, Aquablation has positive coverage policies from all seven Medicare Administrative Contractors, making Aquablation available for Medicare patients nationally, which we estimate represents about half of all hospital-based resective procedures. We also have positive private payer coverage from Anthem, Humana, Healthcare Service Corporation, Blue Cross of Massachusetts, Emblem, and most recently, Cigna, which became effective on 15 September 2021. In the US, since January 2021, we have seen significant momentum in AquaBeam sales, and we believe that is directly related to increased coverage and our core strategy of targeting high-volume hospitals.

On coding and payment we have a unique water jet resection CPT codes for the procedure that provides reimbursement the disposition and is mapped one APC level that provides adequate reimbursement to the hospitals performing X population.

On coverage as of January 2021, our cooperation have positive coverage policies from all seven Medicare administrative contractors, making that population available for Medicare patients nationally, which we estimate represent about half of all hospital base III elective procedures.

We also have positive private payer coverage from anthem Humana Health Care Service Corporation Blue Cross of Massachusetts emblem and most recently Cigna, which became effective on September 15 2021.

In the U S. Since January of 2021, we have seen significant momentum excellent sales and we believe that is directly related to increased coverage and our core strategy of targeting high volume hospitals.

Our product offering consists of the robot as single use Handpiece and that annual service contract. We believe our business model with Aqua been robotic system and recurring disposable revenues enables an efficient commercial model.

Reza Zadno: Our product offering consists of a robot, a single-use handpiece, and an annual service contract. We believe our business model with AquaBeam robotic system and recurring disposable revenues enables an efficient commercial model. We believe both of these factors are strong drivers for our growth. Our initial commercial strategy is to target the 860 high volume hospitals in the US that account for roughly 70% of all resected BPH procedures, or about 180,000 cases. Although a high volume hospital is defined as a center that does more than 100 cases per year, these hospitals on average do more than 200 per year. This is a great starting point for us, and we are seeing good penetration and adoption in these centers, particularly since Medicare coverage became effective in January.

We believe both of these factors are strong drivers for our growth.

Our initial commercial strategy is to target the 860 high volume hospitals in the U S that account for roughly 70% of all respective BPH procedures or about 180000 cases.

Although our high volume hospitals as defined as a center that does more than 100 cases per year. These hospitals on average do more than 200 per year.

This is a great starting point for us.

And we are seeing good penetration and adoption in these centers, particularly since Medicare coverage became effective in January.

In order to efficiently target our customers. Our commercial approach has been to bring together a team consisting of capital sales reps, whose function is to sell our system to increase market penetration.

Reza Zadno: In order to efficiently target our customers, our commercial approach has been to bring together a team consisting of capital sales reps, whose function is to sell our system to increase market penetration, while Aquablation reps focus on educating and training surgeons to drive increased utilization. Lastly, our clinical support staff's function is to support cases and ensure an excellent customer experience. In summary, I believe Aquablation Therapy can truly revolutionize the treatment of BPH. We can consistently treat any prostate size and shape using our robotics irrespective of physician skill. Additionally, we have a first of its kind technology backed by compelling clinical data, favorable reimbursement, KOL support, and a proven commercial strategy. With that, I will turn the call over to Kevin.

While a correlation reps focused on educating and training surgeons to drive increased utilization lastly, our clinical support staff function is to support cases and ensure an excellent customer experience.

In summary, I believe our correlation of therapy can truly revolutionize the treatment of BPH, we can consistently treat any prostate size and shape using a robotic irrespective of position scale. Additionally, we have the first of its kind technology backed by compelling clinical data.

Our favorite Walgreen Bushmen COO.

Oil support and proven commercial strategy with that I will turn the call over to Kevin.

Thanks for the <unk> revenue for the third quarter of 2021 was $8 $7 million compared to $2 1 million for the third quarter of 2020.

Kevin Waters: Thanks, Reza. PROCEPT's revenue for Q3 2021 was $8.7 million compared to $2.1 million for Q3 2020. The increase was primarily driven by US revenues, including both system sales to new and existing hospital customers and increased handpiece revenue. In Q3, US system revenue was $5 million compared to $600,000 in Q3 2020. In the US, we sold 14 AquaBeam systems and saw average selling prices above $350,000. This represents an increase from both prior year and Q2 2021 levels. Our ending Q3 US install base was 75 AquaBeam systems. Prior to obtaining Medicare coverage in January 2021, we did place numerous AquaBeam systems under evaluation agreements as compared to a direct sale.

The increase was primarily driven by U S revenues, including both system sales to new and existing hospital customers and increased Handpiece revenue.

In the third quarter U S system revenue was $5 million compared to $600000 in the third quarter of 2020.

In the U S. We sold 14, Aqua beam systems and saw average selling prices above $350000. This represents an increase from both prior year and second quarter 2021 levels.

Our ending third quarter U S installed base with 75 Aqua being systems.

Prior to obtaining Medicare coverage in January 2021, we did place numerous aqua beam systems under evaluation agreement as compared to direct sale of.

Kevin Waters: Of the 75 systems in our install base, we still have approximately 20 systems under these evaluation arrangements. Even though our install base of evaluation systems represents a near-term revenue opportunity, we are encouraged that over half of our system sales in Q3 were to new accounts that previously did not have an evaluation system. We expect new accounts to comprise the majority of system sales moving forward, and we are anticipating approximately half of the 20 systems under our evaluation agreements do not convert to a sale. Turning to handpiece revenue. US handpiece revenue was $2.2 million compared to $500 thousand in Q3 of 2020 and $1.7 million in Q2 of 2021.

Of the 75 systems in our installed base, we still have approximately 20 systems under these evaluation arrangements.

Even though our installed base of evaluation systems represents a near term revenue opportunity. We are encouraged that over half of our system sales in the third quarter were to new accounts that previously did not have an evaluation system.

We expect new accounts to comprise the majority of system sales moving forward and we are anticipating approximately half of the 20 systems under our evaluation agreements do not convert to a sale.

Turning to Handpiece revenue.

U S. Handpiece revenue was $2 2 million.

Compared to $500000 in the third quarter of 2020, and $1 $7 million in the second quarter of 2021.

Handpiece revenue growth was driven primarily by increases in monthly utilization measure.

Kevin Waters: Handpiece revenue growth was driven primarily by increases in monthly utilization measured by handpieces sold per account compared to Q2 2021. We shipped approximately 840 handpieces in the US in Q3. International revenue for Q3 was $1.3 million compared to $1 million in both Q3 2020 and Q2 2021. This was primarily driven by modest increases in both system and handpiece revenue. Gross margin for Q3 2021 was 48.9% compared to -1% in Q3 2020 and 42.2% in Q2 2021. On a sequential basis, consolidated gross margin improvement was driven primarily by increased system average selling prices.

By hand pieces sold per account compared to the second quarter of 2021.

We shipped approximately 840 hand pieces in the U S in the third quarter.

International revenue for the third quarter was $1 3 million compared to $1 million in both the third quarter of 2020, and the second quarter of 2021.

This was primarily driven by modest increases in both system enhanced revenue.

Gross margin for the third quarter of 2021 was 48, 9% compared to a negative 1% in the third quarter of 2020 and 42, 2% in the second quarter of 2021.

On a sequential basis consolidated gross margin improvement was driven primarily by increased system average selling prices.

Total operating expenses in the third quarter of 2021 were $17 million compared to $10 9 million in the same period of the prior year and $16 8 million in the second quarter of 2021.

Kevin Waters: Total operating expenses in Q3 2021 were $17 million compared to $10.9 million in the same period of the prior year and $16.8 million in Q2 2021. This was primarily driven by increased sales and marketing expenses as we expand our sales organization and G&A expenses associated with supporting a larger, growing public company. Net loss was $14.1 million for Q3 2021, compared to a loss of $12 million in Q3 2020. Our cash and short-term investment balance as of 30 September 2021 was $320.5 million, while our long-term borrowings totaled $50 million. We believe our IPO proceeds will provide the liquidity and capital resources needed to support and grow our current business. Moving to our financial guidance.

This was primarily driven by increased sales and marketing expenses as we expand our sales organization and G&A expenses associated with supporting a larger growing public company.

Net loss was $14 1 million for the third quarter of 2021 compared to a loss of $12 million in the third quarter of 2020.

Our cash and short term investment balance as of September 30 was $325 million, while our long term borrowings totaled $50 million.

We believe our IPO proceeds will provide the liquidity and capital resources needed to support and grow our current business.

Moving to our financial guidance.

Kevin Waters: We expect Q4 total revenue to be in the range of $8.7 to 9 million, which would result in full year 2021 revenues of $33 to 33.3 million. Given that we are still in the early stages of expanding our sales force following our IPO, we expect Q4 AquaBeam system unit sales to be comparable to Q3 of 2021 levels, and we would remind you that system unit sales can vary from quarter to quarter. Regarding system average selling price trends, we continue to expect pricing to vary given the early stage of our commercial launch and expect Q4 pricing to be in the $330,000 range, which is consistent with year-to-date actuals. Additionally, we do not expect to realize any meaningful utilization benefits in Q4 from the recent Cigna policy coverage.

We expect fourth quarter total revenue to be in the range of $8 $7 million to $9 million.

Which would result in full year 2021 revenues of 33 to $33 $3 million.

Given that we are still in the early stages of expanding our sales force. Following our IPO, we expect fourth quarter Aqua beam system unit sales to be comparable to third quarter of 2021 levels and we would remind you that system unit sales can vary from quarter to quarter.

Regarding system average selling price trends, we continue to expect pricing to vary given the early stage of our commercial launch and expect fourth quarter pricing to be in the $330000 range, which is consistent with year to date actuals.

Additionally, we do not expect to realize any meaningful utilization benefits in the fourth quarter from the recent Cigna policy coverage. However, we are forecasting a slight increase in hand piece of sold per account in the fourth quarter compared to the third quarter.

Kevin Waters: However, we are forecasting a slight increase in handpiece sold per account in Q4 compared to Q3. At this point, I'd like to turn the call back to Reza for closing comments.

At this point I'd like to turn the call back to Reza for closing comments.

Thank you again for your time today, Kevin and I look forward to meeting many of you at future investor and industry conferences as well as individual meetings have a great day and at this point, we will take questions operator.

Reza Zadno: Thank you again for your time today. Kevin and I look forward to meeting many of you at future investor and industry conferences, as well as individual meetings. Have a great day, and at this point, we will take questions. Operator?

Thank you, ladies and gentlemen can I ask a question at this time you will need to press. The Star then the one key on your Touchtone telephone.

Operator 1: Thank you. Ladies and gentlemen, if you'd like to ask a question at this time, you will need to press the star then the one key on your touch-tone telephone. To remove yourself from the queue, you may press the pound key. Please stand by while we compile the Q&A roster. Our first question coming from the line of Josh Jennings with Cowen. Your line is open.

Operator: Thank you. Ladies and gentlemen, if you'd like to ask a question at this time, you will need to press the star then the one key on your touch-tone telephone. To remove yourself from the queue, you may press the pound key. Please stand by while we compile the Q&A roster. Our first question coming from the line of Josh Jennings with Cowen. Your line is open.

Remove yourself from the queue you May press the pound key.

Standby, while we compile the Q&A roster.

And our first question coming from the line of Josh Jennings with Cowen Your line is open.

Good afternoon, thanks for taking the questions and congratulations on a strong quarter out of the gate here from the IPO.

Josh Jennings: Good afternoon. Thanks for taking the questions and congratulations on a strong quarter out of the gate here from the IPO. Reza and Kevin, I wanted to just ask about the reimbursement landscape. It's evolving very nicely as you stated in your prepared remarks, Reza, the initial coverage policy decision by Cigna came earlier than expected. Can you help us understand what's on tap in the private payer decision-making realm? Any timelines that we should be thinking about for additional positive coverage decisions?

Risks and Kevin I wanted to just ask about the reimbursement landscape, it's evolving very nicely as you stated in your prepared remarks or is it <unk>.

<unk> coverage policy decision by by Cigna came earlier than expected can you help us understand what's on tap.

Private payer decision, making a realm.

Any any timelines that we should be thinking about for additional positive coverage decisions.

Yeah. Thanks, Josh Yes, we are very happy with the progress we have made in reimbursement on all aspects as I mentioned.

Reza Zadno: Yeah. Thanks, Josh. Yes, we are very happy with the progress we have made in reimbursement on all aspects, as I mentioned, coding, coverage, and payment. More importantly, the full Medicare coverage and Anthem, Humana, and recently Cigna. We are in continuous communication with many payers, including UnitedHealthcare, and we'll be submitting our most recent literature, as we're gonna have follow-up data on five years so that we can change the policy to positive policy. We are working with UnitedHealthcare and others. Our healthcare economics and market access is in communication with them.

Coding coverage and payment more importantly, the full Medicare coverage and <unk>.

<unk> Humana and recently Cigna, we are in continuous communication with.

Many payers, including United and will be sub mid teen Gar most recent literature.

As we are going to have follow up data.

Five years, so that we can change the.

Policy to positive policy sold.

Working with United and others are.

Health care economics and market access is in communication with them.

Excellent and then just a follow up.

Josh Jennings: Excellent. Just to follow up, sticking with the scheme on reimbursement, but just the financial incentive that's in play for Medicare patients with the transitional pass-through payment, I was wondering if you could review those dynamics and then also share with us level of reimbursement from the private payers as well?

Sticking with the scheme on reimbursement, but just the the financial incentive that's in play for Medicare patients with the transitional pass through payment.

I was wondering if you could review those dynamics and then also share with us.

Level of reimbursement.

From the private payer.

My parents as well at least the reason I'm asking is just thinking about the physician fee schedule that came out it may impact some of the non resected procedures in the <unk>.

Reza Zadno: Yes.

Josh Jennings: The reason I'm asking is just thinking about the physician fee schedule that came out that may impact some of the non-resective procedures and the office-based procedures and some of the manufacturers talking about those decisions driving some of the UroLift and Rezūm cases into the hospital outpatient setting. Is there a financial incentive in favor of Aquablation treatments in the HOPD setting relative to those non-resective options as well? Thanks for taking the questions.

Office based procedures and some of the manufacturers talking about those decisions driving some of the euro listeners in cases into the hospital outpatient setting is there a financial incentive in favor of optimization treatments in the <unk> setting relative to those not receptive.

Options as well thanks for taking the questions.

Reza Zadno: Yeah. Thank you for this question. With the recent news that we heard in the past few days, fortunately, our facility payment APC level six remains at the level it was in the $8,400. The physician fee is in the range of $700 to $800, similar to TURP, so that was unchanged. For 2022, our payment to the physician and the facility did not change. It stayed the same. I'm sorry, what was the other part of your question?

Thank you for this question.

With the recent.

News that we heard in the past few days Fortunately are.

Facility payments APC level 60 remains at the level. It was in the $8400. The physician fee is in the range of.

700 to 800 similar to <unk>. So that was unchanged. So put 2022, our payment to the physician and.

Facility did not change.

The same.

And.

I'm sorry, what was the other part of your question.

Josh Jennings: Oh, I was just curious, and I think some of your competitors with non-resective therapies, Rezūm-

I was just curious and I think some of the.

Your competitors with non with respective therapies.

So.

Reza Zadno: Yeah.

Josh Jennings: UroLift to just the reimbursement.

Just yes or no.

Yes, so as you know we are.

Reza Zadno: As you know. Yeah. As you know, we are in the resective market, and we are targeting high volume hospitals. Our procedures are done in the hospital setting, and they were not impacted. Some of the information were mostly on the office setting, so we are not in the office, we are in the hospital setting.

We are in their respective markets and we are targeting high volume hospitals, our procedures are done in the hospital setting and they were not impacted some of the information were mostly on the office setting. So we are not in the office we are in the hospital setting Josh.

Kevin Waters: Josh, this is Kevin. I just add to that, as Reza mentioned in his remarks, you know, our initial commercial focus are frankly the resective procedures, and we feel that from an economic standpoint at our levels, along with a transitional pass-through, you know, we compare very favorably there. You know, really don't see much of an impact or expect much of an impact with the non-resective procedures and any movement of that site of service should it occur.

Josh This is Kevin.

Add to that as Roger mentioned in his remarks, our initial commercial focus.

Frankly, the respective procedures and we feel that from an economic standpoint.

Our levels, along with a transitional pass through.

We compare very favorably there.

So really don't see much of an impact.

I expect much of an impact with the non resected procedures and any movement of that type of service should it occur.

Understood. Thanks for thanks for the answers guys.

Josh Jennings: Understood. Thanks for the answers, guys.

And then the tragic sharp has to do with that.

Reza Zadno: The transitional pass-through, that is, until the end of 2022. That is still in place.

Until the end of 2022 that that is still in place.

Our next question coming from the line of Amit <unk> with Goldman Sachs. Your line is open.

Operator 1: Our next question coming from the line of Amit Hazan with Goldman Sachs. The line is open.

Operator: Our next question coming from the line of Amit Hazan with Goldman Sachs. The line is open.

Oh, Thanks, good afternoon, and congrats on a nice start to your to your public life.

Amit Hazan: Well, thanks. Good afternoon, and congrats on a nice start to your public life.

Thanks, Jimmy Thank you Amit.

Kevin Waters: Thanks, Amit.

Reza Zadno: Thank you, Amit.

Sure.

Amit Hazan: Yeah, sure. Maybe first just a clarification question. I think if we heard you right, the installed base moved up by a couple units sequentially to 75. We're probably missing something there, in terms of just half the units in the quarter having gone to new accounts, suggest maybe there's some retirements. Is that what we're missing just to get to that number?

Kevin Waters: Yeah, that's correct. We do have retirements of demo units. What I had put forth in our prepared remarks is there's about 20 demo units left in the field out of the total 75 installed base. Right now we are forecasting that roughly half of those evaluation units do not convert to a sale. I just think it's important to remember that, you know, we place these evaluation units to drive procedure adoption prior to having Medicare coverage. What we're finding now is that when we have a direct sale, that typically includes buy-in from the hospital CEO, the physician, the reimbursement specialist, and they're fully committed and invested in their Aquablation program such that utilization in accounts for a direct sale are significantly greater than a demo program.

Kevin Waters: Really, as we discussed during the roadshow, we expect to kind of be through the majority of this demo program by the end of our year and don't plan for this program to be very material to how we operate moving forward in 2022.

We expect to kind of be through the majority of this demo program by the end of our year and don't plan for this program to be very material.

We operate moving forward in 2022.

Okay, and Thats, great and just as a follow up just to ask the question about kind of these greenfield units.

Amit Hazan: Okay. Yeah, that's great. Just as a follow-up, just to ask the question about kind of these greenfield units, and that was a good number to hear that half were in new accounts. Just given that we're all kind of getting to know you and hear how you think about kind of visibility, maybe talk to that funnel of new accounts to kind of exclude the evaluation units, you know, and just think about the greenfield. You know, how are you thinking about that funnel right now? How does it look like to you compared to what you just put up in this quarter, for example, and what we should expect as you further build out your sales force and exposure?

A good number to hear that hasler in new accounts.

And just just given that we're all kind of getting to know you and hear how you think about kind of visibility maybe talk to that funnel of new accounts, you kind of exclude the evaluation units.

And just think about the greenfield.

Hi, how are you thinking about that funnel right now how does it look like to you compared to what you just put up in this quarter for example.

And what we should expect as you as you further build out your sales force and exposure.

Yeah. So just in terms of funnel visibility I mean, I think we feel we have a high degree of visibility into the Greenfield accounts in the funnel as Reza mentioned, having over 860 hospitals, there's obviously a lot of opportunities we've implemented.

Kevin Waters: Yeah. Just in terms of funnel visibility, I mean, I think we feel we have a high degree of visibility into the greenfield accounts in the funnel. As Reza mentioned, you know, having over 860 hospitals, there's obviously a lot of opportunities. We've implemented robust CRM processes around how we're gonna evaluate what's in our funnel. We have a stage gate funnel process to evaluate those. With our price point as well, I'd point out, you know, being at our price point, we don't suffer from some of the same, I'd say, unpredictability that perhaps maybe larger capital equipment companies are subject to. With that said, Amit, we are gonna have variability quarter to quarter in capital equipment sales on a sequential basis. That's just the nature of the business.

Robust CRM processes around how we're going to evaluate what's in our funnel, we have a stage gate funnel process to evaluate those and with our price point as well I'd point out being at our price point, we don't suffer from some of the same.

The unpredictability of that perhaps maybe larger capital equipment companies are.

Our subject to with that said I mean, we are going to have variability quarter to quarter in capital equipment sales on a sequential basis and that's just the nature of the business, but the short answer is we have a high degree of visibility into our funnel.

Kevin Waters: The short answer is we have a high degree of visibility into our funnel.

Okay, great. Thanks, so much guys congrats again.

Amit Hazan: Okay. Great. Thanks so much, guys. Congrats again.

Reza Zadno: Bye. Thank you.

Thank you.

And as a reminder, ladies and gentlemen to ask a question you will need to press star one now.

Operator 1: As our final listener, gentlemen, to ask a question, you will need to press star one. Our next question coming from the line of Christopher Pasquale with Guggenheim. Your line is open.

Operator: As our final listener, gentlemen, to ask a question, you will need to press star one. Our next question coming from the line of Christopher Pasquale with Guggenheim. Your line is open.

Next question coming from the line of Chris Pasquale with Guggenheim. Your line is open.

Thanks, and congrats on a great start here guys Reza.

Christopher Pasquale: Thanks, and congrats on a great start here, guys. Reza, I thought your comments about not really being impacted by COVID or by the hospital staffing challenges were interesting 'cause we've definitely heard from some other companies in the urology space, that was a meaningful headwind for them this quarter. Do you think that you're just in too steep a part of your growth curve right now to really notice some of that macro stuff, or is there something about your business that you think shielded you from those issues?

Chris Pasquale: Thanks, and congrats on a great start here, guys. Reza, I thought your comments about not really being impacted by COVID or by the hospital staffing challenges were interesting 'cause we've definitely heard from some other companies in the urology space, that was a meaningful headwind for them this quarter. Do you think that you're just in too steep a part of your growth curve right now to really notice some of that macro stuff, or is there something about your business that you think shielded you from those issues?

Reza Zadno: Yeah. Thanks, Chris. As you know, we are very happy with the utilization that we saw in last quarter. I mean, we can talk more about it. We are working with high volume hospitals, and generally those are scheduled about one day a week. We had very few of those accounts canceling cases because of COVID. Some patients had canceled because they had COVID, but overall, the number of accounts that we were working with who had purchased the equipment and scheduled cases, those cases went through.

Kevin Waters: I'd also just add onto that, Chris. If you think of our business model, when we sell a new system to a hospital, as I think I just answered in my first question to Josh, that means the account is bought in. With that, you know, we don't sell systems without having visibility into that account, having the ability to do procedures in the near term. Given how early we are in our growth curve, I think we're just not gonna be as impacted, perhaps as a more steady state business that doesn't have as high a rate of growth.

I just answered my first question to Josh that means the account is bought in and with that.

We don't sell systems without having visibility into that account, having the ability to do procedures in the near term and given how early we R&R growth curve I think we're just not going to be as impacted perhaps a more steady state business that doesn't have as higher rate of growth.

That's helpful. Thanks.

Christopher Pasquale: That's helpful. Thanks. Could you just walk us through where you exited the quarter in terms of your US sales force headcount, how you're thinking about, you know, where you're gonna be at the end of the year and the impact that that has on your ability to ramp the top line in 2022?

Chris Pasquale: That's helpful. Thanks. Could you just walk us through where you exited the quarter in terms of your US sales force headcount, how you're thinking about, you know, where you're gonna be at the end of the year and the impact that that has on your ability to ramp the top line in 2022?

And then could you just walk us through where you exited the quarter in terms of your U S sales force head count.

How youre thinking about.

What are you going to be at the end of the year and the impact that that has on your ability to ramp the topline in 'twenty two.

Yes, so where we ended the quarter RASM bifurcated, our salesforce in his prepared remarks in the robotic reps Aqua ablation reps and clinical specialists.

Kevin Waters: Yeah. Where we ended the quarter, Reza bifurcated our sales force in his prepared remarks into robotic reps, Aquablation reps, and clinical specialists. We ended the quarter with roughly 10, and 10 in each of those buckets, which would be a total of 30. We are currently in the process today of hiring additional capital reps and utilization reps. Many of those folks are already on board in Q4. The expectation is by Q1, the number of robotic reps and Aquablation reps will be approximately double where they were at the end of Q3. We're training those reps now. I would remind you, our expectation is that those reps, they really don't become productive until 3 to 6 months.

We ended the quarter with roughly 10, 10 and 10 in each of those buckets, which would be a total of 30 and we are currently in the process today of hiring additional capital reps and utility utilization reps. Many of those folks are already onboard in the fourth quarter. The expectation is by the first quarter the <unk>.

<unk> of robotic reps in Aqua ablation reps will be approximately double where they were at the end of the third quarter. We're training those reps now I would remind you our expectation is that those reps they really don't become productive until three to six months, but definitely as we discussed on the road show we felt giving.

Kevin Waters: Definitely, as we discussed on the roadshow, we felt given the coverage that we've obtained, that it'd be prudent to start hiring the folks for 2022 today. And that's what we've been doing, and we feel good that the sales force is gonna be roughly double here as we head into 2022.

The coverage that we've obtained that it would be prudent to start hiring the folks for 2022 today and that's what we've been doing and we feel good that that salesforce is going to be roughly double here as we head into 2022.

Great. Thank you.

Christopher Pasquale: Great. Thank you.

Chris Pasquale: Great. Thank you.

No problem.

Kevin Waters: No problem.

Operator 1: Our next question coming from the line of Danielle Antalffy with SVB Leerink. Your line is open.

Operator: Our next question coming from the line of Danielle Antalffy with SVB Leerink. Your line is open.

Danielle Antalffy: Hey, good afternoon, guys. Thanks so much for taking the question. Congrats on a good start to being a public company. Reza, my first question for you, I know it's early, but I'm curious if you can talk about how you're seeing physicians adopting Aquablation. Like, where is it gaining share disproportionately? Is it from the resective surgery market? Is it from a little bit from the minimally invasive market? Are you getting any of those watchful waiters, sort of how are you seeing this play out so far? And then I have one follow-up.

Reza Zadno: Yeah, thanks, Danielle. You know, as I mentioned in our clinical studies and remarks we made, the product is designed to treat prostates from small to very large prostate. It is independent of the size of the prostate, shape of the prostate, or surgeon experience. The logical place when accounts purchase the robot is for larger prostates, where currently those are more complex cases and there are less available treatments that they feel comfortable with, so they start with that. In fact, these are the most complex cases. As they do these procedures, they move to smaller prostate sizes. That is how we see in these accounts utilization going up because they start expanding this to smaller sizes from 30 all the way to 150 grams.

Reza Zadno: In fact, anecdotally, we see a few accounts that have converted most of their resective procedures to our case. As physicians gain experience, that is where they go. In fact, that is our goal, our mission to become standard of care so that it covers the entire spectrum. It is from very small to very large, this where we go our hospital resective procedure. When we ask the same question from physicians, I mean, of course, a 30-gram prostate, sometimes the answer we get is maybe TURP, but it is really all prostate sizes.

Kevin Waters: I'll just add to that, Danielle. I think it's important to remember the size of the resective market, right? Which, you know, hospital-based resective procedures alone are approaching 200,000 procedures. In the near term, that's where we're hunting, and that's where we're gonna get the majority of our share from.

Majority of our share from yeah I appreciate that okay. Thank you and then my follow up question is just on the Capex environment in this world of Covid.

Danielle Antalffy: Yep, appreciate that. Okay, thank you. My follow-up question is just on the CapEx environment in this world of COVID. You know, the AquaBeam is a, you know, a capital equipment expenditure for these hospitals. Are there any hurdles that you're seeing from a purchasing perspective in getting hospitals on board with purchasing?

And the Aqua beam is a capital equipment expenditure for these hospitals are there any hurdles that you're seeing from a purchasing perspective and getting hospitals on board with with purchasing.

Kevin Waters: I don't wanna say there's not hurdles 'cause there's always hurdles, whether we're in a COVID environment or not. Nothing in the COVID world has caused us to have delays or not be able to meet our internal plan for capital purchases. Again, I think I had said our current average selling price year to date is around $330,000. It feels at that price point, we're able to run a very efficient capital sales process, meaning that the hospital can approve a purchase of AquaBeam by the local CEO and CFO. It doesn't need to go to a further approval.

I don't want to say, there's not hurdles because there's always hurdles, whether we're in a COVID-19 environment or not but nothing in the Covid world has caused us to Abdullah.

Plays or not be able to meet our internal plan for capital purchases and again I think I'd said, our current average selling price year to date is around 330000 U S.

It feels at that price point, we're able to run a very efficient capital sales process, meaning that the hospital can approve a purchase of aqua beam by the local colm's CFO. It doesn't need to go further approval and I think at this price point, that's what gives us a high degree of visibility into the funnel into perhaps.

Kevin Waters: I think at this price point, that's what gives us a high degree of visibility into the funnel and to perhaps not run into some of those issues that a larger capital equipment company would have to deal with at a $1 million plus, for example.

Not run into some of those.

Issues at a larger capital equipment company would have to deal with $1 million plus for example, yes makes sense. Okay. Thank you guys.

Danielle Antalffy: Yep, makes sense. Okay, thank you, guys.

Kevin Waters: Thank you.

Thank you. Thank you.

Reza Zadno: Thank you.

And we have a follow up question from Josh Jennings with Colin Your line is open.

Operator 1: We have a follow-up question from Josh Jennings with Cowen. Your line is open.

Operator: We have a follow-up question from Josh Jennings with Cowen. Your line is open.

Hi, Thanks for taking the follow up I really just wanted to clarify my my second question initially because I did a poor job of framing. It up my my question is really if some of the competitors with the non receptive approaches or their their argument to CMS.

Josh Jennings: Hi. Thanks for taking the follow-up. I really just wanted to clarify my second question initially, 'cause I did a poor job of framing it up. My question is really if some of the competitors with the non-resective approaches, what is their argument to CMS to reverse this reimbursement decision through the final PFS and how it's gonna be implemented over the next couple of years. Their argument is that surgeons will take their non-resective cases into the OR and then in the hospital outpatient department. Is there an opportunity for the surgeon, if they're going to be doing cases, no matter the size of the prostate, in the OR, for AquaBeam to capture some of the non-resective opportunity earlier than initially expected?

To reverse this reimbursement decision to the final PFS and how it's going to be implemented over the next couple of years, but their argument is to that.

Surgeons will take their nonrestrictive cases into the O R and the hospital outpatient department and so is there an opportunity for the surgeons, if they're going to be doing cases, no matter the size of the prostate in the or.

Josh Jennings: Sorry for the poor frame-up earlier, but that corrects my thrust there.

Reza Zadno: Potentially, again, what is important. First of all, it's a conversation between patient and the physician. What is important to many patients is durability and, that's what we are talking, no compromise between safety and efficacy. That's more important. Once that conversation happens. Because today there are small prostates that are happening with AquaBeam or other. Potentially the answer is yes, but the most important is the conversations between the physician and the patient about durability and safety of the product.

Josh Jennings: Great. Thanks again.

Kevin Waters: Thanks, Josh.

Reza Zadno: Thank you.

Operator 1: I'm showing no further questions at this time. Ladies and gentlemen, that does end our conference for today. We thank you for your participation. You may now disconnect. Everyone, have a great day.

Reza Zadno: I'm showing no further questions at this time. Ladies and gentlemen, that does end our conference for today. We thank you for your participation. You may now disconnect. Everyone, have a great day.

[music].

Yeah.

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Q3 2021 PROCEPT BioRobotics Corp. Earnings Call

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