Q3 2022 Pulmonx Corp Earnings Call
Yeah.
Good afternoon, and welcome to harmonics third quarter 2022 earnings conference call. At this time, all participants are in a listen only mode.
Facilitating a question and answer session towards the end of today's call to ask a question. Please press star one one on your telephone.
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I would like to now turn the call over to Lane Morgan from Gilmartin group for introductory comments.
Yeah.
Good afternoon, and thank you all for participating in today's call joining me from the vantage or Glen French President and Chief Executive Officer, and Derek Sun Chief Financial Officer earlier today Harmonics released financial results for the quarter ended September 30th 2022 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 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.
Vince 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.
Gross margin and operating expenses.
So expansion and 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 August eight 2022. This conference call contains time.
Incentive information and is accurate only as of the live broadcast today November three 2022 Harmonics 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.
That I will turn the call over to Glenn.
Thank you Lynn.
Good afternoon, everyone and welcome to our third quarter 2022 earnings call here with me as Derrick sung our Chief Financial Officer.
We remain excited about the $12 billion opportunity to establish our clinically proven zephyr valve therapy as standard of care for the over 1 million patients around the world who suffer from severe emphysema and are profoundly short of breath, despite high dose medications.
The past two and a half years, our business has been severely impacted by Covid surges drilling ICU beds and negatively impacting our procedure volumes. Thus we are pleased to see that looking forward. Despite the continued prevalence of Covid healthcare systems in most places are adapting to the new normal and we're moving in.
To a more predictable macro environment for our business reflecting.
Reflecting on the third quarter, we generated worldwide sales of $13 $5 million, representing growth of 2% year over year and 7% on a constant currency basis with $8 4 million coming from the United States representing growth of 22% compared to the same period last year, while we.
Feel we are moving into a more favorable steady state our business in the third quarter was negatively impacted by continued foreign exchange headwinds. In addition to two key dynamics, which we've mentioned on our last call hospital staffing constraints and seasonality.
Growth and penetration of our solution.
First training and launching new accounts that we believe have the potential to be strong zephyr valve centers.
Second increasing the efficiency and scalability of our base, particularly among our newest accounts by working hand in hand, with our physician and administrative champions to expand procedural capacity.
And finally, increasing center utilization by building local awareness of the benefits of Zephyr vows with patients and physicians, thereby developing a strong referral network and.
In terms of account openings, we added 13, new accounts in the U S and Q3, bringing the total number of U S treatment centers that are performing zephyr valve procedures to 261, even with the seasonal impact from the third quarter, we anticipate ending the year with about 275 total U S treat.
<unk> centers.
Meanwhile, we've gained greater visibility into the state of our trading centers as pandemic related pressure has subsided and staffing related constraints have become clearer. It has become evident that we need to continue to focus driving efficiency and scalability crossed our account base and that we will <unk> that it will take longer to bring a <unk>.
Counts up to maturity.
Over the past two quarters, we've seen a strong recovery and procedure volumes at our.
Well established sites, but utilization across or less developed accounts was more intermittent than we had expected with many respiratory care program spindly staffed and Overstretched, we see opportunity to improve program efficiency and scalability by taking all of our accounts through a series of training and.
Site readiness processes that we have found to be effective at are more developed accounts in.
In support of these efforts, we have allocated additional field marketing sales and patient access resources to support account development and have adopted a new tracking system to measure our success in implementing best practices with our customers. We expect the impact of these programs to be increasing.
Angley evident over the next few quarters and we have confidence that these efforts combined with a more normalised operating environment for our customers will allow us to further enhance procedure rates across all our accounts.
Meanwhile, within our more developed accounts. We are also seeing early returns from our efforts to educate referring physicians, who manage large populations of COPD patients.
We know who these folks are and we are working to both provide information on our treatment an introduction to the treating physicians in area hospitals remarkably when we meet with a referring physician and educate them on our therapy more than half. The time, that's physician refers a patient to a treating physician within six months we bill.
Aleve, we have a strong playbook that will drive penetration across accounts, while expanding our base of more developed accounts. However, given the increased time needed to fully develop our accounts coupled with the ongoing hospital staffing dynamics and foreign exchange pressure, we're moderating our full year 2022 revenue expectations.
Option to now be in the range of $51.5 million to $52.5 million and we expect global revenue to grow approximately 20% in 2023.
In the third quarter, we continued to make significant progress on expanding our addressable market as we grow our commercial footprint and introduce our treatments a new patient populations around the world. We are celebrating a major milestone in our strategic initiative to expand our global footprint, the Japanese Ministry of health.
Labor and welfare NHL W agreed to approve zephyr valves to treat severe COPD emphysema patients in Japan. Following a special panel meeting on October 3rd 2022, we look forward to bringing our treatment to patients in Japan, following the establishment of reimbursement, which we expect.
Late 2023, as a reminder, we estimate Japan to be a 1 billion dollar market opportunity with approximately 100000 patients who stand the potentially benefit from our treatment.
Also in the third quarter, we saw two very encouraging data readouts associated with our Aerocele clinical development program.
As a reminder, we are developing aerocele to expand the addressable market of our Zephyr valves solution to severe emphysema patients not currently eligible due to the presence of a gap in the Fisher separating lobes of the lungs, which results in collateral ventilation or air flow between these loaves this collateral ventilation <unk>.
<unk> target lobe from deflating, when Zephyr Bowser inserted approximately one out of every five patients who undergoes are chartis assessment is deemed ineligible to receive zephyr valves due to the presence of collateral ventilation.
<unk> is a polymeric phone that is delivered via bronchoscope to seal the airways, leading to the Fisher gaps between loaves of the lung potentially enabling treatment of patients who were previously in eligible for valves due to collateral ventilation at the European Respiratory Society International Congress in Barcelona, Spain.
<unk> interim findings from our convert multi center trial showed that treatment with <unk> in the first 40 patients of this study successfully converted 78% of patients to having little to no collateral ventilation. In these patients were subsequently treated with zephyr valves with successful vol.
Hume reduction in the target Lobello that.
Convert trial is ongoing and we expect it to be complete too incomplete enrollment next year with final data presented in 2024 learnings from the convert trial continued to inform the design of our USA I'd protocol, which we are discussing with FDA and expect to initiate some time next year.
Also in the third quarter the full data set from a single centre feasibility study in Australia was published in the journal of rest Barology results demonstrated that aerocele not only successfully closed collateral air channels to allow patients with collateral ventilation, you'll be treated with zapper valves, but that these treated patient.
And showed clinical outcomes comparable to patients without collateral ventilation, who are treated with zephyr valves. Both the preliminary convert trial data presented a drs in the published Australian study data bolster our belief that <unk> could offer a compelling solution to expand our zephyr valve therapy to <unk>.
Patients who are today not candidates in summary, we have taken steps forward on multiple market development initiatives expansion of our global footprint in our clinical development pipeline, we anticipate growing our market presence by driving site efficiencies across our account base and increasing utilization and are more <unk>.
<unk> accounts by geographic expansion and through broadening the array of patients who are able to we are able to treat with our technologies are progress across these initiatives along with substantial increasing patient interest in zephyr vows <unk>.
Limited competition in the field and our financial.
Financial strength provides us with continued optimism for our long term growth potential with that I'll now turn the call over to Derek to provide a more detailed review of our third quarter results.
Thank you Glenn and good afternoon, everyone.
Total worldwide revenue for the three months ended September 30th 2022 was $13.5 million, a 2% increase from $13.3 million in the same period of the prior year and an increase of 7% on a constant currency basis.
U S revenue in the third quarter was $8.4 million, a 22% increase from $6.9 million during the prior year period.
The growth in U S sales reflected continued commercial momentum and adoption of Zephyr valve therapy, which was slowed somewhat by ongoing hospital staffing constraints.
International revenue in the third quarter of 2022 was $5.1 million.
A 20% decrease from $6.4 million during the same period last year and a decrease of 10% on a constant currency basis.
Or international markets experienced a more pronounced summer slowdown that materialized earlier in July and lasted longer through September and we have previously seen.
We attribute this unusual impact to already stimuli staff teams that saw this summer is the first opportunity for an extended holiday since being on the front lines of the pandemic for the past two and a half years.
Gross margin for the third quarter of 2022 was 75% compared to 73% in the prior year period.
The year over year expansion in gross margin was primarily driven by production efficiencies we.
We expect gross margin to remain between 74, and 75% next quarter as foreign exchange impact continues to offset gains in production efficiencies.
Total operating expenses for the third quarter of 2022 or $24.1 million, a 23% increase from $19.5 million in the third quarter of 2021.
Non-cash stock based compensation expense with $4 $1 million in the third quarter of 2022 and accounted for 30% of the increase in operating expense from the prior year.
As a result of our efforts to prudently manage expenses, while continuing to invest to drive growth. We are reducing our operating expense guidance for the full year 2022 to 98, two $100 million inclusive of approximately $16 million of stock based compensation expense compared to our prior operating expense guidance of 102.
$105 million.
R&D expenses for the <unk> for the third quarter of 2022 or $4 $4 million compared to $2.8 million in the same period of the prior year.
The increase was primarily due to clinical and development costs related to our <unk> program as well as an increase in stock based compensation expense.
Sales general and administrative expenses for the third quarter of 2022 $19.7 million compared to $16.7 million in the third quarter of 2021.
The increase was primarily attributable to an increase in sales and marketing expenses as we expanded our commercial team and increased commercial activities as well as an increase in stock based compensation expense.
Net loss for the third quarter of 2022 was $14.2 million or loss of 38 cents per share as compared to a net loss of $10.2 million or a loss of 28 cents per share for the same period of the prior year and.
An average waited share counted 37 2 million shares was used to determine loss per share for the third quarter of 2022.
Turning to our balance sheet. We ended September 30th 2022, with $157 million in cash cash equivalents and marketable securities a decrease of $10 million from June 30th 2000, 2000 22022.
We remain on track to reach cash flow breakeven in our current operations with a capital that we have on hand and continue to manage our business to maintain a cash runway of at least three years of Ford cash burn until we turned cash flow positive.
We've also taken a couple additional measures to provide us with balance sheet flexibility, we recently refinanced our existing $17 million term loan to extend the maturity date out by another five years with at least two additional years of interest only payments and have secured optional access to an additional $20 million in debt financing of which we have no immediate.
Plan to draw down.
We also just file the shelf registration statement on form S. Three with the SEC, which we view strictly as a matter of good corporate housekeeping.
Finally, turning to our outlook for 2022 and beyond.
As Glenn mentioned, we are lowering our full year 2022 revenue guidance to be in the range of $51, 5% to $52.5 million compared to our prior guidance of $55 million to $60 million that we communicated at the start of the year.
Updated or updated guidance reflects a foreign exchange headwind to global sales growth of approximately 5% for the full year, which is significantly greater than what we anticipated when we set our initial guidance and now also reflects our understanding of the ongoing hospital staffing constraints and the additional time required to scale our accounts in this new environment.
As Glenn discuss we believe that we have the programs in place to drive the required scale efficiency and procedural volumes in our new and existing treatment centers, but the time required to do so is slightly longer than we previously anticipated accordingly, we expect to grow 2023 revenue around 20%.
As usual, we will be providing full details of our 2023 outlook. When we report our queue for earnings next year.
And with that I'd like to thank you for your attention and we will now open up the call for questions.
Operator.
Wonderful and thank you. This is a reminder, again and you have a question and you would like to raise your hand. Please press start one line on your phone and wait for your name can be announced again with a limited time that we have we only have time for one question I went <unk>. Please.
Please standby I think that's the first question at here.
Our first question comes from <unk> and Stifle go ahead make.
Thanks, a lot.
Afternoon, Glen Hi, Derek maybe a minute.
Okay.
Alright.
With the 20th twenty-three outlook, you're wondering if you.
Brave enough to.
Give us a number.
Geib maybe.
Maybe talk if you were a little bit about your thinking there.
The back of the envelope Masters I look at it.
Giving your 22 got it looks like you're talking about a fourth quarter that might be in the 13 have $14 million range and when I think about the implied number for 2023.
And the low 60 million kind of range.
When I think about annualized in the fourth quarter that really doesn't show a lot of growth and.
How 'bout better understand your your your car from there.
Yeah.
One question I'll, just throw a lot into it but when I see the number of centres you've expanded your plans to drive efficiency and scalability.
It does seem like a cautious.
Initial stab.
At a 23 number any thoughts in color there would be very appreciated. Thank you.
Eric how are you this is glenn.
I think it's reasonable to characterize it as a cautious number I think it's very important to us that we set out things that we.
We don't like to have calls like this one where we're.
Reporting on things that we didn't deliver in the way that we said that we would.
We look at next year in a very general sense.
As driving about 25 per cent growth in the United States and about 15% growth outside the United States, which blends to just over 20%.
Sort of the back of the envelope number and we.
We really want to be sure that m&a's Derek in a moment to add anything he he has here, but we want to make sure that.
That we do we're building something that's brand new we're not going in and swapping out somebody else's treatment.
We have learned that it takes a little bit longer to establish these the fully developed.
Developed accounts the way that we need to and we want to be one I can get some performance behind us before we get too aggressive on the growth numbers.
One of the things that we are absolutely certain of is that this is a very large opportunity.
And we have things lined up we believe in a in a very good way in terms of all of the elements and we do expect that we're going to tap into this this has taken a little bit longer.
Derek do you have anything you want to add to that.
Sure I'll, just add that from a macro perspective in terms of the way that we're thinking about this and I do like the way that you would characterize us as an initial stab because this is an initial stab we wanted to provide some directional guidance clearly we will be providing a much more refined looking will have a much better better visibility on our next quarter call.
But you know from where we stand today from a macro perspective I think the good news is that we are kind of moving out of this this pandemic stage of Covid and moving into a more stable environment.
Where we don't expect to see kind of the the en masse shutdowns that we've seen previously is covered Sir just come through and and this has given us some of the visibility.
And one way to understand what we need to do.
Methodically developed this market.
From macro perspective, we do expect that foreign exchange will remain a headwind.
At least through the first three quarters of the year of exchange rates state where they are so that's.
Going to drag down our global growth with 40% of our total sales coming from outside the U S.
And then we do expect that.
Some of these hospital staffing constraints that are continuing to persist through.
Through the end of this year will continue to persist into next year.
That's affecting our outlook as well so that's the additional commentary I'd provided.
Sure I'll stop there thanks, so much.
Alright.
And again it has any questions. Please stop.
One one on your phone hat that we can put you into the call.
Alright, our next question comes <unk> Jason.
Jason Bedner some papers and there go ahead <unk>.
Good afternoon.
Wanted to start here on the the implied guide for the fourth quarter.
I think the revenue here would suggest international business is still gonna remain pretty sluggish, but I guess I'm trying to reconcile that against the commentary that we're moving into a more predictable environment.
It seems like Something's changed and maybe become a little bit less predictable.
Or it's simply that.
Realize that it.
It takes a little longer to get somebody that accounts going.
Fully appreciate the staff initiatives seasonality that weight on the third quarter, but coming back to the fourth quarter you help us understand why the business wouldn't show better constant constant currency growth than than what we're seeing here in the third quarter.
Yeah. So.
Jason we are.
And I think that we're moving into the fourth quarter, we're entering the fourth quarter in really good shape, we exited the third quarter.
You know in a way that was I think.
That was strengthening and in October was a good month for us. So we look ahead and I think one of the things that.
That keeps us on our toes as we do have some history, particularly outside the United States of of things really slowing down around the holidays in the United States, We give up the better part of three weeks.
Holidays, and so I think that's integrated into our guidance.
But having said that we entered the quarter in a in a pretty solid place.
And I just think we're anticipating that we're going to we're going to have some soft weeks as we get near the end here.
Okay, Alright, and then maybe picking up on on Rick's question as a follow up.
Look into 2023, and thinking about that 20% growth commentary for next year.
I agree it is very helpful and commend you for stepping out and giving giving some kind of guidance and a lot of other companies are waiting here a few more months to do so but I guess it would seem like the challenges here in the second half that we're seeing here the second half of 22.
From the growth perspective, those might maybe that extend into 2023, maybe the first quarter. The first half. So really just wondering if a as we try to fine tune things.
See if you'd be willing to expand on how you see the growth coming together first task versus the second half of 2023. Thank you.
Yeah. Thanks, Jason This is Derek.
I think I think thats well characterized.
When we provide are forward looking guidance for 2023 and again, it's our initial staff I think we are looking at the dynamics that we're seeing in the back half of this year and again, what we're seeing here in the back half of this year is really the <unk>.
First opportunity, we now have kind of two quarters, which isn't a lot, but we have two quarters of kind of visibility post this.
Pandemics era of Covid to get a better sense for where our accounts are and how they're developing and kind of what's the ongoing constraints maybe in them.
We essentially kind of expect to see kind of the same dynamic that we're seeing in the back half of this year extend into at least the first half of 2023. So that's kind of where we don't want to get ahead of our skis.
And.
Certainly we're not expecting 2023, the first half of 2023 to look anything like the first half of 2022, right where we saw.
Just a mass shutdown procedure volumes in the first quarter when that last major search came through but I think we're expecting kind of a <unk>.
Dynamic that we are seeing currently in this back half with continued constraints and.
Taking a little bit longer to develop our accounts, we expect it to extend into the first half of next year and that's driving some of the.
Outlook of that we are providing in 2023.
Alright next question.
<unk>.
<unk> go ahead <unk>.
Hi, Yes. This is Zachary day on for Bill My question and Thank you for taking my question is do you have any commentary on the strap X and what you're seeing with that in regards to the new patient. So the top of the tunnel and how and like how should we think about I guess like that in regard to COVID-19 specifically.
There's a connection.
Sorry about that was on mute [laughter]. The strategy numbers are are looking strong.
Particularly outside of the United States, It's an interesting.
An encouraging sign that are that are stratex numbers are looking as strong as they are particularly in markets, where the procedures are presently pretty pretty depressed places like Germany, and France relative to prior year.
So I think we're seeing that both in the U S and outside the United States, which gives us optimism about what's ahead, but we.
With regard to Covid.
I think the short answer is as we look ahead, we don't see a significant reduction in.
Our ability to deliver Stratex scans as a result of COVID-19 it could be that.
[noise] staffing could provide some challenges along the way, but the challenges that we face with staffing aren't really specific to stratex. It's it's much more likely to be impacting the pulmonary function testing that needs to happen before the cardiac testing that needs to happen before the the pulmonary <unk>.
<unk> Haitian that has to happen before one of our procedures and so forth.
As well as the team that executes the procedure. So there's multiple steps to our process stratex is pretty straightforward because keep in mind, though.
What feeds into Stratex is the C. T scan that is standard in terms of the diagnosis of a patient with emphysema patient shows up says I'm short of breath.
The Doctor says are you a current or former smoker and if the answer is yes. They immediately order a C. T scan look it over see what the the tissue density is diagnosed the emphysema and if if the distribution looks like they might be a good candidate than that data flows into stratex. So.
I don't I don't think the Covid is a real big impact or on Stratex, particularly as we look ahead.
Okay got it thank.
Thank you for for clarifying that and if I could follow up so.
You cited.
Like 5% on the ethics headwinds for Q3.
It was around the same for Q too and you said that <unk> was higher than you expected and do you think that those headwinds are gonna be roughly the same moving forward into 2023 for a little bit. So you think around like 5% like if we were going to have a specific failure.
Does that seem fair.
Yeah. So so let me just clarify that so so so yeah. So F X.
On a global basis impacted Q3 about 5% that was similar to cue to my commentary was in relationship too.
Moderation of our guidance for the full year of of 2022, so when we set.
Our guidance at the beginning of this year, we were not expecting a 5% global.
Headwind two year over year growth by any means it was we were looking at something on the order of a couple of percent.
So that is.
The greater than expected that I was referring to I would expect that in Q4, we'll probably see a similar sort of 5% ish.
[noise] headwind to growth and.
Through the first three quarters of 2023, if you look at the exchange rate. So I mean, they've just there's almost a linear downwards through from Q1 percent of Q3, so even if assuming things stay the same I respect next year, we'll see if things stay the same will see something less than 5%, but it's probably closer to 3% I think you're going to see.
A similar sort of dragging the first two quarters, and then again, assuming FX change FX stays at current rates they might level off a little bit more in 2000 and the back half of 2023, So right now where we stand we estimate it will be maybe.
3% of global growth.
[noise], yes.
Alright. Thank you again with another reminder, if you have an <unk>.
Ask a question. Please press thilan one on your telephone and wait for union to be announced.
Alright, I have only compounded kunai rats.
Mmm.
Our next question comes from <unk>.
Frank.
Oh yeah.
Alright.
I have a question regarding <unk> is there any way you could do more color.
For the U S market and F D a.
Timeline.
Yes, we are we.
We are in discussions with FDA very very deep in discussions with essentially.
We're we're moving forward on on.
Analyzing an Ivy trial.
Protocol that we will execute.
Multinational study it'll be like the convert trial.
Very much like to convert trial and.
And that'll be the path to getting you S approval, we expect that that study will commence next year.
We expect that in.
2000 to 25, 2026 that product will get to the U S market.
Alright, no anything currently in my questions to come in for speakers.
Again to answer ask a question. Please <unk> on your telephone continuing to be announced.
Oh.
Alright, so there's no questions at this time I want to say thank you for participating in today's confidence Congress does conclude our program you may now disconnect.
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