Q1 2023 Pulmonx Corporation Earnings Call

Speaker 1: You.

Speaker 2: Thank you.

Speaker 3: Oh.

Speaker 4: Thank you for standing by. Welcome to the PullmanX first quarter 2023 earnings conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session.

Speaker 5: To ask a question during the session, you will need to press star 1 1 on your telephone.

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Speaker 7: To withdraw your question, please press star 1 1 again.

Speaker 8: As a reminder, today's conference is being recorded. I would now like to turn the conference over to your host, Lane Morgan, at the Gilmartin Group. Lane, please go ahead. Lane Morgan, CFO of the Gilmartin Group. I'm going to turn it over to you, Elaine.

Speaker 9: Thank you, operator. Good afternoon and thank you all for participating in today's call. Joining me from Plomonics are Glenn French, President and Chief Executive Officer, and Derek Sun, Chief Financial Officer. Earlier today, Plomonics issued a press release announcing its financial results for the quarter ended March 31, 2023.

Speaker 10: a copy of the press release is available on Plomonics' 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.

Speaker 11: Any statements contained in this call that relate to expectations or predictions of future events, results, or performance are forward-looking statements.

Speaker 12: All forward-looking statements, including without limitation, those related to our operating trends, commercial strategies, and future financial performance, the timing and results of critical trials, 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,

Speaker 13: gross margin and operating expenses, commercial expansion, and product pipeline development are based upon our current estimates and various assumptions. These estimates involve material risks and uncertainties that could cause actual results or events to materially differ from those anticipated or implied by these four looking statements.

Speaker 14: Accordingly, you should not place undue reliance on these statements.

Speaker 15: For a living description for the risks and uncertainties associated with our business, please refer to the risk factors section of our filings with the Securities and Exchange Commission, including the annual report on Form 10-K filed with the SEC on March 1, 2023. Also during this call, we will discuss certain non-GAAP financial measures.

Speaker 16: Reconciliation of these non-GAAP financial measures to the most directly comparable GAAP financial measures are provided in the press release, which is posted on our Investor Relations website. These non-GAAP measures are not intended to be a substitute for our GAAP results.

Speaker 17: This conference call contains time-sensitive information and is accurate only as of the live broadcast today, May 2nd, 2020-30. Plomonics explains 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.

Speaker 18: And with that, I'll turn the call over to Glenn.

Speaker 19: Thanks, Lane. Good afternoon, everyone, and welcome to our first quarter 2023 earnings call. Here with me is Derek Sung, our Chief Financial Officer.

Speaker 20: I'm delighted we're off to a strong start in 2023 with our focus commercial strategy on track to enable us to deliver.

Speaker 21: on our near-term revenue commitments while we continue to make consistent progress on our longer-term geographic growth and clinical indication expansion initiatives.

Speaker 22: We achieved $14.5 million in worldwide sales, benefiting particularly from relative strength in the US, where we achieved 55% year-over-year sales growth.

Speaker 23: We expanded our base of treatment centers and saw relative stability and account activity despite typical first quarter seasonality.

Speaker 24: These trends, along with our commercial momentum exiting the first quarter, leave us confident that our three-pronged strategy designed to build a strong foundation for long-term, sustainable growth will enable us to achieve our previously communicated, full-year 2023 revenue guidance term.

Speaker 25: of $63 to $65 million.

Speaker 26: As a reminder, our focus commercial strategy is as follows.

Speaker 27: First, training hospitals that we believe based on our comprehensive assessment criteria have the potential to be high performing Zephyr valve centers.

Speaker 28: Second, providing information and education on Zephyrvalve program best practices to our physician and administrative champions, which facilitate increased efficiency and procedural capacity.

Speaker 29: And finally, increasing commercial activity by building local education and awareness of the substantial benefits of Zephyr valves for emphysema patients and the COPD physicians who manage them.

Speaker 30: While we continue to make progress on all three initiatives, our primary focus this year remains on educating existing US treating centers about best practices for Zephyr valve programs to encourage greater efficiency and therefore procedural capacity and improve the patient experience.

Speaker 31: We are seeing an increasing number of our existing accounts investing in their Zephyr valve programs as a key component of their growing pulmonology service lines.

Speaker 32: As our accounts seek to scale their programs, we are sharing best practices from our high-volume accounts both on the clinical front through expert case reviews and on the administrative side through clinical coordinator best practice training sessions.

We are also taking the opportunity with sites trained virtually during the pandemic to provide in-person training and peer-to-peer education to accelerate their learning curves.

As a result of these efforts, we are seeing a growing number of more efficient and more clinically experienced hospitals offering Zephyr valves.

We continue to expect to see the results of these and similar activities translate to sales and increased productivity in the back half of this year. As a reminder, we measure account productivity based on the average number of cases conducted in a given quarter.

by our active, established, EFRIVALB treating hospitals, which are those that have been performing EFRIVALB procedures for at least 12 months and have placed a revenue-generating order in the quarter.

Average account productivity for the first quarter of 2023 was approximately 4.1 cases in the US remaining in the range of 4 to 5 cases per account that we have experienced since exiting the pandemic.

As expected, the lower account productivity in the first quarter compared to the fourth quarter of 2022 largely reflected typical seasonal dynamics.

Encouragingly, we saw the total number of active established accounts grow nicely, which thereby increased the denominator in our productivity calculation.

We continue to expect a meaningful ramp and account productivity in the back half of the year, exiting 2023 above five cases per active established account.

Meanwhile, US account activity in the first quarter of 2023 was 74%. Blightly higher than what we saw in the fourth quarter of 2022.

As a reminder, we define account activity as the percentage of treating centers that place a revenue generating order in a given quarter. We continue to expect account activity to remain in the 75 percent range as we benefit from a more normalized operating environment and grow our denominator of treating centers.

To that end, in the U.S., we added 15 new treating centers in the first quarter of 2023, bringing our total number of U.S. centers to 293. We continue to expect to identify and establish a total of 40 to 50 new accounts throughout the year. And our near-term commercial strategy, we are also looking to identify and establish a total of 40 new accounts throughout the year.

reimbursement and the initiation of sales through our post-market study in late 2023. As a reminder, we estimate Japan to have approximately 100,000 patients who stand to benefit from our treatment.

In our clinical development pipeline, we remain on track with our AEROSIL program to meaningfully expand the addressable market for our ZephyrVal solution. We continue to expect a complete enrollment this year of our CONVERT1 trial with final data presented next year.

We are also taking final steps to enable the launch of our next multinational clinical trial, which we call Convert 2 in the back half of this year. Results from Convert 2 will form the basis for our AERSIL PMA submission.

In summary, we are very pleased with our progress in increasing engagement with top centers and expanding best practices with our emerging centers.

We have been delighted to see strong early traction and receptivity across our team and with our customers.

As awareness around the unmatched benefits of Zeproval procedure build, we believe we are well positioned to address the substantial unmet needs of the largely untapped global population of patients with severe emphysema. Again, we expect to build on this early commercial momentum to drive continued growth in the back.

March 31, 2023, was $14.5 million, a 35% increase from $10.8 million in the same period of the prior year, and an increase of 37% on a constant currency basis. US revenue in the first quarter was $9.3 million.

a 55% increase from $6 million during the prior year period.

The growth in U.S. sales reflected continued commercial momentum and adoption of our Zephyr valve therapy and also benefited from depressed sales in the first quarter of 2022 due to the COVID pandemic.

International revenue in the first quarter of 2023 was $5.2 million.

A 9% increase from $4.8 million during the same period last year, and an increase of 15% on a constant currency basis.

The increase in international sales was driven by growth of Zephyr valve procedure volumes in our European geographies.

Growth margin for the first quarter of 2023 was 73% compared to 75% in the prior year period, reflecting slightly lowered capacity utilization.

We continue to expect gross margin for the full year 2023 to fall within the range of 73 to 74 percent, remaining near 73 percent in the first half of the year and trending towards 74 percent in the back half of the year.

Total operating expenses for the first quarter of 2023 were $27 million.

A 13% increase from $23.8 million in the first quarter of 2022.

Non-cash stock-based compensation expense was $4.4 million in the first quarter of 2023.

Excluding stock-based compensation expense, total operating expenses in the first quarter of 2023 increased 11% from the same period of the prior year.

Looking ahead, we continue to expect operating expenses for the full year 2023 to fall between $112 to $114 million, inclusive of approximately $22 million of non-cash stock based compensation expense, as we take a disciplined and prudent approach to managing expenses.

while continuing to invest to drive growth.

R&D expenses for the first quarter of 2023 were $4.3 million compared to $3.5 million in the same period of the prior year. The increase was attributable to an increase in clinical and development costs related to our Ayrisield program as well as an increased in stock based compensation expense.

Sales, General, and Administrative Expenses for the first quarter of 2023 were $22.7 million compared to $20.2 million in the first quarter of 2022.

The increase was attributable to sales and marketing expenses as we ramped commercial activities as well as an increase in legal and stock-based compensation expenses.

Net loss for the first period of 2023 was $15.9 million or loss of 42 cents per share as compared to a net loss of $15.8 million or a loss of 43 cents per share for the same period of the prior year.

An average weighted share count of 37.6 million shares was used to determine loss per share for the first quarter of 2023.

Adjusted EBITDA loss for the first quarter of 2023 was $11.2 million as compared to $11.8 million in the first quarter of 2022.

The year-over-year improvement demonstrates our ability to drive operating leverage, a trend that we expect to continue for the full year 2023.

We ended March 31, 2023 with $155.5 million in cash, cash equivalence, and marketable securities, an increase of $8.4 million from December 31, 2022. The increase in cash reflects our February drawdown of the remaining $20 million provided by our existing term loan that we discussed on our last call.

excluding that drawdown, our cash equivalence and marketable securities would have decreased by $11.6 million during the first quarter of 2023.

With our Strength and Balance sheet, we continue to these feel very good about our pathway to cash flow break even as we grow our top line and deliver operating leverage.

Finally, turning to our revenue outlook for 2023. We continue to expect to deliver full year 2023 revenue in the range of $63 to $65 million.

Our guidance continues to assume foreign currency exchange rates will be relatively neutral to growth on an annual basis as effect headwinds begin to ease through the remainder of 2023.

And with that, I'd like to thank you for your attention, and we will now open up the call for questions.

Operator? Thank you very much. At this time, we will conduct a question and answer session. As a reminder to ask a question, you'll need to press star 1, 1 on your telephone and wait for your name to be announced.

So with all your questions, please press star one one again. Stand by while we compile the Q&A roster.

The standby. Bye.

And our first caller is Larry Beagelson with Wells Fargo. Larry, your line is open. Please go ahead. Hey, good afternoon. This is Vick in for Larry. A couple of questions to me, please. So first, you beat consensus by about $1 million. But you kept guidance intact. Can you potentially provide some insight as to why you decided not to raise guidance after the beat and how to think about quarterly gain with some here and that I had a follow-up? Thank you. Sure, Vick. So we're very happy with our performance in the first quarter. We're clearly operating a much more stable and predictable environment now.

And the momentum and the early traction that we saw in Q1 certainly gives us a lot of confidence around our ability to achieve the guidance of 63 to 65 million that we set out just 10 weeks ago. And we do feel good about trending towards the higher end of that range given what we've seen in that first quarter.

That said, it is still early in the year and we talked previously about how our efforts to drive same store sales and account productivity will take some time to yield results that will be more visible in the back half of the year. So at this point, we just don't want to get out over our skis on guidance, but we do feel really good about the direction that we're headed. That's helpful.

There's a number of pharmaceuticals that are out there that are being used for the treatment of patients with COPD. Some of them are targeting smooth muscle, some are targeting mucus production. None of them are targeting trapped gas in the lungs.

That's what we're targeting. There's no drug out there that can solve a leader of trapped gas in the lung. There's a surgical procedure that isn't well adopted because of the morbidity and mortality associated with it. Last year, I think we did about five times as many of our procedures as the surgical procedure was done. We're able to treat a...

a much wider array of patients as a result of the approach that we take. So, there's a depicting, we are happy for COPD patients. We don't see that impacting our opportunity. Okay. Please.

questions. I guess the first, can you maybe talk about, you know, what you saw in the quarter in terms of the operating environment? What are you seeing on staffing? Is there still maybe any lingering COVID-19 disruption? And then how are things looking so far here in the second quarter?

Yeah, I think the short answer is that we are, we did not be what I would call material staffing issues in the first quarter and we thus far in the second quarter were not seeing what I would call material staffing issues.

I think that's a bit of a reflection of...

Just being a procedure-based technology, one that's paid for under a surgical DRG. I mean, these are the kinds of procedures that I think is something like 90% plus of hospital revenue comes from these types of patients, these surgical patients, procedure-based patients. And so we kind of...

suggest that we haven't faced it, but I just don't cross the 300 accounts that we're in. I would say it's in material.

Okay, and then the 15th Council, I don't know if the US, should we expect similar cadence to account ads throughout the rest of the year?

Yeah, so we, I think we're projecting 10 to 12 of a quarter or something on that order. I think I said.

40 to 50 this year, so you know we're in that neighborhood, so 15 is a nice number to start with, but that the total is the one that I mentioned in the script.

Great, thank you. Okay, thank you very much.

and stand by for our next question. And our next question comes from Cecilia Furlong with Morgan Stanley . Cecilia, your line is open. Please go ahead.

Good afternoon and thank you for taking the questions. I wanted to ask if you could just speak a bit to what you were seeing in the US versus some of the OUS markets specifically around recovery and stabilization and then as we think about just the break up of 23 guidance, if anything is shifted as you think about contributions from the US versus OUS. Thank you.

I'm going to let Derek take the second question about whether.

We see any difference in terms of the shift between US and OUS guidance.

As it relates to US that OUS performance, obviously we highlighted that we had a really great quarter in the US. I would say that we had some other markets that also had strong sort of increases over prior years specifically. If you look at our top four markets, three out of the top four, actually...

Four out of the top five all had good increases specifically the UK, France and Switzerland. They had real strong performance versus prior period. And I think the magnitude of that particularly in the bigger markets, France and the UK.

was on the order of what we saw in the United States. They're executing against the plan that's...

Remarkably similar and the results are remarkably similar as well. So. That's where we saw things strengthening. Yeah, and Cecilia regarding guidance in Q1, the US accounted for about 64% of our total sales in the quarter.

I would expect that ratio to remain around the same for the remainder of the year. So I would expect for the remainder of the year, the U.S. is somewhere between 60 to 65% of total sales.

OUS is somewhere in the 35 to 40 percent range. Now over time, we continue to expect the U.S. to grow meaningfully faster than our international business. Even this year, our guidance implies the U.S. grows 20 to 30 percent in that range and our international business grows more in the 15 to 20 percent range. So.

We do expect U.S. to continue over time to become a significantly greater portion of our mix of sales. If I could follow up as well, just the 15 account ads in the quarter. I know you talked about previously some of your specific initiatives in terms of engaging, going deeper and junior accounts, getting them trained.

Can you just speak to the profile of some of these accounts driving interest and how it fits into your broader ramping strategy going forward and thank you for taking the questions.

Yeah, so we're in most of the major metro areas. I think a lot of the ads are incremental ads in those geographies. What we're finding is that.

You know, patients who would prefer to drive less far have to get the procedure done. The going deeper with these accounts is we've just increased the hurdle that they need to clear in order to come in for training and to become an account that we adopt essentially. Really.

That involves bringing profiles of patients in before they come to training such that when they exit training They they do their first cases as opposed to going back and trying to find You know start the process of identifying patients and so we you know they hit the ground running. We also have a

follow up on those first three patients, where an expert will sit down with the physicians, talk about lessons learned and ways that they could have made that a stronger exercise. And those are all invariably, those are super positive kinds of experiences.

So, anyway, that's how we're going deeper or getting deeper with our initial new accounts.

Thank you.

Okay, stand by for our next caller.

Our next question comes from Travis Steve with VIA V securities. Travis your line is open. Please go ahead. Hey, thanks, second question. Maybe put some numbers on the progress with account productivity over the course of the year. I think you said 4.1 per Q1 and I think the prior plan was exit the year 5 to 6. So just kind of want to go through some of the numbers and how you expect.

account productivity to ramp over the course of the year. And maybe some color on kind of a top 10% of your accounts, kind of the procedures that those accounts are doing and how those accounts look at this point.

Sure, thanks Travis, thanks for that question. So just as a reminder to kind of ground everybody, when we look at account productivity metrics, we are looking at the productivity of the cases on average.

per account for accounts that were active or put in a revenue-generating order in a given quarter and had been up and running for approximately 12 months. Because it does take a while, there is clearly a ramp up, that productivity ramp. So we look at what we call our established accounts or those that are active enough and running for at least 12 months.

It was around 4.1 cases on average per account in the first quarter. Over the last three quarters or so, it's kind of bounced around between four and five cases. So on average about four and a half cases per quarter. And

With some of the focused efforts that Glenn recently just talked about We do expect our focusing on driving same store sales that we believe will result in an increase in productivity So exiting the year we do expect to be above five between that five and six range and that's

in the US specifically, and that is what is implied in our US guidance.

So, relating to your second question around kind of our top 10% of accounts or so, we do continue to see strong performance in our top 10% of our account that would say on average or top 10 or 20% of accounts.

on average are doing nearly 10 cases per quarter on average. So there is a wide range and what we're really focusing on this year is taking those accounts that have lower productivity, again, focusing on same store sales. I think that's the biggest driver that we see to our US growth this year.

No, that's helpful. And put some finer points on the Q2. I know last year you expected Q2 to be flat, so according to the Q1, I imagine Q2 could step up this year to Q1 in terms of total revenue? We do, exactly. In fact, specifically, I would say I would expect it to be flat.

quarter. So I think it'll be a meaningful step up of around 10% or so sequentially is what we would expect in Q2 versus Q1. Great, that's helpful. I'll drop there. Thanks a lot.

Thank you very much. And stand by while I bring the next question to the stage.

Good afternoon, everybody. Glenn, maybe just if you could dig a little deeper on the, it gives a little more color on the, the, the, your best practices for procedural efficiency programs. Clearly it's having a positive impact. I'm curious how many.

accounts have you brought this, you know, where are you in the process of bringing these best practices, maybe to accounts performing less optimally if that's the right way to phrase it. And I'm also sort of fascinated with the number of clinical coordinators you're training in person.

That sounds important. Any color on those things? Sure. So we're focusing on best practices across the clinician who are doing the procedure, ensuring that patient selection is optimized and the execution of the procedure is optimized.

We're focused on sort of the administrative side of things and that's where the clinical coordinators come in. These programs, the larger programs, are allowed to be large because of the great work that's being done by these clinical coordinators. And they really keep everything running on time and so forth. But there are mechanisms by which.

There's been a lot of manufacturing analogies where you can increase your cycle or decrease cycle time and increase throughput and so forth. So we're making sure that we're sharing those best practices from an administrative perspective.

are looking inside themselves to try to identify the patients that exist in within their own network and stage six is really that outbound look at things. And I think what what so we actually there there are

Gatherings where best practices are talked about across the hospital in terms of the learning and so forth and That sixth step is really an out and external Focus and so marketing gets involved the mark mark not our marketing the hospital marketing team

and they learn from what other hospitals are doing to get better and stronger and look to expand their position in the given area.

I don't know if Derek it's for you or Glenn. Maybe give us a little more color about your expectations for the OUS business for the rest of the year. The dramatic recovery rebound reacceleration in the US.

OUS respectable 9% 15% XFX. Is this the kind of pace that we should expect? Or what are the drivers for the rest of the year? Thanks so much.

I expect, Derek, you can add on to this, but I expected things will strengthen outside the United States. I think we had a...

I expect, Derek, you can add on to this, but I expected things will strengthen outside the United States. I think we had a little softer than...

I expect Germany is going to strengthen relative to the first quarter, I think, as we look ahead and across the year. That's our second largest market behind the United States. I expect France and the UK, which are our third and fourth largest markets, to continue. They're very strong performance to this point. Expect the Netherlands to strengthen, switch the land to continue to perform great, spain to continue to perform really well. So I think we...

fully reflect the sort of strengthening of that business. If you look at on sequential basis that will look, I think very strong. Yeah, I think on average, Rick, that 15% growth that we saw this year, or somewhere in that 15, between 15 and 20% growth is what we'd expect out of our international business moving forward.

Thanks so much, Derek. Thank you both. Thank you very much and stand by while I promote the next caller. Jason Bednar, we're going to Piper Sandler. Jason, your line is open. Please go ahead.

Hey guys, good afternoon. Thanks for the questions. Really a couple follow ups on some prior questions that were asked. Maybe to first follow up on the international conversation here. Totally understand the UK and France performance is pretty strong. Like they're alluding to there and just being similar to the US in terms of growth. I think the implication there, maybe not some of those markets you were just mentioning, Glenn, but maybe some of those smaller international markets, maybe a bit more challenged or below the growth we saw that you put up in the first quarter here.

I think they've been under pressure for a few quarters now. So I guess the question I have here is after that preamble is, if you have visibility on those markets, bottoming out, or starting to show a recovery in growth.

are not yet growing this year. But, you know, so we've got eight out of 10 that are growing. And I think I mentioned which markets those are, they're primarily in Europe , where the bulk of our OUS business is. So, is there a specific aspect to your question you'd like me to try to address? No, I guess it was just trying to, I think you addressed it there. I was trying to reconcile, you know, how good some of your big markets were and knowing that some of the smaller markets have been under pressure for a while and that also reconciling the fact they are looking for growth to remain similar in the range of where we were in first quarter. So again, just trying to put all the pieces together here.

I'm gonna get involved in some of the moving parts around some of those markets. Maybe I've got the, you know, some of my math and whatnot, you know, not totally squared away, but, you know, maybe a follow-up related to the retraining topic, I think that Rick was hitting on a little bit, but maybe a different angle. Glenn, you mentioned some activity about retraining some of those accounts that went through the virtual training process during the pandemic.

I'm just curious if you're willing to share the delta on the account productivity between those that have gone through in-person training versus those that were trained virtually during the pandemic. What does that look like today? It sounds like it's a decent gap and just wondering how much of an opportunity this could present for colonics.

I think we're just pulling people back into, we feel like there's, it's a better experience and a better degree of engagement. A lot of back and forth during these face to face training programs both with the physicians that are attending. So often they'll be from multiple institutions and the folks that are leading those sessions.

So...

Yeah, I'm not in a position to share statistics on.

What kind of return we get on bringing somebody back, but suffice it to say that it's, we determine that we believe it's worthwhile to get people onto sort of a consistent footing as it relates to the foundation of experience and training that they have. And we felt in retrospect though, virtual training was the best we could do when people were grounded.

Okay. All right. Thanks so much. Thank you very much. Dan, by for our last question, will be our last question this evening. And it comes from Bill Plovenek from Connacore Genuity. Bill, your line is open. Please go right ahead. Hi, Zachary Day, I'm from Dopalvanic. Thank you for taking the question. Regarding operating leverage, how should we think about investment in the commercial organization going forward? Thank you very much. All right. Thanks for that question. So.

We're supporting the efforts and desires of these accounts to learn from each other. I think it's favorable to leverage. Thank you very much. Thank you. That does conclude our Q&A. I would like to now turn it back to Glen French, President and CEO for closing remarks. Thank you very much. So again, we are very pleased with the strong start to an important year for us. We remain confident in our strategy and its execution and we very much like the momentum that we're seeing building in our business. So I'd like to thank you all for your interest and your time today.

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Thanks for watching!

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