PROCEPT BioRobotics Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
November 1, 2023

There are 10 speakers on the call.

Operator

Good day, and welcome to the ProCep BioRobotics Third Quarter 2023 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 call over to Matt Basco, Vice President, Investor Relations, for a few introductory comments.

Speaker 1

Good afternoon. Thank you for joining ProSett BiRobotics Third Quarter 2023 Earnings Conference Call. Presenting on today's call are Reza Zadno, Chief Executive Officer and Kevin Waters, Chief Financial Officer. Before we begin, I'd like to remind listeners that statements made on This conference call that relate to future plans, events or performance are forward looking statements as defined under the Private Securities Litigation Reform Act of 1995. While these forward looking statements are based on management's current expectations and beliefs, these statements are subject to several risks, uncertainties, assumptions and other factors that could cause results to differ materially from the expectations expressed on this conference call.

Speaker 1

These risks and uncertainties are disclosed in more detail in Prosafe Biobiotics' filings with Statements which speak only as of today's date, November 1, 2023. Except as required by law, Prostate Bio Robotics undertakes no obligation During the call, we will also reference certain financial measures that are not prepared in accordance with GAAP. More information about how we use these non GAAP financial measures as well as reconciliations of these measures to their nearest GAAP equivalent are included in our earnings release. With that, I would like to turn the call over to Russa.

Speaker 2

Good afternoon, and thank you for joining us. For today's call, I will provide opening comments and a business update followed by Kevin, who will provide additional details regarding our financial performance Updated 2023 items before opening the call to Q and A. Starting with our quarterly revenue results, We are pleased to report another record quarter with both increased customer utilization and strong system placements. Total revenue for the Q3 of 2023 was $35,100,000 representing growth of 72% compared to the Q3 of 2022. Growth in the quarter was driven by strong U.

Speaker 2

S. System sales, As we have previously discussed, We believe our strategy of focusing on outstanding long term clinical data, gaining reimbursement coverage and building a top performing field team Have led to consistent growth of the use of hypovulation therapy. In the 3rd quarter, we sold 38 robots in the U. S, Representing unit growth of 46% compared to the prior year. The number of robot placements Q3 was driven by growing awareness of our population therapy and the addition of new capital reps in greenfield territories.

Speaker 2

As a reminder, we added 10 new capital reps in late Q4 2022, which expanded sales capacity by 50%. As expected, the capital reps added in the Q4 of 2022 have hit their stride The typical productivity ramp is 6 to 9 months. While we recognize and monitor the challenges of the macro environment very closely, We entered the Q4 of 2023 with a robust capital pipeline that continues to grow meaningfully. Given the current hospital capital spending environment and now having the largest and most tenured Capital sales force in the company's history, we continue to feel very good about continuing our strong commercial execution The Q4 of 2020. Next, touching on quarterly utilization.

Speaker 2

West Handpiece and consumable revenue increased 113% compared to the Q3 of 2020. When analyzing our accounts, we continue to be extremely pleased with overall utilization trends. Our U. S. Installed base in 9 months has grown 62% compared to the end of 2022.

Speaker 2

And while new accounts take time to ramp, we delivered monthlyization of 6.4 We are encouraged by what we are seeing on account specific utilization and have multiple proof points where acoavulation therapy is viewed as the respective standard of care within a given hospital. The primary drivers of procedure growth continues to be active surgeon growth, It is a combination of new surgeon performing procedures and active surgeon retention rate greater than 90% for the 1st 9 months of 2020. We define active surgeon retention as any surgeon who performs a case in both the current and previous quarter. As a company, we benefit greatly from this high level of surgeon retention as our commercial team can focus on training new surgeons. Given our strong underlying momentum in utilization across our installed base, The addition of UnitedHealthcare coverage and seasonal tailwinds from elective procedure volumes, We remain confident in our ability to deliver sequential increases in monthly utilization in the 4th quarter.

Speaker 2

Our revenue guidance, as Kevin will go through shortly, continues to be informed by what we are seeing in our pipeline, Our opportunities progress, what customers are telling us regarding their outstanding real world experience, the productivity ramp of new capital reps and overall growth rates. All these indicators continue to trend positive as awareness around acoverylation therapy grows, which gives us confidence in achieving our 2023 growth targets. Turning to clinical updates. Since the inception of hypovlation therapy, many of our key opinion leaders have been encouraging us to pursue the prostate cancer Having now treated greater than 30,000 BPH patients, we felt investigating The merits of our coagulation therapy to treat prostate cancer was a logical next step. In the second half of twenty twenty two, we initiated a small feasibility prostate cancer study that treated men who have both PPH and localized prostate cancer with the purpose of assessing safety of acoagulation therapy.

Speaker 2

The results were encouraging, which gives us confidence to invest further in this clinical area. Specifically, we will be expanding enrollment to increase up to 125 patients across 7 sites globally. The study will include men with BPH who also have Grade 2, 3 or less prostate cancer. Furthermore, when combining legacy BPH data along with data from our feasibility study, We were able to provide support to the FDA to remove the prostate cancer contraindication for acoagulation therapy for men In September 2023, we also announced the ID approval to investigate the safety and efficacy of HACWOV ratio therapy specifically for prostate cancer. The IDEA approval allows us to initiate A single arm study in the United States and enrolled 20 grade group 1 and 2 patients I want to stress We are still very early in our research of prostate cancer and that we remain in the evaluation phase.

Speaker 2

That said, Given the traction we are experiencing today in BPH, the relationships we are developing with urologists globally and the desire of Those urologists to pursue this research, if a coagulation therapy can deliver effective and safe outcomes Relative to the current prostate cancer alternatives, this could be a significant future opportunity for CROSEP. With respect to international market development activities, last month, we announced that in the United Kingdom, NICE granted its strongest endorsement, the standard arrangement recommendation for acoagulation therapy. With this strong clinical recommendation, our pipeline of large NHS hospitals has grown meaningfully. Given the accelerating interest from U. K.

Speaker 2

Surgeons and strong unit economics on the handpiece and system average selling prices, We plan to make additional investments over the next 12 months in the UK to accelerate growth. Turning to Japan. We are more than halfway through enrolling patients in our post market survey and expect to complete enrollment Q4 of 2023. While we do not expect meaningful revenue contributions from Japan in 2023, We review Japan as a very attractive market long term. Like the U.

Speaker 2

S. And the United Kingdom, our strategy is to keep the clinical data Support a more robust and sustainable commercial launch. Lastly, in early August, we successfully completed The primary goal of the financing was to fortify the balance sheet from a position of strength to allow us to As of September 30, we had approximately $287,000,000 of cash on the balance sheet, which we believe will allow the company to reach cash flow breakeven without additional financing. We also officially moved our corporate headquarters to San Jose in mid September, which is 4 times the size of our previous facility. In this new facility, we will have more than enough space to meet our future growth goals.

Speaker 2

In closing, While we are not providing 2024 financial guidance at this point, I have a high degree of confidence in our ability We will now begin to achieve our long term growth plan. Every metric we track is moving in the right direction. And to summarize, these catalysts, Our pipeline and sales funnel continue to consistently grow driven by an experienced capital sales team and growing awareness of our population therapy. Model utilization accelerated sequentially in Q3 and continues to reinforce the growth of our business and strong relationship with surgeons. With the addition of UnitedHealthcare in mid-twenty 23, we can now offer a coagulation therapy to roughly 95% of all men We demonstrated prudent cost control in Q3 and successfully completed an equity financing We remain excited about the progress we have made since becoming a public company and our ability to execute on our plans each quarter.

Speaker 2

With that being said, our opportunity remains fast. Pacoablation therapy currently represents only 6% of annual receptive DPH procedures in the United States. Also, we expect to exit 2023 with greater than 310 hospital customers, which only account for 11% of the 2,700 hospitals performing dissecting DPH surgery. With that, I will turn the call over to Kevin.

Speaker 3

Thanks, Rosa. Total revenue for the Q3 of 2023 was $35,100,000 representing growth of 72% compared to the Q3 of U. S. Revenue for the quarter was $32,300,000 representing growth of 73% compared to the prior year period. U.

Speaker 3

S. Handpiece and consumable revenue for the Q3 was $17,000,000 representing growth of 113% compared to the Q3 of 2022. U. S. Handpiece revenue growth was driven by an increase in the installed base of robotic system.

Speaker 3

Monthly utilization per account of 6.4 increased sequentially by 5% compared to the Q2 of 2023. U. S. Handpiece revenue growth in the Q3 was driven by both strong surgeon interest at new accounts with most program launches having multiple surgeons. Additionally, we continue to see increased account level utilization over time as we continue to train new surgeons and increase utilization of our existing surgeon base.

Speaker 3

We shipped 4,873 handpieces in the U. S. In the Q3, representing unit growth of 112% Compared to the Q3 of 2022 with average selling prices of approximately $3,140 In the Q3, we sold 38 robotic systems, generating total U. S. System revenue of $13,500,000 Increase of 37% compared to the Q3 of 2022.

Speaker 3

Our U. S. Installed base at the end of the Q3 is now at 271 systems, which is an increase of 95% compared to the Q3 of 2022. 3rd quarter system average selling prices were $353,000 and remain within our expected range given quarterly variability. International revenue for the Q3 was $2,800,000 representing growth of 62%.

Speaker 3

Gross margin for the Q3 of 2023 was 54% Compared to 50% in the prior year period. Gross margin expansion in Q3 is primarily due to the increase in revenues Our ability to absorb overhead expenses over a larger number of units produced. Moving down to income statement. Total operating expenses in the Q3 of 2023 were $44,500,000 Compared to $32,300,000 in the same period of the prior year. When compared to the Q2 of 2023, Total operating expenses increased by only $400,000

Speaker 4

which is

Speaker 3

the lowest sequential increase over the previous 2 years. The increase was driven by increased sales and marketing expenses, primarily to expand the commercial organization and variable compensation expense, Increased research and development expenses and general and administrative expenses. Total interest and other income were $1,000,000 Quarterly interest expense from our $52,000,000 term loan was offset by favorable interest income from our cash balances, which were significantly increased Our recent equity financing in early August. Net loss was $24,600,000 for the Q3 of 2023 Compared to $22,600,000 in the same period of the prior year. Adjusted EBITDA was a loss of $19,400,000 Compared to a loss of $18,300,000 in the Q3 of 2022.

Speaker 3

Our cash and cash equivalents balance as of September 30th Approximately $287,000,000 which includes the $162,000,000 of net proceeds raised in our equity offering in August. Moving to our 2023 financial outlook. We are increasing our full year 2023 Total revenue guidance of approximately $133,500,000 representing growth of 78% compared to 2022. We are increasing our revenue guidance based on the following factors. Starting with U.

Speaker 3

S. Systems, we now expect full year system sales to be 145 systems. Given normal seasonality and a more experienced capital sales team, we expect 4th quarter system sales to increase relative to the 3rd quarter. Turning to U. S.

Speaker 3

Handpiece revenue. We continue to expect full year utilization to be approximately in the mid-6s As measured by weighted average handpieces sold per account per month, which implies approximately 6.75 handpieces sold per account in the 4th quarter. Given normal Q4 procedure seasonality, we believe this will more than offset the expanding installed base, thus allowing utilization to continue to increase sequentially. Additionally, we expect Hanby's average selling price to be comparable to the 3rd quarter And our other consumables revenue to be $1,900,000 Lastly, on revenue, given another strong quarter and positive momentum, We now expect full year international revenue to be approximately $11,500,000 Moving down the income statement. We now expect full year 2023 gross margins to be in the range of 54% to 55%.

Speaker 3

We continue to expect operating expense Approximately $174,000,000 Given our recent capital raise and subsequently larger cash balance, We expect Q4 net interest income to be $2,100,000 resulting in full year net interest income of $3,300,000 Lastly, we expect adjusted EBITDA to be a loss of $76,900,000 With that, I will turn the call back to Reza for closing comments.

Speaker 2

Thanks, Kevin. In closing, I want to thank our employees, customers and shareholders for all their support to help us along our journey to We will continue to leverage our commercial and clinical investments to execute on our long term strategy. Have a great day and I look forward to seeing many of you at upcoming investor conferences. At this point, we will take questions. Operator?

Operator

Thank One moment please for our first question. Our first question will come from Craig Nishu of Bank of America. Your line is open.

Speaker 4

Great. Good afternoon, guys. Thanks for taking the questions and congrats on a Very strong quarter. I want to start with utilization as I usually do and it seems pretty important to you guys. Reza, I appreciate your comments on trends of previous cohorts, but would love to hear kind of as you're adding a number of new systems, How those system utilizations, the newer systems, how they ramp And just a little bit more color there.

Speaker 3

Okay. We're going to Give us one second here. We just had a fire alarm go off in the building. It's just turned off. I apologize to everyone here.

Speaker 3

Can you please repeat your question and we're going to reset here. Thank you very much, Craig. Sorry about that.

Speaker 4

No problem. All right. So utilization, so I guess the question just comes down to, I wanted to know How you guys are seeing utilization with some of the new systems that you're adding? I appreciate Reza's comments that the older cohorts are Still increasing, but wanted to understand when you place a new system, how you're seeing that ramp?

Speaker 2

Thanks, Craig. Sorry for the disruption. We are very happy with the utilization we saw in Q3 And some of the underlying trends, I want to talk about those. Historically, Q3 is a flat, We saw in this quarter, we saw an increase and that was number 1, our existing Surgeons, generally existing surgeons is flat. We saw an increase in our existing surgeon.

Speaker 2

We also had the largest number of new surgeons in this quarter that entered and that contributed to this Increase in utilization and also the retention. So these are the three factors that led to a very good utilization in And I'll let Kevin to add to this.

Speaker 3

Yes. It's a good summary. And Craig, when we look at new accounts, I mean, we are seeing today and I think it's a testament to our focus on our Aqua Ablation sales rep team and focusing on utilization. So when we launch new accounts today, we typically have 2 to 3 surgeons in that account. And again, a lot of that's due to our sales team, but a lot of it's due to general growing awareness And market acceptance of Aquavation.

Speaker 3

If I go back 2 years pre IPO, I mean most accounts would launch with 1 surgeon. Now we're seeing 2 to 3. On top of that, we're seeing many program launches within the Q3. So it was a really nice quarter for new account launches.

Speaker 2

And we are also hearing our surgeons telling us that the patients are asking awareness amongst patients

Speaker 4

Great. That's helpful. And I want to ask also about the sales funnel. You guys track that rather closely. I appreciate you guys expect a sequential pickup in systems in Q4 versus what you saw in Q3.

Speaker 4

So just wanted to see any changes in kind of the conviction or the confidence that you have in your visibility And any lengthening of sales cycles or anything else from there may be capital market or Capital purchasing impacted.

Speaker 2

So, I want to answer First part of your question, the demand is really driven by surgeons. As we have said in the past, once we identify The surgeon champion is very difficult to lose that deal. It generally goes to the finish line And there is a demand by surgeons for our technology. And we have also increased our sales force this year is about 50% And awareness among the surgeons of increased, these are the I'm just driving for the capital and that's what gives us confidence. I'm going to add.

Speaker 3

Yes, I think specifically Craig, I mean to your question, I think we have a higher degree of conviction today in our capital pipeline than we did when we entered the year. I mean, our guidance still suggests that 55% All of our sales are going to come in the back half of the year. And now that we're kind of only 1 quarter left to go in the year, we obviously feel much better about our ability to achieve that number Just given that time has gone by. And I just think the second point too is, this was the 1st year where we had such a large addition to our capital team and we were really dependent on those folks being productive in the back half of the year And that was an unknown at the beginning of the year. And I think now we see in our pipeline these reps being productive.

Speaker 3

We see deals coming into the funnel. We see The same sales cycle, so we don't see any lengthening and we see similar close rates. So I think all of those things give us more confidence today than when we entered 2023.

Speaker 4

Thanks for taking the questions, guys.

Speaker 3

Thanks, Craig. And sorry again about the hiccup there at the beginning.

Operator

Thank you. One moment please for our next question. Our next question will come from Joshua Jennings of TD Cowen. Your line is open.

Speaker 5

Hi, good afternoon. Thanks for taking the questions and congratulations on another strong quarter. I wanted to follow-up on Craig's Question, Reza and Kevin, just thinking about 2024, I mean, the Street is just north of $200,000,000 plus 50% plus Revenue growth, I think you probably had some of the key drivers of strong revenue growth in 2024, now you're not issuing guidance. I I was hoping you could just take us through some of those key drivers and how we should be thinking as we're thinking about Updating our models and forecast for

Speaker 2

2024. Thanks, Josh. I'm not providing financial guidance, But as I summarized in my prepared remarks, we feel very good about the business going forward and every metric is moving in the right direction. These are the tailwinds that have a strong pipeline. We saw the increased utilization with United coming on board down 95% Access to this therapy among patients.

Speaker 2

We demonstrated also a prudent cost control and with the recent Financing will strengthen our balance sheet, combination of these will take us to profitability. I also want to mention that we are very early still in this ramp, whether it's on utilization or robot placement. So these are all those parameters that gives us confidence going to 2024. Kevin, do

Speaker 3

you want to? Yes, Josh. I mean, the drivers specifically that you referenced, I mean, as of today, our business is fairly simple. We sell capital and the capital What we measure is utilization, right? And those drivers don't change.

Speaker 3

In 2024, I do think you see a business though that shifts more Heavily weighted obviously to disposables as we grow our installed base. So that's point 1. Point 2, we're obviously aware of the management team and as a company, The Street expectation, if you look at utilization expected of the company in 2024, it's roughly equivalent to what We're guiding to in Q4 of 2023, which I would suggest as a proof point that what expectations are, Are not terribly ahead of even where we're at today. So that's point 1 on utilization. And then point 2, we still believe our ability to sell capital is directly correlated The number of capital reps that we have in the field that are productive.

Speaker 3

And we're going to exit the year probably close to the 35 to 40 range of capital reps, Which we think if you just take average productivity, I mean, you could do the math yourself and back into kind of what a system number would look like for 2024. To Reza's comment, we're very early in our penetration and therefore we don't expect diminishing returns as we have capital reps. So I appreciate we're not answering your question directly on 2024. As Rosa mentioned, the growth drivers of the business are in place to allow this business to continue to grow at, I'd say, rates that far exceed Most other med device companies.

Speaker 5

No, that was very helpful. Thank you. And just a follow-up. As you're seeing the AquaBeam system and AquaBeam Relation treatment being adopted at centers And deeply penetrating those accounts, becoming standard of care at those centers, I was just hoping to get a feel for What's being displaced? Are there is there a low hanging fruit in the respective either approach or technology Turb, Hollub, Greenlight, Prostotec, MIRRORS, it really broad based, I guess replacement of those approaches.

Speaker 5

I really wanted to ask that and just hear also about just the conversion of hollow up surgeons and that rate to date in the United States. Thanks for taking the questions.

Speaker 2

Thanks, Josh. So when we ask this question from our surgeons, definitely TURF and Greenlight are the ones that we asked them if you didn't use our technology, what else could use. The majority of the Cases are from TURP and FreeLight and that's because TURP, again, with the data we have still is what the largest effective treatment. And as far as the larger prostate, I mean, definitely we are physicians use our product for larger prostate. The advantage compared to other therapies is the shorter therapy time, faster recovery And also not that much dependent on surgeon skill.

Speaker 2

So these are definitely for larger prostate. The advantage we have is in those areas. I'd also just add specific to

Speaker 3

your question on hold up. I mean, if you look at the respective market, Josh, hold up is about 10% of the respective Surgical market, maybe something slightly less of that. And the reality of that procedure, it's a very long procedure. It's difficult to perform. It's highly specialized.

Speaker 3

I don't think anybody would suggest that whole up would have the ability to become the standard of care over time. So as Rosa mentioned, it primarily is TURP and Greenlight. I'm sure we're getting some holdup cases, but there's also I would say many holdup loyalists and our growth is not dependent on cannibalizing in the near term.

Speaker 5

Great. Thanks again.

Operator

Thank you. One moment please for our next question. Our next question will come from Matthew O'Brien with Piper Sandler. Your line is open.

Speaker 6

Afternoon, thanks for taking my questions. And I'll refrain from trying to make a joke about the smoke alarm going off

Speaker 3

We appreciate it. The first call in the new facility here, but it was interesting. We're good.

Speaker 6

Got it. So on the utilization side, I'm just curious about the performance there because again in Q4, we're expecting a pretty big step up As far as utilization goes for the existing systems, you grew 5% sequentially in what's typically a seasonally slow So can you just talk about some of the momentum you're seeing? And again, kind of to Craig's question, across the cohorts, are some of the people that have been using you for a while At 10 cases per month on average. And then what kind of benefit are you baking in for United in Q4 specifically?

Speaker 3

Yes. So I think all of your questions point to kind of our comfort around our ability to expand utilization in the 4th quarter, right? I mean, that's really what it comes down to. And Our Q4 guidance implies utilization of about 6.75, 6.8 procedures per month per account in the 4th quarter. And when you look at that metric regarding cohorts, so to achieve that in the 4th quarter, We do not need any accounts that purchase systems in 2023 to be at that corporate level.

Speaker 3

And that means by definition that the accounts that have been with us prior to 2023 are doing north of 6.8 and in many cases, as you pointed out, Well north of 6.8 and that is what is expanding utilization in the Q4. I'd also suggest that In BPH procedures, it is an elective procedure. We do expect some normal seasonal tailwinds from our existing surgeons in Q4 as they do more procedures Then they did in the previous quarter. And I guess just the last point around kind of how we are comfortable with expanding utilization. Our historical growth in 2022 was that the growth we experienced last year in our Q4, The guidance we're giving today is very comparable to that sequential growth.

Speaker 3

It's about 5% to 6% sequential increase in utilization In Q4 'twenty three, which would be very comparable to what we did in Q4 'twenty two as well. So, the multitude of factors that get us comfortable that we could continue to expand utilization Even with a greatly expanding installed base in the 4th quarter.

Speaker 6

Got it. Appreciate that feedback. And then Kevin, another one for you. Just more on the margin side of things. Gross margins Just a little bit, not the end of the world.

Speaker 6

Love to hear what happened there. But then also, it looks like the cash burn came down quite a bit, and I know that's an area Investors have been focused on. So can you just talk about some of the levers that you're pulling on, on the operating margin side of things and the cash burn side of things? Thank you.

Speaker 3

Yes, I'll address both of those. So first margin, those gross margins, they were around our expectations, but as you pointed out down sequentially. The main contributor for margin being down sequentially is really the impact of our system ASPs and The impact of that on overall gross margin. If we had capital pricing similar to Q2, our gross margins In fact, would have been roughly 180 basis points higher, which would have translated to 56% versus 54%. But as we've continually said on previous calls, We do expect quarter to quarter variability on system pricing and we actually see that rebounding back to 3.70% in Q4.

Speaker 3

So we think that's kind of a temporary situation. I'd also point out, while it's not as material as pricing, we did produce as a company relatively fewer units in the 3rd quarter, And therefore, our average costs were marginally higher. But now that we're fully into our new facility, we do expect production volumes to return to more historical And this won't negatively impact margins in the future, but we feel good, although I appreciate this quarter to quarter variability, The trend over time is up into the right with gross margins. Your second question, I'm glad you asked on cash. This was as you pointed out from an operating cash Slow point significantly improved over the previous two quarters.

Speaker 3

We were in the 35,000,000 in Q1, 28,000,000 And you saw that number drop below $20,000,000 in the Q3. And this is purposeful by the company, particularly given our recent equity rate. We feel that as a business, we're definitely investing in the long term. We're investing in our commercial team. But at the same time, we're being prudent with our cash and we understand in this environment that a pathway to profitability and having OpEx discipline It's important.

Speaker 3

It's always important, but particularly in this environment, we believe that we need to show investors that we can grow the top line and demonstrate leverage On the bottom line, and that's what we feel we did in the Q3. And our guidance suggests on OpEx that that's going to continue in the Q4 with relatively flat operating expense. Very helpful. Thank you.

Operator

Thank you. One moment please for our next question. Our next question will come from Richard Newitter Tuohy Securities, your line is open.

Speaker 7

Hi, thanks for taking the questions. Congrats on

Speaker 8

the quarter. Just a

Speaker 7

couple for me. You mentioned, I think Kevin, productivity for your capital reps. In the past, I think you said You target that getting north of 4 to 5 systems per rep if you're heading into next year with 35 to 40.

Speaker 3

I mean, is that the right

Speaker 7

kind of rule of thumb to just be thinking about broad strokes?

Speaker 3

Yes. Broad strokes Good rule of thumb. I would remind you that we've said to get to that productivity, it does take a rep on average 6 to 9 months, but we believe that productivity is in the ballpark, correct?

Speaker 7

Okay. And then can you comment at all on the percent of IDN either orders or I know you said That you're at the highest level of IDN contracting, exiting 2Q or entering 2023 maybe that was the comment. Can you just talk about those percentages?

Speaker 2

And, 1, what percent

Speaker 7

are you at and where do you expect As you exit the year in terms of IDN as a percentage of total orders. And then 2, how if at all does that impact Pricing,

Speaker 3

do those reflect multi

Speaker 7

system orders and or is there Anything you can give us in terms of IDN orders and where they fall on the kind of the range of ASPs that you've Delineated in the past between $350,000 $400,000 Thank you.

Speaker 3

Yes. Thanks, Raj. Let me start with pricing. So our IDN relationships Do not impact our system ASPs negatively. So I'll just start with that.

Speaker 3

That's the quarter to quarter variability around system pricing is Not a reflection of IDN deals. So I'll start with that one. To your broader question on IDNs, we do continue to partner with IDN affiliated hospitals, as we mentioned, we do believe we're on track to have the majority of all large IDNs Under contract by the end of 2023, which were a business at our stage of commercialization is something we're really frankly proud of as a management team here. And I think it's a great testament to the technology. With that said, I think you're hearing from other companies that sell capital And we're not any different.

Speaker 3

We are not seeing large bulk buys from our IDN partners in 2023. And our guidance is not dependent on any improvement in this environment in Q4. I think when we entered the year, while we said we weren't And then on large bulk buys, I think we were thinking we had the possibility to get a few this year, but those Just are going to be pushed into 2024. And if anything, I think we view our IDN relationship as a future tailwind for us Because we're able to meet our 2023 capital expectations really without any bulk buys. It's been kind of onesies and twosies negotiating with Individual hospitals under their RFP process as opposed to any type of large book buy.

Speaker 3

So none in our current sales In the first half or in the 1st 9 months of 2023, but something we continue to work on and are working on deepening those relationships daily.

Speaker 7

Okay. Thank you very much.

Operator

Thank you. One moment please for our next question. Our next question will come from Neil Chatterjee of B. Riley. Your line is open.

Operator

Pardon me, Neil Chatterjee, Your line is open. And again, one moment for our next question. The next question will come from Brandon Vazquez of William Blair. Your line is open.

Speaker 8

Hi, everyone. Thanks for taking the call. One, maybe a quick clarification question and a little bit about future plans. On the capital rep side, I think you had just mentioned you'd exit this year with somewhere between 35 to 40. Are you able to shore us up on where you are today?

Speaker 8

And then as you look to next year, I think you discussed before that there's room for further expansion as you look to 2024. Do you hire a cohort for 2024 as we go into the year or do you hire that cohort in 2024? Any updated thoughts around that?

Speaker 3

Yes. We're probably in regards to cadence, we're about halfway To be fair, it's where we want to be. So think of around 35 sitting here today, which means we have another class, probably 5 coming in here in the next 2 months. I'd also suggest that in 2024, the plan isn't to stop, but at the same time, I don't think we're in a position Call out the exact number of capital folks we're going to add. As the business gets more complicated and we get into more accounts, It's not just going to be capital reps we hire.

Speaker 3

We're looking at things like strategic account managers. We're looking at key accounts. We're looking at IDN relationships. So I think it becomes a little messier, so to speak, in 2024, but we definitely continue to plan to invest in that business. We still want to make sure we're investing responsibly, making sure we're not sacrificing outcomes, making sure we're not moving too fast, being very methodical to how we have to get the organization.

Speaker 2

Okay. Thanks. And then internationally, I

Speaker 8

mean, you guys have had a couple of nice wins, Especially in the U. K, you've mentioned that you might step up investments in the U. K. Through 2024. Can you talk a little bit about what those investments are?

Speaker 8

When that can accelerate, I mean, you have good reimbursement there, you have endorsements, you're making some investments. Is there any reason that that U. K. Opportunity can't Via high growth area or as high of a growth of an area that we're seeing in the U. S?

Speaker 2

Yes, definitely we are I think we are very pleased with another solid quarter we have from international. Our international strategy has always been to Market development and working with KOLs and increased awareness. As you mentioned, recent announcement by NICE Having this third arrangement is a great driver and catalyst for our product in the UK. For that, we will increase our sales infrastructure in U. S.

Speaker 2

In U. K. And international, definitely Japan, I'm staying more focused on U. K. Our immediate action will be increasing infrastructure.

Speaker 2

I'm going to Kevin.

Speaker 3

I'd just say the only point I'd add to Reza's comments is, I don't believe our commentary around investing more In the U. K. Is going to change kind of the OpEx leverage of the business. So I think we're investing in the U. K, But it will be absorbed into the run rate of the company as opposed to anything materially incremental if you're thinking about it from an OpEx standpoint.

Speaker 2

From an opportunity point of view, international, we are targeting those geographies that is a great market. We see international as a great opportunity, but we are moving very methodically and making sure we have the Invorsement and KOL and awareness in place. Got it. Thanks a lot for taking the questions.

Speaker 3

Thank you.

Operator

Thank you. One moment for our next question. Next question will come from Neel Chatterjee of B. Riley. Your line is open.

Operator

Neil Chatterjee, Your line is

Speaker 3

We'll put Neil a separate note. Why don't we keep moving here?

Operator

Okay. I

Speaker 3

think Neil is having technical issues and We'll try and let's put them at the end and see what happens.

Operator

Thank you. Thank you. One moment please for our next question. The next question will come from Nathan Trebek of Wells Fargo. Your line is open.

Speaker 9

Hi, guys. Congrats on the great quarter. I just want to can you just touch on the drivers of system ASP variability quarter over quarter? I think generally there were expectations that ASP will be down sequentially in Q1 and then kind of stable Q2 through Q4, so maybe if you could just touch on what was driving the variability? Thanks.

Speaker 3

Yes. Thanks, Nathan. So look, we've mentioned this on previous calls and we have talked kind of about our overall mission Partner with our hospital customers, drive procedure growth and gain market share. And we do have internal limit or so to speak on pricing, But at the same time, we are willing to negotiate on capital. And if that means we can get a system in sooner, if we have a committed surgeon that we know is going to do a lot of volume, We will be willing to negotiate on pricing.

Speaker 3

And I think you are going to start to see in our business some seasonality, Not only in systems sold, but also in system ASPs. And it appears to us that Q1 and Q3 Appear to be, I would say, a weaker capital quarter where we've seen ASPs now be roughly in the $350,000,000 to $355,000,000 range. We saw Q2, as you pointed out, at $370,000,000 And when we look at the funnel in Q4, we see an increase from Q3. So I do think there's just going to be some quarter to quarter variability. But at the same time, when we make the decision on price, it's always in light of a bigger opportunity and how fast can that hospital become An Aqua Blasian standard of care center, so to speak.

Speaker 3

And that's a trade off we're willing to make and it's individual negotiations with these hospitals. We don't have as a management team any concerns kind of about our long term capital pricing and our ability to get a fair price and a fair margin for

Speaker 2

our system.

Speaker 9

Okay. Thanks for that. And then in terms of just system sales outside the U. S, they were down Pretty meaningfully quarter over quarter. Can you just talk about what drove this and I guess your outlook for Q4 and then maybe into 2024?

Speaker 9

Thanks.

Speaker 3

It's timing, Nathan, to be honest. I mean, at these volumes, if you think of European customers, particularly in capital, I mean, I think the seasonality in Q3 It's even more pronounced than the U. S. Quite frankly. We did see strong utilization overseas Even with that seasonal factor, but when we look at the pipeline, we had some we had a very robust Q2 where you're talking about relatively few units as well, right?

Speaker 3

And We see a good funnel in Q4 and I would expect capital to rebound in Q4 based on what we see in the pipeline, but we're not reading into anything other than timing on capital internationally.

Speaker 9

Great. Thanks.

Speaker 3

Thank you very much.

Operator

Thank you. And one moment for our next question. Our next question will come from Mike Krutke of Leerink Partners. Your line is open.

Speaker 1

Hi, everyone. Thanks for taking our question. Can you provide a little more color on next steps for Acoblation in prostate cancer? And How are you thinking about the overall size of that market opportunity and just your level of confidence that that could be an effective treatment option for patients?

Speaker 2

Yes. Thank you for the question. We are very excited about the cancer opportunity, but this is very early. And the reason we started this study, as we mentioned from the very beginning of the company, KOLs were asking us to enter this segment. And because this is the same anatomy, same procedure and the same surgeon and it made sense considering some of the Data we have gathered in our FDA trial on the procedure.

Speaker 2

If we can show similar results in the cancer treatment, this could be a great opportunity For millions of men who are sitting on the sidelines, but again, this is very early. This is a great opportunity Very early. It makes perfect sense for us to have that as our next indication.

Speaker 3

And I'm going to add even though you didn't ask. I think the beauty of this Indication for ProCep is the project currently doesn't require any material increases Our R and D spend, our R and D group, this is purely a clinical effort over the next 1 to 2 years, which is nice As we get to move forward and make a lot of progress, we'll keep 99% of the organization's resources and focus on our opportunity in BPH. So we're really excited about it.

Speaker 1

Understood. Thanks.

Speaker 3

Welcome. Glad to have you on board.

Speaker 1

Thank you very much.

Operator

Thank you. This will end our Q and A session on the call. I would now like to turn the conference back to the CEO, Reza Zadno for closing remarks.

Speaker 2

Thank you for attending our earnings call. We look forward to seeing you and speaking with you in the future conferences. Have a very nice day.

Operator

This concludes today's conference call. Thank you all for Thank you for participating. You may now disconnect and have a pleasant day.

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Earnings Conference Call
PROCEPT BioRobotics Q3 2023
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