Pulmonx Q2 2023 Earnings Call Transcript

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August 2, 2023

There are 7 speakers on the call.

Operator

You for standing by. Welcome to the Pulmanex Second Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer session. As a reminder, today's conference is being recorded.

Operator

I would now like to turn the conference over to your host, Lane Morgan at the Gilmartin Group. Lane, please go ahead.

Speaker 1

Thank you, operator. Good afternoon and thank you all for participating in today's call. Joining me from Pelemonics are Glenn French, President and Chief Executive Officer And Derek Sun, Chief Financial Officer. Earlier today, Peharmonic issued a press release announcing its financial results for the quarter ended June 30, 2023. A copy of the press release is available on Haemonics' website.

Speaker 1

Before we begin, I'd like to remind you that Management will make statements during this call that include forward looking statements within the meaning of federal securities laws, which are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Any statements contained in this call that relate to expectations or predictions of future events, Results or performance are forward looking statements. All forward looking statements, including without limitation, those relating to our operating trends, Commercial strategies and future financial performance, the timing and results of clinical trials, expense management, expectations for hiring, Growth in organization, market opportunity, guidance for revenue, gross margin and operating expenses, commercial expansion and product pipeline for development are based upon our current estimates and various assumptions. These statements involve material risks and You should not place undue reliance on these statements. For a listen description of 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 quarterly report on Form 10 Q filed with the SEC on May 8, 2023.

Speaker 1

Also during the call, we will discuss certain non GAAP financial measures. Reconciliations of these non GAAP financial measures to the most directly comparable GAAP financial measures 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. This conference call contains time sensitive information and is accurate only as of the live broadcast today, August 2, 2023. Polonix disclaims any intention or obligation, except as required by law, to update or revise any financial projections or forward looking And with that, I'll turn the call over to Glenn.

Speaker 2

Thanks, Elaine. Good afternoon, everyone, and welcome to our Q2 2023 earnings call. Here with me is Derek Sung, our Chief Financial Officer. In the Q2, we executed on our commercial strategy while continuing to advance our market and geographic expansion initiatives. In Q2, we delivered a new high of $17,200,000 in worldwide sales, representing 23% growth over the same period of the prior year, driven by another record U.

Speaker 2

S. Performance of $11,000,000 in sales. Given the positive momentum we saw in the Q2, we are updating our full year 2023 revenue guidance to be in the range of $64,000,000 to $66,000,000 up from our prior guidance of $63,000,000 to 65,000,000 Throughout the Q2, we continued to make progress on our focused U. S. Commercial strategy to 1, Train hospitals that have the potential to be high performing Zephyr valve centers 2, facilitate sharing the best Sharing of best practices to existing centers to optimize their Zephyr valve programs and 3, Build local awareness of the benefits of our treatment among COPD physicians and patients.

Speaker 2

Increasingly, we are seeing view their Zephyr valve programs as areas of strategic investment. In the first half of this year, many of our accounts In addition, Zephyr valve hospitals are increasingly implementing routine standard of care protocols To identify and treat patients with severe emphysema, similar to their approach for screening and working up suspected lung cancer patients. For example, a hospital in the Midwest recently changed its protocol to ensure every lung function test is evaluated for hyperinflation And hyperinflated patients with a suspicion of severe emphysema are referred to workup for endobronchial valves. This has led to substantial growth in patients being identified at this account that might otherwise Have been missed in the routine evaluations by other physicians at that system. I'm pleased to report that we are Starting to see early evidence and that these efforts are translating into increased sales and productivity.

Speaker 2

As a reminder, we measure account productivity based on the average number of cases conducted in a given quarter by our active Zephyr valve treating hospitals, which are those that have been performing Zephyr valve procedures over the past 4 quarters and have placed a revenue generating order in the current quarter. Over the past year, average account productivity in the U. S. Has ranged between 4 and 5 cases per account. And in the Q2 of 2023, average U.

Speaker 2

S. Account productivity trended back up to 4.7 cases While seasonal trends will drive some variability in this metric from quarter to quarter, on average, over time, we expect Account productivity to continue to move higher. Meanwhile, U. S. Account activity in the Q2 of 2023 was 73%.

Speaker 2

As a reminder, we define account activity as the percentage of treating accounts that place a revenue generating order In a given quarter, we continue to expect account activity to remain in the mid-70s range as we grow our denominator of treating centers. We also further expanded our commercial footprint, adding 15 new centers in the U. S. In the Q2 of 2020 3, bringing our total number of U. S.

Speaker 2

Centers to 308. We now expect to end the year having opened approximately 50 new centers, which is toward the high end of our previously communicated expectation of 40 to 50 new centers this year. From a geographic expansion perspective, we achieved regulatory approval of our Zephyr valve in Japan last year and continue to the establishment of reimbursement in Japan later this year. Once reimbursement is established, we will initiate sales in Japan Through a post market study. As a reminder, though we anticipate it will take time to grow awareness of this new treatment option, We estimate Japan has approximately 100,000 patients who stand to benefit from our treatment.

Speaker 2

In our clinical development timeline, we remain on track with our ARISCL program, which we expect will expand the addressable market of our Zephyr valve solution for severe emphysema patients with collateral ventilation. I'm happy to announce that during the Q2, we completed enrollment in Multinational clinical trial, CONVERT-two. And in support of this, we are in the late stage discussions with FDA. Again results from convert 2 will form the basis of our Aeroseal PMA submission. In summary, Our commercial execution is on track.

Speaker 2

I am confident in our go forward strategy, Our expectations for 2023 and the long term growth trajectory of our business. With that, I'll now turn the call over to Derek to provide a more detailed review of our second quarter results.

Speaker 3

Thank you, Glenn, and good afternoon, everyone. Total worldwide revenue for the 3 months ended June 30, 2023, reached a new quarterly high of $17,200,000 a 23% increase from $14,000,000 in the same period of the prior year. U. S. Revenue in the 2nd quarter reached a new record of $11,000,000 a 28% increase from $8,600,000 during the prior year period.

Speaker 3

The growth in U. S. Sales reflected continued commercial momentum and adoption of our Zephyr valve therapy. International revenue in the Q2 of 2023 was $6,200,000 a 16% increase from $5,300,000 during the same period last year. The overall increase in international sales was driven by growth of Zephyr valve procedure volumes.

Speaker 3

Gross margin for the Q2 of 2023 was 74% compared to 75% in the prior year period, reflecting slightly lower We continue to expect gross margin for the full year 2023 to fall within the range of 73% to 74%, trending towards 74% in the back half of the year. Total operating expenses for the Q2 of 2023 were $29,200,000 A 17% increase from $24,800,000 in the Q2 of 2022. Non cash stock based compensation was $5,500,000 in the Q2 of 2023. Excluding stock based compensation expense, Total operating expenses in the Q2 of 2023 increased 15% from the same period of the prior year. Looking ahead, we continue to expect operating expenses for the full year 2023 to fall between $112,000,000 to $114,000,000 inclusive of approximately $22,000,000 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.

Speaker 3

R and D expenses for the Q2 of 2023 were $5,700,000 compared $3,600,000 in the same period of the prior year. The increase was primarily attributable to an increase in clinical and development costs related to our Aeroseal program as well as an increase in stock based compensation expense. Sales, general and administrative expenses for the Q2 of 2023 were $23,500,000 compared to $21,200,000 in the Q2 of 2022. The increase was attributable to selling costs as ramped commercial activities as well as an increase in legal and stock based compensation expenses. Net loss for the Q2 of 2023 was $16,200,000 or a loss of $0.43 per share as compared to a net loss of $14,600,000 or a loss of $0.40 per share for the same period of the prior year.

Speaker 3

An average weighted share count of 37,800,000 shares was used to determine loss per share for the Q2 2023. Adjusted EBITDA loss for the Q2 of 2023 was $10,300,000 compared to $9,800,000 in the Q2 of 2022. We ended June 30, 2023 With $147,600,000 in cash, cash equivalents and marketable securities, a decrease of $7,900,000 from March 31, 2023. We continue to feel very good about our pathway to cash flow breakeven as we grow our top line and deliver operating leverage. Finally, turning to our revenue outlook for 2023.

Speaker 3

Given our strong performance in the first half of the year, we are updating our full year 2023 revenue guidance to be in the range of $64,000,000 to $66,000,000 representing approximately 19% to 23% growth over 2022 and up from our prior guidance of $63,000,000 to $65,000,000 Our sales guidance incorporates seasonality in the 3rd quarter, which is typically down sequentially to the Q2 due to the summer holidays. With that, I'd like to Thank you for your attention. And we will now open up the call for questions. Operator?

Operator

Our first question comes from the line of Rick Wise with Stifel. Your line is now open.

Speaker 4

Good afternoon, Glenn. Hi, Derek. How are you doing? Nice to see the solid quarter and the beat and raise. You keep doing it.

Speaker 4

It's nice to see. Maybe starting off, I was hoping you could add some extra color on the guide. The new range Does clearly seem to imply a sequential step down in the Q3. And I just wanted to understand How much of this is seasonality? I know you're always opening new centers and training new docs and The sales force gets more productive and you step up utilization in active accounts.

Speaker 4

Why not? And I'm not asking this argumentative. I'm just sort of curious, why not sequentially even or higher in the 3rd quarter?

Speaker 3

Sure, Rick. This is Derek. Thanks for your question. So, yes, we are obviously super happy with our performance in the second Right. We're seeing that increased traction and engagement with our hospital customers exactly as we hoped.

Speaker 3

And we did raise our overall guidance, Both the top and bottom range for the year. Now that said, and as you pointed out, we are Acutely aware of the summer slowdown, which typically affects our Q3. Last summer, we saw a very Pronounced seasonal summer impact. And we have no reason to believe that this year will be any different or perhaps even More substantial. So that has been contemplated into our guide and that's the primary reason for Our belief that we expect Q3 to be down sequentially, I think somewhere around the order of 5% to 7% would be What we'd expect given what we've seen in the past and what we're factoring in.

Speaker 3

But that said, we really do expect to see a nice step up back in Q4 and particularly Given all the dynamics that we saw, the positive dynamics that we saw in Q2, we expect Q4 to step up nicely. We just don't want to get Ahead of ourselves and we really want to see how the summer plays out this year. So, that's the primary explanation.

Speaker 4

Got you. Glenn, maybe for you, there's been a lot of discussion For several quarters now about patients coming back post COVID and recovery and obviously the Intersection with staffing and other lingering issues. But given what seems to be a stable to improving Environment continued recovery. Are you noticing do you feel like in addition to everything else that's going on, are you seeing A meaningful or any difference in patient backlogs here. Our patients seeking treatment as you If all these programs share best practices and build local awareness, is that making a difference in The pipeline or the patient backlog or however you would characterize it?

Speaker 2

Yes. Thanks, Rick. So with regard to our activities. So first of all, COVID to a large extent The patients have always been there all along. I think we've talked about in many of the prior calls 100,000 patients that are engaged With us and with others through social media, and through our website and so forth.

Speaker 2

So the patients are out there. And one of the things that we've really been focused on and when we hopped out of COVID, it really became obvious to us was that we thought that the accounts had established our treatment as a standard of care in a way That was a little bit different than what was actually the case. And so we've been very much focused on sharing best practices and trying to bring these treating accounts Up the learning curve as it relates to that. And then to make sure that they're taking full advantage of the opportunity that's right around them By looking around the hospital and around their hospital system for the patients that are there right now and that's been really the primary focus over the last few quarters. And we feel very good about the progress we've made.

Speaker 2

We feel good about the plan. And as we look ahead, we think it provides us with a nice foundation to begin to move those patients Into hospitals that are ready to accept them.

Speaker 4

Yes. And maybe just last for me for now. And I know everybody hates it when analysts ask on these calls about the outlook for the next year. Can't help myself. As we think about 2024, it seems like the setup is positive for all the reasons you've articulated.

Speaker 4

Are you comfortable with where consensus is? I mean, we're thinking about 20% growth. You keep delivering it. Maybe talk us through just at a high level, The drivers we might want to be sensitive to as we think about the year ahead. Thanks so much.

Speaker 3

Yes. Thanks, Rick. So look, we feel we certainly feel good about, what we've seen in the first half of this year, right? And As Glenn kind of outlined, a lot of what we're putting in place this year builds that foundation for us to continue to drive growth forward. So we really like what we've Been seeing relative to how we were hoping to execute relative to our plan this year.

Speaker 3

Now next year, it's obviously premature and we're not going to comment on guide, Etcetera. I do feel good about next year. I feel comfortable where consensus currently sits today. So that's not something that I would feel I need to move around. But I think most importantly, We like what we're seeing and the way things are playing out this year and that's going to build a strong foundation for us to grow next year.

Speaker 4

Really appreciate that. Thanks to you both. Nice to see the quarter.

Speaker 2

Thank you.

Operator

One moment for your next question. And your next question comes from the line of Jason Bednar with Piper Sandler. Your line is now open.

Speaker 5

Hey, good afternoon, Yaron. I'll echo Rick's comments there. Really nice quarter, guys. I actually wanted to I know we always focus on the U. S.

Speaker 5

Part of the business, but I also want to look at an international here, because that was Better as well than what we had been thinking. Can you talk about the procedure demand improvements you're seeing in your international markets? Was the strength there broad based or Was it concentrated in a given market or 2?

Speaker 2

Well, Jason, As you know, about 2 thirds of our business is in the U. S, about a third is outside the United States. And of that, It's actually 6,436 I think year to date. But in any case, it's moving in that direction. We've got Five countries, including the U.

Speaker 2

S. That represent over 90% of our global business. If you look across those markets, I think all of them were headed in a positive direction. It looked solid. I think one of them was is really set up the weakest of the 5 is really set up I think for a strong back half of the year.

Speaker 2

So we feel good about That's foundation that exists outside the United States.

Speaker 5

Okay. All right. Fair enough. And then I'll press you a little bit, Derek. I appreciate the Kind of the directional color here on 3Q, but I guess when I do the quick math on implied guidance then for 4Q, I don't know, I guess it looks a little lighter than I would have thought.

Speaker 5

I don't know if that's conservatism. But just as we think about that in the context of how you responded to Rick's question for the 2024 outlook. I guess just looking for your level of like Confidence or maybe conservatism that you've built into the back half of the year. And again, I'm kind of coming at this with you guys Beat pretty nicely here in the Q2, more than $1,000,000 beat versus consensus. You raised the guide by $1,000,000 but last quarter you were already pointing to the upper end of your prior So maybe help me marry all that together, really as I drill into trying to model out 4Q appropriately.

Speaker 3

Yes, I think it's a great question. Again, I think what really goes into the back into the guidance implied in the back half of the year and kind of front and center of our mind is Q3. And I think there is some uncertainty as to How impactful that summer seasonality will be this quarter. We were frankly surprised by the severity of it last year. And at this point as we go into the summer, I don't think there are any indications that things will be any different.

Speaker 3

And I think there's potential that it could be worse Or better, but certainly that I think is some of the uncertainty that we're factoring in. And really, again, due to these Excess and more pronounced summer vacations that folks appear to be taking both outside the U. S. And inside the U. S.

Speaker 3

So If you take that into account and you look at Q4, we've historically seen a very nice step up between Q3 and Q4. Q4 has historically been One of the strongest quarters of the year for us and we would expect that to be the case again this year. So again, I think we feel good about the fundamentals of our business and the foundation that we're building. And we look forward to that momentum showing itself through Q4 and into next year. But again, we just don't want to get ahead of ourselves.

Speaker 5

Fair enough. I'll hop back in queue. Congrats again.

Operator

And your next question comes from the line of Bill Tovanyc with Canaccord Genuity. Your line is now open.

Speaker 5

Hey, guys. It's Zachary on for Bill today. Thank you for taking the question and congrats on the quarter. So regarding Japan, you said that you're still expecting regulatory approval and expect reimbursement later this year. With that, what do you think the cadence would be on that going into the commercial launch?

Speaker 5

Like do you have an idea of how long The gap between those two events would be, thank you very much for taking the question.

Speaker 2

Thanks, Zach. We got regulatory approval nearly in the back half of last year and we are anticipating reimbursement in place by the end of this year. And we will begin to commence commercialization Within a clinical trial, sort of a post approval trial, so the Japanese government will require us To enroll the first one hundred is this slightly over 100 patients into a Post approval study. So every one of those patients will go in under that. We're in the because we already have approval, we're in the process of training the physicians right now and We don't anticipate there to be a long lag before that study commences.

Speaker 2

And it'll take on the order of a year to get all those patients in, I think because of the number of accounts that we're going to be limited to and at which point we'll be able to expand more broadly. And that's Where we in the script that we were just reading from made reference to the idea that we're going to be increasing awareness over time And then expanding into that substantial opportunity beyond the completion of the enrollment of this post approval trial.

Speaker 5

Okay, great. Thank you very much. Sorry, thank you for clearing that up.

Speaker 2

Just to be clear, that will be a revenue generating Proposition for us, although it'll just be

Speaker 5

at a fairly low level. Awesome. Thank you so much.

Operator

And your next question comes from the line of Philip Lamar with Citi. Your line is now open.

Speaker 6

Hey, this is actually Anthony on for Joanna Lynch. Thank you for taking our questions. Just another one on Japan. So Once you sort of get past this initial year in the trial and you expand more meaningfully, is there anything structurally about The Japanese market that we should be taking into account, whether it's maybe differences in the referral pathway or the workup? And then I just had a follow-up after.

Speaker 2

The Japanese well, it's a complicated question that you asked very simply, but It's a very hierarchical market. That's no big mystery. It's probably the most hierarchical market that I'm aware of in the big market in the world. And therefore, you really need to do things in a specific order and there's a price to be paid if you don't. We have engaged with the thought leaders.

Speaker 2

They're both national and global thought leaders that are based in Japan. They have been we've been working together with them through process and the reimbursement process. So we are very confident that we're working with the right people and that we're on the right path. And We ultimately expect that this hierarchical nature of the medical Community there may in fact play out in our case to our benefit as it relates to Communicating out that this is something that is accepted by kind of the by through Japanese standards and as a consequence may It's like the U. S.

Speaker 2

That maybe even aren't as, one doctor across town doesn't typically care in the United States what another doctor across Tom's doing, whereas in Japan, it's really all about what the key professor is doing and others In other experiences that I've had have followed. So we'll see how that plays out. It's still to be determined.

Speaker 6

Okay. That makes sense. And then on account activity, and I feel like it's been sort of hovering in the low to mid-70s for the past few quarters. Is there a room for that to push up? Or do you think this mid-70s level is a natural ceiling?

Speaker 6

Thank you.

Speaker 2

Yes. It has everything to do with how you define it. We're in the mid-70s. We talk about that's where we expect to be. It's sort of I think literally We are more or less on top of plus or minus 1% exactly where we've been for like the last 3 years.

Speaker 2

And even though the denominator goes up, the activity number sort of stays flat. Now there is a dynamic here. We're having more and more People who are when we first start out, everything's trunk stock and then we move to stocking accounts after some period of time. So there's some I think we're getting more and more accounts that are stocking. And then in any case, we If you were so somebody is placing an order at the end of 1 quarter and they don't place until after the start of the quarter that follows the next quarter.

Speaker 2

You've got challenges there. If I was to say, for example, to expand this 3 month horizon From 3 months to 6 months, that 75 goes to 85. I think when people see 75, they assume that we've lost 25% of our customers and that's absolutely not the case. I think the flip side to the 85% number is, well, what happened to those 15%. And the reality is that, much of our business is in academic centers.

Speaker 2

A lot of these interventional pulmonologists are moving around. We focus on trying to get more than one physician doing the procedure at each of the centers. There typically is one who's the leader. If that leader Moves from University of Chicago to Columbia Press in New York, then there's a certain amount of inefficiency and downtime. And I think That movement of these folks is probably the biggest explanation for that 15%.

Speaker 2

And then the last little bit, the smallest part of That last 15% is, we probably just didn't make a good selection of the account. So we've got some Sort of stuff at the bottom of the barrel that we haven't scraped out, probably made a mistake in picking those accounts. So, but that's a very small single digit proportion of that whole.

Speaker 6

Great. Thank you very much.

Speaker 2

Great. We are very pleased with this record quarter that we've just reported. We're Confident in the strategy that we have in place and we're also very pleased both to raise the bar with regard to our full year revenue expectations And also with our longer term growth trajectory. So with that, I'd like to thank you all for your time and interest in pulmonics and wish you all the best.

Operator

This concludes today's conference call. Thank you for your participation. You may now disconnect.

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