Lantheus Holdings, Inc.

Good morning, ladies and gentlemen. Welcome to the Land Use Holdings Third Quarter 2021 Financial Results Conference Call. This is your operator for today's call. Please note that all lines have been placed on mute to prevent any background noise. This call is being recorded for replay purposes. A replay of the webcast will be available in the Investors section of the company's website approximately two hours after the completion of of the call and will be archived for 30 days. I'll now turn the call over to your host for today, Mark Kinnerney, Senior Director of Investor Relations. Mark?

Thank you, and good morning. Welcome to Lantheus Holdings' third quarter 2021 Financial Results Conference Call. With me on today's call are Mary Ann Haino, our President and CEO, Bob Marshall, our Chief Financial Officer, and Paul Blanchfield, our Chief Commercial Officer. Mary Ann will begin the call with introductory remarks and then turn the call over to Paul to provide a commercial update. Mary Ann will return to provide a business update and then Bob will cover our financial results and updated guidance. Mary Ann will conclude the call with closing remarks and then we will open the call for Q&A. This morning we issued a press release which was furnished to the Securities and Exchange Commission under Form 8K reporting our third quarter 2021 results. You can find the release in the investor section of our website at lantheus.com. For those of you not on the webcast, you can find the slide presentation in the investor section of our website under the presentations tab. Before I get started, I would like to remind you that our comments during this call will include forward-looking statements. Actual results may differ materially from those indicated by forward-looking statements due to a variety of risks and uncertainties. In particular, the impact of COVID-19 on our business results and outlook continues to be a best estimate based on currently available information. Please note that we assume no obligation to update these forward-looking statements except as required by applicable law, even if actual results or future expectations change materially. Please refer to our SEC filings for a detailed discussion of these risks and uncertainties. Also, discussions during this call will include certain non-GAAP financial measures. Reconciliation of these measures to the most directly comparable GAAP financial measures is also included in the investor section of our website. With that, it's my pleasure to now turn the call over to Marianne.

Thank you, Mark, and good morning to everyone joining us on today's call. I hope all of you are safe and healthy. We delivered a strong quarter despite a resurgence of COVID-19 infections that impacted elective procedures and hospital access. We did see an impact to certain aspects of our business, which Bob and Paul will discuss, and we did note, in our monitoring across our sites of care, the more recent and increasing reference by analysts covering healthcare of concern about staffing levels in hospitals. The past few months have been a period of intense activity and significant progress for Lanthea's across our portfolio. DFINITY again delivered solid growth. We are thrilled with the launch and reception to Polarify in its first full quarter since approval and believe there is significant momentum heading into the fourth quarter and 2022. Before I turn the call over to Paul to give an update on our commercial portfolio, let me update you on select strategic developments since our last call. We reached an important milestone towards our goal of supplementing DFINITY Supply with our own on-campus manufacturing facility by filing our Supplemental New Drug Application, or SNDA, with the FDA. The SNDA review process is expected to take approximately four months and will require a pre-approval inspection before anticipated approval in the first quarter of 2022. Earlier this year, we successfully manufactured batches of DFINITY on this manufacturing line that will be commercially saleable upon FDA approval. For Polarify, which remains the first and only commercially available PSMA-targeted PET imaging agent for prostate cancer, We continue to make significant progress on our commercial launch, including ongoing investment in our customer-facing teams, where we have, we believe, the largest fully dedicated PSMA pet sales force and market access teams. We are delighted by the reception to and adoption of Polarify to date, including interest from institutions, physicians, patients, and patient advocacy groups to this game-changing prostate cancer diagnostic, even against the backdrop of COVID resurgence and other challenges facing our customers during this period. We have continued to actively work with our pet manufacturing facilities, or PMS, channel partners to build out our polarified manufacturing and distribution network access across the U.S. As a reminder, for over 20 years, PMS have been reliably delivering FDG, another F18 isotope-based test diagnostic, nationwide to imaging centers on a daily basis. At almost 2 million patient procedures per year, FDG is the most widely used diagnostic cancer cut imaging agent in the U.S. We are tapping into the same proven wide scale cut manufacturing and distribution network for Polarify. PMS work with the imaging centers they serve to meet the needs of physicians ordering imaging studies for their patients. The high batch yields of F18 from cyclotron production is particularly well suited to the demographic and needs of the prostate cancer community, as has already been proven with its use in other cancer types with significant patient populations. Cyclotron-based manufacturing offers the scale needed to meet customer demand, and this can be offered at whatever time of day suits that imaging center's needs. This is in direct comparison to generator-produced products, which are limited by both the quantity and frequency of doses that can be produced at any one time, and the limited time frame during which the produced dose must be delivered and utilized. With Polarify, the availability and scale offered through the PMS geographic network we are building with our partners, combined with F18's 110-minute half-life, allows for broad availability across the U.S. and the flexibility needed for physicians and the prostate cancer patients they treat. During the quarter, we continued to expand our network in line with our year-end goals of broad availability across the U.S. At the start of the third quarter, our network covered approximately 6% of the U.S. population. Throughout the quarter, we continually expanded coverage, and I am pleased to report that we are now able to serve approximately 70% of the U.S. population across 20 PNFs. Paul will give you further details on that and other aspects of the Polarify launch shortly. The advantages of PET imaging and PSMA targeting with Polarify are further complemented by Polarify AI, the branded name for APromise, the first and only FDA-cleared, AI-enabled PSMA digital application. Polarify AI employs a deep learning algorithm trained and validated by employing more than 3,000 PSMA images. Polarify AI offers a standardized platform for physicians and researchers to efficiently, consistently, and accurately quantify PSMA uptake at the lesion level for men with prostate cancer. We were honored to have been selected to present Polarify AI at the preeminent Prostate Cancer Conference, the annual Prostate Cancer Foundation scientific retreat, which took place last week. At the conference, we introduced Polarify AI to prominent researchers and key opinion leaders in the field of prostate cancer. Since 1993, the Prostate Cancer Foundation has hosted this annual scientific retreat that brings together diverse researchers in a collaborative forum to present and discuss new findings for prostate cancer diagnosis, prognosis, and treatment. We will be launching Polarify AI at the Radiological Society of North America, or RSNA, meeting later this month, and are pleased to report that, to date, five leading cancer centers are already in the process of adding Polarify AI into their prostate cancer diagnostic workflows. Now I'll turn the call over to Paul for a commercial update.

Thank you, Mary Ann, and good morning, everyone. Our commercial teams have been productive during the third quarter. I'll start with an update on the Polarify launch. As Mary Ann mentioned, we began the third quarter with two active PMFs, covering approximately 6% of the U.S. population. Over the course of the quarter, we activated 16 additional PMFs covering major markets such as New York, Chicago, Los Angeles, San Diego, Houston, and Washington, D.C. Just this past week, we activated two more PMFs, which brings us to 20, and added the additional markets of Dallas and Kansas City. we are selectively flying doses into key markets such as Florida and Northern California in advance of PMF activations in those regions. This enables prostate cancer patients access to Polarify and allows institutions to incorporate Polarify into their prostate cancer workflow in advance of local PMF activation. We continue to work towards our previously stated goal of broad availability across the U.S. by year end and ongoing geographic expansion in the first half of 2022. Together with our PMF partners, we have contracted with approximately two-thirds of our targeted academic institutions in the U.S. who treat prostate cancer. From a demand perspective, we have been happy with the breadth of ordering across our customer base, with hospitals comprising approximately 65% of orders to date, independent imaging centers, 20%, and government facilities, 15%. We have been particularly pleased with the adoption by hospitals, much of which is in the hospital outpatient setting, even prior to pass-through payment initiation. We are also encouraged by the rate of repeat demand, with over 80% of customers having ordered multiple doses to date. Importantly, during the quarter, the National Comprehensive Cancer Network, or NCCN, included PSMA PET imaging in their recently updated guidelines, with piflufolistat F18 now included in the areas of unfavorable intermediate, high, and very high risk, as well as recurrent disease for the management of prostate cancer. The NCCN guidelines are widely recognized, and used as a standard for clinical policy and oncology by clinicians and payers. The Society for Nuclear Medicine and Molecular Imaging, or SNMMI, also added PSMA PET imaging, including piflufolistat F18, to the Prostate Cancer Appropriate Use Criteria Diagnostic Guidelines. These guidelines were developed with input from the American College of Nuclear Medicine, American Urological Association, American Society of Clinical Oncology, the American College of Physicians, and other key international associations. We believe this will further facilitate the commercial adoption of Polarify as it raises awareness in the medical and payer communities of PSMA's clinical relevance for physicians in diagnosing and choosing treatment options for prostate cancer patients and the potential impact this novel PSMA-targeted imaging agent can have in the overall treatment plan of men with prostate cancer. Regarding market access, specifically coverage, coding, and payment, we submitted our pass-through application to the Centers for Medicare and Medicaid Services, or CMS, during the third quarter. And we expect pass-through payment to go into effect January 1, 2022. which aligns well with our stated goal to have broad availability of Polarify across the U.S. by the end of 2021. During the quarter, we also received notification that our HCPCS code, which enables streamlined billing, will be effective as of January 1, 2022. We are making progress in coverage of both indications. The majority of Medicare Administrative Contractors, or MACs, have either paid claims, published guidance, or have indicated they will cover Polarify usage in our approved indications. Finally, we have seen prior authorizations approved and claims paid by both Medicare Advantage and commercial insurers, and we continue to work with payers to have formal policies updated during 2022. We also recently completed the build-out of our PSMA PED dedicated sales force, which we believe is the largest in the industry, as well as our market access team. We continue to work to meet the needs of the U.S. prostate cancer community through PMF activation, customer contracting and onboarding, and appropriate coding coverage and payment. Switching now to DFINITY, the third quarter saw double-digit growth year-over-year in sales. During the quarter, we did observe an impact to the traditional pattern of echo utilization that we attribute to the resurgence of COVID-19. We also noted nationwide concern related to medical staffing within hospitals, with specific reference to nursing staff late in the third quarter. Despite these headwinds, our overall in-person promotion remained above 50% for the quarter, albeit with regional variability, and the team continued to drive awareness of the appropriate use of DFINITY in suboptimal echocardiograms, and we were pleased with being able to deliver another strong quarter of growth for DFINITY. Now on to our SPECT portfolio. Technolite continued to be a stable contributor to our overall business, and this quarter we again benefited from opportunistic sales to ANSTO. Ventilation studies, which have yet to return to pre-COVID impact levels, continue to negatively impact our Xenon business. Now, I'll turn the call back to Marianne.

Thank you, Paul.

Moving on to Isedra. The surge of Delta variant infections in the third quarter created conditions similar to those we initially experienced during the height of the pandemic. Given the special conditions under which Azedra is administered in the hospital setting and the nature of pheochromocytoma and paraganglioma disease in patients, we have seen instances where treating physicians and patients have chosen to defer treatment until infection rates have subsided, a pattern noted in the early onset of the pandemic. Access to our commercial and medical representatives was also limited throughout the third quarter as hospitals reintroduced protocols to these specialty areas, again, similar to the latter half of 2020. Despite these challenges, our commercial teams have been working with academic centers of excellence in key markets across the U.S. in preparation for future demand, and we have continued to build out the medical team that will interface with stakeholders. Switching now to R&D, I am pleased to report we have recently completed an interim analysis of our ongoing Arrow Phase II study of 1095, a PSMA-targeted therapeutic. The Independent Data Monitoring Committee has recommended the study continue without modifications. As a reminder, the Arrow trial is a multicenter, randomized, open-label, controlled Phase II clinical study evaluating the efficacy and safety of 1095 in combination with enzalutamide, compared to enzalutamide alone in patients with metastatic castration-resistant prostate cancer who are PSMA-avid, chemotherapy-naive, and have progressed on abiraterone. PSMA-avidity is determined utilizing Polarify. The primary endpoint in arrow is prostate-specific antigen, or PSA, response rate. Key secondary endpoints include time to radiographic-free progression, progression-free survival, and overall survival. Patients in the hour trial are followed for one year after their first treatment for all efficacy endpoints. Survival and efficacy data are collected for an additional year. We will continue to update you on the trial as we progress. I will now turn the call over to Bob for a financial update.

Thank you, Marianne. Good morning, everyone. I'll provide highlights of the third quarter financials, focusing on adjusted results unless otherwise noted. Turning to the quarter, revenue for the third quarter was $102.1 million, an increase of 15.3% over the prior year quarter. Comparison includes our now-defested Puerto Rico operation. Now turning to the details, beginning with precision diagnostics, revenue of $87.9 million was 9.8% higher over the prior year quarter. Sales with affinity, net of rebates and allowances were 57.6 million, 14.5% higher as compared to the prior year quarter amidst the summer surge of the Delta variant of COVID-19. During the quarter, our sales and marketing teams experienced reduced access to hospitals in those regions impacted more severely by the surge with a slight overall impact on performance. Technolite revenue was 22.7 million net, up 7.4% from the prior year quarter, supported by opportunistic generator sales to our partner, ANSTO, of 3.0 million. Within other precision diagnostics, Xenon's performance has continued at similar levels to the previous sequential four quarters. Radiopharmaceutical oncology contributed 8.9 million of sales, up 167.6% from the prior year quarter, mainly attributable to the promising early results from our launch of Polarify as noted by Paul earlier. While we remain confident in Azedra, it was down sequentially from Q2 2021, as it is more susceptible to treatment cancellations in the face of COVID infection spikes and limitations imposed on hospitals for access for Glanthea's representatives. Lastly, strategic partnerships and other revenue was $5.3 million, up 2.7%, driven primarily by the Relastore royalty. Gross profit margin for the third quarter was 50.1%, an increase of 270 basis points over the third quarter of 2020 on a similar basis. The increase is due in part to the impact of COVID-19 on cost in the prior year comparison. Gross profit margin is slightly lower than our expectations for the quarter based on product mix, with slightly lower contribution from Divinity, as I previously noted, as well as lower than expected as edger sales against the relatively fixed overhead costs at our Somerset manufacturing facility. Operating expenses were 39 basis points unfavorable to prior year at 40.2% of net revenue, but within previously guided spending levels. Within sales and marketing, we continue to invest in the Polarify launch with increasing effort around product awareness, market access, and contracting activities, as well as providing support for DFINITY with a mix of in-person and virtual promotional activities. R&D and G&A together were in line with the prior year spending levels, reflecting permanency of synergy capture together with focused investments in our pipeline and back office functions. Operating profit for the quarter was $10.2 million, or an increase of 50.2% over the same period prior year. Total adjustments in the quarter totaled $24.5 million of expense before taxes. Of this amount, $3.9 and $8.4 million of expense is associated with non-cash stock and incentive plans and acquired intangible amortization, respectively. Also in the quarter, we recorded a $2.6 million net expense adjustment to contingent assets and liabilities, including the Polarify CVR contingent liability. Also, during the quarter, the company successfully negotiated a sublease arrangement for its One World Trade Center office, one of the final synergy opportunities identified with the Progenix acquisition, and as such, incurred a $9.5 million impairment on the asset group, which is primarily made up of the right of use lease asset for the space. The remainder is related to acquisition, integration, and other non-recurring expenses. Our effective tax rate was 21.6% in the quarter, During the quarter, we release another portion of our uncertain tax position or UTP provision dating back to our sale from BMS in 2008 for which we are fully indemnified based on newly acquired information. The indemnified receivable release flows through other income as an expense and the release of the UTP tax reserve through the tax provision as a benefit. The net result does not have an effect on net income. The resulting reported net income for the third quarter was a loss of $13.4 million and a profit of $5.7 million on an adjusted basis, an increase of 134.9%. Gap fully diluted earnings per share were a loss of 20 cents and a profit of 8 cents on an adjusted basis, an increase in the prior year of 127.4%. Now turning to cash flow. Third quarter operating cash flow totaled $4.3 million as compared to $8.6 million in Q3 2020. Capital expenditures totaled $2.4 million, down $1.3 million from the prior year quarter. Free cash flow, which we define as operating cash flow less capital expenditures, was $1.9 million, a decrease of $2.9 million from the prior year period. One of the drivers of the year-over-year variance relates to the accounts receivable balance increasing due to ramping Polarify sales in the quarter and related receipt terms with customers. Cash and cash equivalents net of restricted cash now stands at $91.5 million. We continue to have access to our $200 million undrawn bank revolver and are comfortable with our strong liquidity position. Turning now to guidance for Q4 and the full year. We forecast revenue to be in a range of $110 to $115 million for the fourth quarter of 2021. an increase of approximately 17 and 22 percent over the fourth quarter of 2020. The range takes recent Polarify performance into consideration as well as a broadened view of other product contribution against a backdrop of various macro environmental pressures. Therefore, we now forecast full year revenue to be in the approximate range of $405 to $410 million from the prior range of $395 to $402 million. Now turning to earnings, adjusted EPS should be in a range of 15 to 18 cents for the fourth quarter. We are raising our full year adjusted EPS to account for relative performance of Polarify on increasing batch productivity offset in part by incremental impacts from other unfavorable product mix estimates as well as a commitment to invest in revenue growth initiatives as we have noted in prior quarters. As such, we now expect full year adjusted EPS to be in a range of 40 to 43 cents per share versus the prior range of 38 to 42 cents. With that, let me turn the call back over to Marianne. Thank you, Bob.

In closing, we delivered a strong quarter with significant progress across our portfolio. DFINITY delivered solid growth. We look at Polarify's first full quarter in the market and see success across all of our objectives and increasing momentum as we move through the fourth quarter and into 2022. We continue to monitor the impact of COVID-19 always with first priority to the safety of our employees and our intent to continue to serve our physicians and their patients whose health depends on Lantheus. For our shareholders, we continue to commit to the mutually achievable goal of driving sustainable growth across our portfolio of diagnostic and therapeutic solutions while delivering on our mission to find, fight, and follow disease to deliver better patient outcomes. With that, Bob, Paul, and I are now ready to take your questions. Operator, please go ahead.

Thank you, ladies and gentlemen. We'll now begin the question and answer session. As a reminder, if you wish to ask a question, please press star 1 on your telephone and wait for your turn to be announced. We'll pause for just a moment to compile the Q&A roster. First question from Anthony Petrone from Jefferies. Your line is open.

Great. Thank you. And congratulations, everyone, on a strong quarter here. And I hope everyone's doing well. Marianne, I want to start with Polarify and sort of just going through some numbers in the P&L when we look at radiation, precision oncology, rather. Nine million in the quarter. You sort of back out the sort of one and a half to two million. previous to the Polarify launch, it suggests about 7 million in the quarter from Polarify. So first I want to kind of scrub those numbers. And it looks like that comes from just two activated sites, the Louisiana and Virginia site. So maybe just a little bit on the timing when those sites went live and whether or not there was any stocking in that number. And then I'll have a couple of follow-ups.

So good morning, Anthony. Great to hear you. And a couple of corrections, and then I'm going to turn it over to Bob and Paul because they can really speak to this much more clearly. But just to correct, we started the quarter with two PMFs, but then as Bob and Paul both noted, we built throughout the quarter and actually ended the quarter with 20 PMFs. So that's one thing that they'll both speak to. And then, as you remember, and remember, I'm always teaching you, Anthony, but no stocking when you're talking about radioisotopes. Remember, this is like running through the desert fixing cones. There's no stocking on these drugs, right? They're used just in time. So there's no inventory build at these PMFs. But I'm going to turn it over to Paul first, who can talk about the great quarter we had with Polarify, and then Bob can bring you up to date a little bit on the financials.

Thanks, Anthony. Yes, we were obviously very pleased with the quarter for Polarify. As I mentioned, both the interest and the reception to the product. We believe there's significant momentum heading into the fourth quarter and into 2022, and overall things are on track. Regarding PMFs, as you correctly noted, we started the quarter July 1st with two PMFs. Over the course of the quarter, we activated 16 additional PMFs and so ended the quarter with 18 PMFs covering roughly two-thirds of the U.S. population. And so you can think of that as a phasing where we activated some sites in July, August, and September, ending with 18. And then as was recently noted, we added two additional sites earlier this week, which brings us to 20 and roughly 70% coverage. So overall, we're very pleased with the reception and the launch thus far as the only commercially approved PSMA PET imaging agent for men with prostate cancer. I'll turn it over to Bob to answer some of the financial questions.

Hey, good morning, Anthony. So you're right around radiopharmaceutical oncology as a product category. Just to remind everybody what's in there, you have what is Quadramet or what had been Quadramet, which did have sales in the quarter, Zedra, as well as Polarify. Now, as I noted in my scripted remarks, Azedra, which had a pretty good Q2, if we remember, but I would like to point out just the headwinds we were discussing relative to DFINITY, Azedra is probably even that much more susceptible since it's an inpatient procedure. So from that perspective, it does step down. So I think the math you're doing is... is, you know, pretty accurate. And, you know, from that perspective, that is one of the reasons that we created, you know, this product category is to be able to give some transparency to these different products that we know will help to drive diversified revenue growth over the long term.

That's helpful. And then, you know, maybe to stand corrected there on the active PMFs in the quarter, so you exit July 1 and 2, you come up to 20 as of November 1st. I guess what was the timing of activations and sort of just trying to get a sense of, you know, sort of how the initial utilization went at some of these sites. And I'm sure it's dispersed by volumes at these sites. And then, you know, looking ahead to the planned future sites, several more coming. You know, is this expected to – are these expected to be sort of ready to go Gen 1 sites? And then as we look into, you know, 2022 and perhaps even beyond, when we look at the, you know, sort of pet market for prostate cancer, really have two solutions here in the marketplace, you know, how do you think sort of share shakes out, you know, over the next couple of years? And then I'll have one on just some of the headwinds in the quarter.

So... Just as a reminder, Anthony, there is only one product approved in this category, and that is Polarify, the only approved PSMA PET diagnostic. And to your question around PNF activation, this is a fluid process, and we've kind of been clear about that from the start, that we have a a plan that is a continuous rollout. You can actually track it because we have our website, polarify.com, that is updated. I would not say daily, but on a fairly frequent basis, you can go and look and we show which PMS have been activated and where they are geographically. We remain constant on our goal, and our goal is to have broad availability across the U.S. that covers all the major markets. And until we have that, and Paul can speak to this better than I can, We are literally using planes, trains, and automobiles to even cover those markets that we're not yet in, all to the service of this prostate cancer community, which we feel is really benefited by the availability of Polarify. So I'll turn to Paul and let him cover in with additional remarks.

Yeah, no, thank you, Anthony. Thank you, Marianne. So, Anthony, I think how I would characterize this, as I mentioned, we started the quarter with two PMS active patients. and they ramped up fairly steeply during the quarter where we added 12. We had 12 as of August 1st. We had 17 as of September 1st, and we closed the quarter with 18, and then, as I noted, add two more earlier this week. Similarly, we have seen a ramp in Polarify adoption. When a PMF does come on board, we're obviously working with customers to contract and onboard them But that does take a little bit of time. And so we have seen the ramp improve for Polarify over the course of the quarter. To your point, we are flying doses, as Marianne mentioned, to the key markets, specifically Florida and Northern California, where we do not yet have an active PMF. But given the benefits of F18 and the 110-minute half-life, we have that availability. to be able to bring product in while we work to activate PMFs to serve those prostate cancer patients, but also to ensure that Polarify is embedded in the prostate cancer workflows of those key institutions. So that does remain an overall priority. Regarding the ramp going forward, we do focus on having broad availability, and I'd note we are already at 20 PMFs and 70% coverage by the end of the year, which coincides well with pass-through initiation in the hospital going live January 1st, 2022. We will continue to add PMS to ensure that Polarify is available across the country both through the rest of the year as well as into 2022.

The only other note I'll make is you asked how share will shake out. Right now it's shaking out at 100%, and that's for Polarify.

No, no, I understood. The last questions I'll get in queue here. You mentioned prior authorizations for Prolifer are actually approved and claims are being paid. I'm just wondering if in the early days that's covering the cost of doses for the early adopters here. And then, Marianne, just on staffing, obviously we've heard a lot about this across this earnings season and from channel checks. So just from the view of Lantheus on staffing shortages, any data points you can share on perhaps how long this headwind will last later into this year and perhaps in the next. Thanks again. Congratulations on a good quarter.

Thanks, Anthony. I'm going to ask also if the rest of the folks in the background can put yourselves on mute because we seem to have a little bit of background noise. And to staffing, Anthony, this is, of course, an issue that is so much broader than our sites of care and those parts of the hospital or different parts of you know, healthcare institutions that we call on. You know, we're, of course, very attuned to it, and we're watching it, and we hope that if there are answers to it. One is, you know, our folks being taken care of, and we hope that everyone out there is healthy. We've seen it impact our business, as Bob mentioned, in different ways. Zedra, as an inpatient treatment, and using very specialized resources in the hospital probably gets impact earliest and most when either hospitals limit access or when staffing concerns become a concern for the hospital. We've probably seen it leased in Exedra, but I would also say there that our background is also leased. We don't have as much experience in understanding what happens. But Exedra also, from the site of care perspective, has a lot of out-of-hospital use. A lot of the imaging centers are freestanding and are not as dependent on hospital staffing if you're talking about concerns with overall nursing staffing in hospitals. Oh, I'm sorry, I meant to say to clarify they're not, of course. And with the affinity, as Paul mentioned, we have seen or anecdotally heard that there may be some pressure on overall levels of sonographers, and it's something that we're in touch with the American Society of Echocardiography about looking to see what are the overall programs doing. Are they inviting more students in so that they have good levels coming out of the programs to ensure that on a go-forward basis, they're bringing enough people into these programs. But it's an issue that is much larger for the industry that I think we all have to be concerned about. And quite frankly, it crosses out of healthcare and into many other industries. I operate in a lot of other forums in the larger Boston area And staffing and the worker talent are concerns that we all share across many industries.

Anthony, maybe to just touch on your market access questions, you did correctly note, as we noted, that we are seeing prior authorizations covered in the commercial landscape. I think what I would highlight is that we are particularly pleased with the uptake in the hospital setting. I noted that 65% of our orders to date are in the hospital setting. That is primarily but not exclusively in the hospital outpatient Medicare setting in light of the age of the prostate cancer demographic as well as most of this being outpatient from a PET imaging. We do have coverage in the majority of Medicare locations, but that is distinct from a separate payment for the radioisotope. And so while the overall scan is being covered, hospitals in the Medicare hospital outpatient setting are not yet getting paid for the separate Polarify dose, and yet we've still seen 65% of our orders to date coming from the hospital setting, which we believe is building significant momentum as we go into the fourth quarter and 2022, specifically January 1st when pass-through is initiated, and there would be a separate payment for Polarify in addition to the PET imaging scan.

Thank you very much. I'll get back to you.

Thank you so much. Your next question from Daniel Antolfi from SVB Lyric. Your line is open.

Hey, good morning, everyone. Thanks so much for taking the question. Congrats on a really strong quarter. I wanted to get into guidance a little bit. And you're raising guidance by, I think, about $9 million at the midpoint. You beat in the quarter by about $4.5 million at the midpoint. Just following up on some of the commentary around the headwinds but also the Polarify launch, you know, is it safe to assume that at least four and a half of that guidance raise is tied to maybe a better than expected Polarify launch and maybe a less good, you know, performance from the hospital procedure-tied business? Just trying to get a sense of, like, sort of where Polarify is in that guidance and how to think about Q4 and the momentum we're taking into 2022. And I have one follow-up.

Great. Good morning. So that's a great question. And so, you know, when I was putting this together, I was trying to think through how you guys might model things. So let me just sort of break down what I was saying. When you think about DFINITY, when I look at what the street consensus is, I would have people moderate what they are thinking about Q4. Now, why is that? you know, the access into hospitals, you know, both for people's willingness as well as from a sales rep ability to get into the hospital and do in-person promotion, as well as, you know, a patient's willingness to go into that setting of care, which has always been one of our key tenants to our guidance. You know, as we've seen the Delta variant sort of wane a little bit, that doesn't necessarily mean that we think hospitals are going to immediately sort of back off of their current policy. And so we think that that can continue into Q4. And so because of that, we just want to take a stance that this is going to have potentially an impact into Q4. We're not talking big significant dollars, but that would have the street moderate their expectations. Azedra, again, for the same reasons that we've been discussing here over the last moments, I would expect Zyder to look a little bit more like Q3 than it did in Q2, so from that perspective. As you work through then the other products at a similar run rate that we've had, that should then shake out by math what we think that Polarify should do. Yes, we are expecting for it to continue to ramp from where we left off in Q3 and as we progress through Q4. The entire difference, I would say, from that, our prior guidance, taking into consideration these other adjustments to the other parts of the portfolio, are attributable to Polarify. Again, this is the benefit of having a diversified revenue stream that we can continue to demonstrate strong growth and be able to have an opportunity to raise our guidance.

That's super, super helpful, Collar. Thank you for that. And then I know you're not going to give 2022 guidance on this call. I certainly appreciate that. But, you know, just looking at where consensus is for Polarify in 2022 at around 50 million, I think it's a pretty wide range, though, from what I can tell. Maybe you could talk qualitatively about the launch. You're going to be going into 2022 with, you know, most of the country covered from a PMF and an insurance perspective. So just curious how to think about how reasonable that sort of growth trajectory is as we look to 2022, even if you could talk qualitatively about the ramp. Thanks so much.

So I think we can talk qualitatively. We, as Bob has already alluded to, we will not offer specific product guidance for Polarify, but you've already touched on some of the important considerations, and that is Paul spoke to we will have, we anticipate we will have pass-through coverage as of January 1st. We will also have our HCPCS code as of January 1st. We remain on track with our goal of having broad availability, which is our PMF coverage. And as we've now mentioned several times, we see great momentum. Here we've built already what we see is great loyalty with physicians. Paul's mentioned we've seen lots of repeat usage already in the markets where we're serving. We've embedded ourselves in many of these markets. We are the only approved product, so physicians are really getting great kind of usage experience with Polarify, and the feedback has just been simply terrific about what this kind of diagnostic does and allows for them in their treatment, you know, as they're considering treatment options for patients from the information they get from a Clarify scan. So we really are very optimistic about 2022. And we'll continue to build out the teams that we have and, quite frankly, the influence that we have out in the markets where we are serving physicians and their patients.

Thank you all.

You're welcome.

Thank you so much. Once again, if you wish to ask a question, please press star one on your telephone keypad. Next question from Larry Solo from CJS Securities. Your line is open.

Good morning, guys, and thanks for all the color. Just a couple of follow-ups on the Polarify. It sounds like the revenue trends and the interest level are really high at the start. How about on the cost side? You spoke of it sounds like you've completed a good majority of the commercial infrastructure there. Can you maybe, Bob, just give us an idea, you know, are these good sort of base levels in terms of SG&A and expenses? And then or should we expect significant increases?

Good morning, Larry. So let's just kind of pick apart. You talked about gross margin. I also asked about OpEx. So I'll tackle OpEx first. So all year I've been noting that we've been sort of in a range of $40 to $45 million. I don't really necessarily see that ramping that significantly. Of course, there will be some annualization as we look into 2022 of the sales team, market access teams that we've been adding. So I would see some there. But there will be other costs that will moderate over time as well. I expect to see G&A. stay fairly stable and get leverage that is a percentage of revenue. And then R&D will be very dependent on, you know, the different programs that we advance and the different costs associated with that. And, of course, each, you know, every dollar that we spend in R&D is one of these, you know, we're going to phase gate. We're going to be very diligent about the return on that investment. So from that perspective, I do expect to see leverage in the P&L as we go forward in time. So from that perspective, and that's not only just for Q4, but also into 2022. With regard to gross margin, you know, the beauty of this ramp with Polarify, particularly as you think about the beginning aspects of Q3, and I'll make up an example. If your batch is, you know, 10 or 15 doses and you're selling three, you're still having to expand the entirety of that entire batch. But what we've seen throughout the quarter is, you know, with the really great growth that we've seen, obviously our gross margin profile has improved because now I'm being able to use all of those doses being sold, you know, to sell them. But my overall costs don't go up from a fixed basis. Yes, there are variable costs of each dose, but not to the same extent. So as we go and are able to ramp volume, I do expect polarified gross margins to be above the company average. And so as such, it'll be more contributory not only from a gross margin perspective, which I would expect to see jump up a little bit here in the fourth quarter, and then continue on that path that we have talked about over time, which is an expansion of gross margin over the next number of years by hundreds of basis points. This is one of those drivers. And so that will help to drive each of the different operating expense categories as a percentage of revenue to fall over time to drive that, you know, earnings leverage.

Okay, no, I appreciate that call. And just, you know, I realize the acquisition of Progenics obviously closed a couple years ago. But, you know, I know at that, I mean, Susan, it was announced a couple years ago. And at that point, you sort of, you gave sort of accretion targets, sort of two years post, and gross margin targets. And I know you haven't specifically updated those numbers. But are we still sort of, you know, targeting, you know, or in the range? Do you feel like things have changed at all from a high level without, you know, being super specific?

So, Larry, this is Marion. Good morning. I think we're just going to all agree it was a really good decision. And I think we're probably on target with our – we're on target or ahead of our initial assumptions, and it was just a really good decision.

Let me just tack on to that. I totally agree with what Marianne just said. Our synergy targets, we hit all of them a year ahead of what we had initially, and even capped off today with the announcement of being able to sublease the One World Trade Office. That was some of the last of the synergy targets that we had in mind, and that will start to flow through the P&L as well. But in terms of some of the other goals, we remain committed to the 800 basis points over the next three years. That is achievable. And you have to remember, too, these goals that we put in place were done pre-COVID. And even throughout this process of closing the deal on a virtual basis and then achieving these financial targets and getting Polarify filed on time, getting it launched in Expectations, The deal is working out quite nicely. Fair enough. I appreciate the call. Thanks so much.

Thank you so much. Once again, in order to ask a question, please press star 1 in your telephone keypad. We show no further question at this time. Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may disconnect and have a wonderful day.