Pulmonx Corporation

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the Pullmanx Third Quarter 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press star, then 1 on your telephone keypad. If you require any further assistance, please press star, then 0. At this time, I would like to turn the conference over to Mr. Brian Johnston of the Gil Martin Group. Thank you. Sir, please begin.

Thanks, operator. Good afternoon, and thank you all for participating in today's call. Joining me from Pulmonix are Glenn French, President and Chief Executive Officer, and Derek Sung, Chief Financial Officer. Earlier today, Pulmonix released financial results for the quarter-ended September 30th, 2020. A copy of the press release is available on the company's website. Before we begin, I'd like to remind you that management will make statements during this call that include forward-looking statements within the meaning 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 and future financial performance, the impact of COVID-19 on our business, and prospects for recovery, expense management, expectations for hiring, growth in our organization, market opportunity, guidance for revenue, gross margin, and operating expenses, commercial expansion, and product pipeline development are based upon our current estimates and various assumptions. These statements involve material risks and uncertainties that could cause actual results or events to materially differ from those anticipated or implied by these forward-looking statements. Accordingly, you should not place undue reliance on these statements. For a list and description of the risks and uncertainties associated with our business, please refer to the risk factor section of our public filings with the Securities and Exchange Commission, including the final prospectus filed with the SEC pursuant to Rule 424 on October 1, 2020, in connection with our initial public offering. This conference call contains time-sensitive information and is accurate only as of the live broadcast today November 10th, 2020. Omonix Corporation disclaims any intention or obligation except as required by law to update or revise any financial projections or forwarding statements, whether because of new information, future events, or other problems. And with that, I'll now turn this all over to Glenn.

Thanks, Brian. Good afternoon, everyone, and welcome to our third quarter 2020 earnings call. Here with me today is Derek Sung, our Chief Financial Officer. Before I get started, I'd like to thank two important groups of people. First, our pulmonary and critical care customers around the world who've been on the front lines combating COVID-19. And second, the entire pulmonics team that has persevered through and delivered during this particularly challenging time across the country and in the pulmonary space in particular. Thank you all. As many of you are aware, this is our first earnings call since we completed our IPO and listed on NASDAQ in October. Before I begin, I'd like to say thank you to all who participated in the offering, which raised approximately $201 million in net proceeds to the company, and to those of you who have invested in the company since. With your support, we are now well positioned to take the next steps in our journey toward establishing ourselves as the global leader in minimally invasive treatments for lung disease. While we had the chance to tell our story to many of you through our IPO process, I'll start today's call with an introduction to Pulmonix and our platform solution before moving on to cover our recent updates and vision for the future. Pulmonix is a commercial-stage medical technology company that provides a minimally invasive treatment for patients with severe emphysema, a form of chronic obstructive pulmonary disease, or COPD. Our platform solution, anchored by our Zephyr endobronchial valve, treats patients who, despite medical management, are still profoundly symptomatic and either do not want or are ineligible for surgical approaches. As background, emphysema accounts for approximately 25% of all COPD patients and is a debilitating and life-threatening disease. More specifically, it progressively destroys lung tissue, resulting in a diminishing ability to breathe and engage in the most basic daily activities, leading to a high mortality rate. From a market perspective, approximately 3.8 million patients in the United States were diagnosed with emphysema as of 2018, of which roughly 1.5 million had severe emphysema. Of these 1.5 million severe emphysema patients in the U.S., we estimate that approximately 500,000 patients would qualify for treatment with our Zephyr valves. After taking into account an additional roughly 700,000 Zephyr patients outside the U.S., we believe our global addressable market is approximately $12 billion. This represents our opportunity today and does not account for any additional patients who we may be able to treat in the future with technologies under development. We expect to capitalize on this significant addressable market because there is an urgent clinical need for a safe, effective, and minimally invasive solution for patients with severe emphysema, and this is what our platform offers. Current treatment options include either medical management and pulmonary rehabilitation, which are non-invasive but limited in their efficacy, or the more invasive treatments of lung volume reduction surgery or complete lung transplantation, which bring with them significant morbidity and mortality, and thus are simply not an option for most patients with severe emphysema. Our solution is comprised of the Zephyr Endobronchial Valve, the first FDA-approved implant to reduce hyperinflation associated with severe emphysema, the Chartus Pulmonary Assessment System, and the Stratex Lung Analysis Platform. Zephyr valves are indicated for bronchoscopic treatment of adult patients with hyperinflation associated with severe emphysema in regions of the lung that have little to no collateral ventilation. During the one-time bronchoscopic procedure, the valves are placed in the airways to occlude the most diseased parts of the lung, allowing trapped gas to escape until the target lobe is reduced in size. The intended result is a reduction in lung volume and hyperinflation in the target lobe thereby allowing healthier parts of the lung to expand and take in more air. The STRATEX platform and the Chartist system are treatment planning and patient identification tools designed to enhance outcomes with our solution. STRATEX facilitates the analysis of existing CT scans to help identify target lobes and to plan the Zephyr procedure. Chartist is used to effectively simulate the procedure immediately ahead of valve placement and to definitively identify the patients most likely to benefit from this treatment. It does this by determining the presence of collateral ventilation, an exclusionary criterion that is naturally present in approximately 50% of people. Using these tools together is the best way to identify and treat patients who will most likely benefit from Zephyr valves. These patient assessment and treatment planning tools represent a significant competitive advantage and we believe they will allow us to establish our platform as the standard of care for the treatment of well-selected patients with severe emphysema because they enable us to deliver better average outcomes. Consistent results across four randomized controlled clinical trials and over 100 scientific publications demonstrate that patients selected with the Chartas system and successfully treated with Zephyr valves show clinically meaningful and statistically significant improvements in lung function, exercise capacity, and quality of life compared to medical management alone. As a result, Zephyr valves have been indicated in the treatment guidelines for COPD worldwide. The quality of evidence for treatment with endobronchial valves has been graded A by the Global Initiative for Chronic Obstructive Pulmonary Disease, widely known as GOLD. Further, the United Kingdom's National Institute for Health and Care Excellence also known as NICE, has included our treatment as part of standard measures for COPD and recommended all qualifying patients be evaluated for eligibility. The consistent and significant results of our clinical trials have enabled us to establish reimbursement in major markets, and this furthers our confidence and our ability to execute. In the U.S., roughly 75% of our patient population is covered under Medicare, which pays for our medically necessary solution. The remaining 25% of our patient population is covered by commercial plans. Here we have made significant progress in securing positive coverage decisions with national commercial payers such as Aetna and Humana. Most recently, Healthcare Services, Healthcare Service Corporation, the second largest Blue Cross Blue Shield plan covering 16 million members across five states issued a positive coverage policy for the Zephyr Valve effective November 1. Select Health, a health plan serving 900,000 members across three states, also recently issued a positive coverage decision for our treatment. In all, we are very pleased with where we stand in terms of reimbursement and believe this is not a significant barrier to adoption of our treatment at this time. For perspective, even payers without positive policies have generally been approving preauthorization requests for our technology in more than 90% of cases. Outside the United States, our solution is covered by major health systems across Europe and Asia Pacific. In the last two years, we materially improved our reimbursement situation in Austria and Germany and established national reimbursement in Belgium and France. Just last week in the United Kingdom, a commissioning decision was published by NHS England that enables access to routine funding for our Zephyr Valve treatment in experienced treatment centers. This decision is based on advice of doctors, health experts, and patient and public representatives, further cementing the recognized clinical benefit of our procedure. It is noteworthy that the NHS England decision is specific to the design of our Zephyr valve and does not apply to other valves of different design. Finally, just earlier today, the Scottish Health Technologies Group, a national health technology assessment agency that provides evidence support and advice to NHS Scotland on the use of new health technologies, published a report recommending endobronchial valves be made available to all eligible patients in Scotland. Now that I've provided some background on the platform and the market, I'll shift to an overview of our commercial approach. For perspective, the Zephyr valve is now commercially available in more than 25 countries, including the U.S. Over 80,000 valves have been used to treat more than 20,000 patients globally to date. the U.S. market lends itself to a particularly efficient commercial model given the relatively small number of U.S. hospitals and leading pulmonologists that are high-volume interventionists. We believe we can serve substantially all of the patients in the U.S. with just 500 centers of excellence, which represent less than 10% of all U.S. hospitals, and as of the third quarter, we've already begun procedures in 135 of these target accounts. We are creating an entirely new market. To fully unlock the opportunity, we have three key elements to our commercial strategy. First, we have to train new physicians and open new hospitals, setting them up in a way that they can scale easily. Second, we have a coordinated playbook to work with the physician champion and their hospital to reach out to local community physicians with high concentrations of COPD in their practices and build awareness and referral networks. Third, as we get these elements in place, we leverage geo-targeted digital and social media to bring patients into the conversation and help them to advocate for themselves. We've been piloting this approach in specific geographies and have already seen a tremendous growth in interest. While we do not see direct to patient as essential to our near-term success, We believe that healthcare will continue to become more patient-driven and see this as an important component of long-term growth. From a global perspective, we sell primarily through a direct sales model with more than 90% of sales through our 70 sales representatives around the world. As of the end of September, we had 42 sales reps in the U.S. and 28 sales reps focused on our international business. We find that our value proposition resonates with both providers and patients across the world, particularly because the platform is a new service line with potential economic benefits for hospitals. The procedure is emotionally rewarding for physicians given high procedural success and limited alternatives. Chartists and stratics allow physicians to select patients who are most likely to benefit, which improves the likelihood of positive results. and the procedure's minimally invasive nature translates to fewer complications and quicker recovery versus invasive alternatives. Collectively, these factors have all played a role in driving our success. Turning to our results, we were very encouraged by the strong rebound of Zephyr Valve procedures in the third quarter following the significant drop in sales that we experienced in the second quarter when our business nearly ground to a complete halt during the initial weeks of the COVID pandemic. Our worldwide sales of $10.6 million in the third quarter represent the highest quarterly sales we've achieved to date. We saw continued signs throughout the third quarter that the underlying clinical need for our treatment is durable and that a recovery in our business is underway. For example, since the onset of the pandemic in the second quarter, There continues to be strong interest from new accounts in adopting our treatment, and we've opened 21 new accounts during this time period. We have also seen Stratex report activity largely return to pre-COVID levels in the third quarter, and we have seen a resumption of inbound patient calls into hospitals and into our reimbursement support service. We believe these indicators are representative of the underlying demand for our treatment, and validate the significant unmet need that we are addressing for severe emphysema patients who have limited alternatives. That said, we remain cognizant that our business is uniquely sensitive to the impact of COVID. Our procedure requires a three-night inpatient stay. Our pulmonologist customers remain at the forefront of the COVID response, and our patients remain at high risk from this virus given their weakened respiratory status. Accordingly, we expect that COVID will continue to impact our business over the next few quarters and we remain cautious against the current backdrop of increasing COVID cases and regional and national lockdowns across the globe. Nonetheless, despite COVID-related headwinds and the underlying demand in our business gives us strong confidence that we will see a relatively quick return to pre-COVID activity across our accounts once the pandemic subsides. Looking even further ahead, we remain focused on our key strategic priorities designed to fuel our growth. First, we plan to continue expanding our commercial organization by recruiting and training talented sales professionals to drive adoption of our Zephyr Valves within our existing markets. Next, we intend to continue opening new accounts in the U.S., collaborating with leading hospitals and physician champions to build emphysema centers of excellence. And finally, we're focused on promoting awareness of our Zephyr Valve Therapy through the training of referring physicians and the education of patients. Longer term, we are investing in new technologies to broaden the patient population that can be treated with our products. As stated earlier, Zephyr Valves are an effective treatment in patients who have near or complete divisions between the lobes in their lungs, and thus little to no airflow between the lobes. We refer to these patients as being collateral ventilation negative, or CV negative. However, nearly 50% of patients with severe emphysema are collateral ventilation positive, and thus are not candidates for Zephyr valves. For these CV positive patients, we have commenced clinical research of aerosol, a polymeric foam, that is delivered via a bronchoscope to a targeted region of the lung as a possible treatment for CV-positive patients. This patient population is incremental, too, and nearly the same size as the population we are able to treat with Zephyr valves, and thus represents a significant potential increase to our total addressable market. Together, we believe these commercial and product development initiatives will help us build on our success to date and enable us to fully realize our goal to be the global leader in minimally invasive treatments for lung disease. With that said, I will now turn the call over to Derek Sung, our CFO, to provide a review of third quarter results.

Thank you, Glenn, and good afternoon, everyone. Total worldwide revenue for the three months ended September 30, 2020, was $10.6 million. a 17% increase from the $9.1 million in the same period of the prior year, and an increase of 15% on a constant currency basis. U.S. revenue in the third quarter was $5.3 million, a 57% increase from $3.4 million during the prior year period. The year-over-year increase in U.S. sales was primarily driven by increasing commercial traction from the launch of our Zephyr Valve as we continued to expand our sales force and drive adoption into new accounts. International revenue was $5.3 million, an 8% decrease from $5.7 million during the same period last year. On a constant currency basis, international sales decreased by 11% as our business continued to be impacted by the COVID pandemic. Gross margin for the third quarter of 2020 was 70.3%, relatively flat compared to the prior year period, and back to the level that we experienced prior to the COVID pandemic. As we look ahead, we plan to continue to drive gross margin expansion and operating efficiencies by spreading fixed overhead costs across increasing production volumes as we meet the growing demand for our products. Total operating expenses for the third quarter of 2020 were $12.8 million, a 28% increase from $10 million in the third quarter of 2019. R&D expenses for the third quarter of 2020 were $2 million compared to $1.4 million in the same period of the prior year. The increase was primarily due to an increase in personnel and clinical study-related expenses needed to support our product development and clinical research activities. Sales, general, and administrative expenses for the third quarter of 2020 were $10.8 million compared to $8.6 million in the third quarter of 2019. The increase was primarily attributable to personnel-related expenses in sales and marketing as we continue to expand our commercial team, as well as expenses related to building out our general and administrative infrastructure and support staff as we scale operations. Net loss for the third quarter of 2020 was $3.9 million, or a loss of $1.37 per share, as compared to a net loss of $4.3 million, or a loss of $2.41 per share for the same period of the prior year. Net loss in the third quarter of 2020 includes a non-cash gain of $3.3 million from a decrease in the fair value of the liability associated with outstanding convertible notes and a non-cash charge of $0.8 million resulting from an increase in the fair value of the liability associated with an IPO-related success fee from a prior term loan. Note that the weighted average share count of 2.8 million shares used to determine loss per share for the third quarter of 2020 does not reflect new shares issued in connection with the closing of our IPO on October 5th. New shares issued in connection with the closing of our IPO include 11.5 million shares issued through the offering, 17.8 million shares issued upon conversion of convertible preferred stock into common, and 2.6 million shares issued upon conversion of the aggregate principal amount of outstanding convertible debt plus accrued interest. These shares will be incorporated into the weighted average share count for the fourth quarter of 2020. We ended the third quarter of 2020 with $39.8 million of cash and cash equivalents. This does not include net proceeds of $201.4 million from our IPO. Now, let's look for 2020. We expect full-year revenue to be in the range of $31.5 to $32 million. While this factors in an expectation for continued pandemic-related impact to our sales, the recent rise in COVID cases and lockdowns occurring in many geographies around the world could present additional uncertainty to our outlook. That said, we expect to see a solid return to growth as transient headwinds from the pandemic subside and the underlying strength of our business shines through. With that, I'd like to thank you all for your attention, and we will now open up the calls for questions. Operator?

Yes, sir. Ladies and gentlemen, if you have a question or comment at this time, please press star then 1 on your telephone keypad. If your question has been answered or you wish to remove yourself from the queue, simply press the pound key. Again, if you have a question or comment at this time, please press star then 1 on your telephone keypad. Our first question or comment comes from the line of Bob Hopkins from Bank of America. Your line is open.

Oh, great. Thanks very much for taking the call, and good afternoon. Appreciate all the commentary that you guys made as an intro, but I was just wondering if you could maybe give us a little bit more of a detailed sense for what you're seeing out there right now and whether or not that Q4 guide assumes that things kind of deteriorate from where you are right now or basically stay the same from where you are right now. And I apologize for the short-term nature of the first question, but it's obviously a unique time.

Yes. Thanks, Bob. Yeah, it's a very, very interesting time. We're literally getting updated almost on a daily basis. You know, we have navigated in the United States through some of this in the past. I think the situation that we're seeing right now is significantly different as things are building. I mean, obviously, you're probably looking at the same data as I am in the United States today. We are seeing some number of cases being rescheduled, getting pushed off into the future in certain hotspots, which we experienced in the third quarter as well and in the second quarter to a much greater extent where a certain geography becomes a hotspot and things get pushed off. Right now, the middle of the United States is really generally that hotspot. and it's kind of a U-shape around the United States from the west coast down south and across the eastern coast where most of the accounts are still scheduling and doing these procedures. And that is where most of our business is, frankly. So that is encouraging, but we don't know whether this is going to spread out from the middle. Of course – As you probably know, Bob, through the third quarter, about 50% of our business was in the U.S., and 50% was outside the United States. Of that 50% outside the United States, 85% of our business is in Europe. And you're obviously aware of what's going on in Europe. I mean, right now, all elective procedures are down until early December in France, and something north of 20 different countries. There's various different degrees of lockdown. But if you look across our biggest markets, Germany is continuing to do cases, but there are certain hotspots in Germany that are impacting and having rescheduling. And then there's certain other countries that have done things that will no doubt make it more difficult to get patients to hospitals. We've tried to factor in. to the extent that we can, but it's these implications. I would say right now the only major market that's stopped elective procedures is France, and they are projecting to pop back out in early December, and we're still assessing patients in France, and there's actually a couple, two to four hospitals in France that are continuing to do procedures, albeit at a low level.

Okay. So it sounds like you're assuming from kind of where you were in October and early November that you assume that things do get a little worse rather than stay the same just in terms of the guidance you provided.

Yes. I think we are anticipating that there will be some impact from this. I will say that we were able to navigate across this in the third quarter, and if this kind of turns itself around and there's indications, for example, in Belgium that And in France, that they may have already reached the peak, and the other countries are hoping that they're not far behind. But we'll know a lot more in a week.

Right, right. Dynamic time. So the other quick question I wanted to just get a sense, another kind of data point is, you know, in the U.S., what percentage of the centers that were kind of up and running and operative pre-COVID are up and running today in the U.S.? ?

We have, uh, our active accounts are around 80% of our accounts right now.

Okay.

And, um, yeah, so it's, we're a little bit off. We were, you know, sort of the, in the pre COVID phase, we, we, we were in the nineties, if you will, in terms of active accounts, you know, accounts that have ordered in, in the, in the recent past. So that that's, that felt like kind of the, the norm and we'd expect to bounce back to that sort of neighborhood in the, in sort of the post COVID phase. But this is reflective of hotspots. It's how many accounts are active in the U.S. So we've got 135 accounts. About 80% of them are active.

Okay. Great. I'll leave it at that. Thanks very much for the questions.

Thank you. Our next question or comment comes from the line of David Lewis from Morgan Stanley. Your line is open.

Good afternoon. Thanks for taking the question. Glenn, you had been kind enough to give us the inter-quarter trends here in the third quarter during the roadshow, and obviously it's not perfect math because you're working off a bar chart, but it sort of implied that if you're kind of at first quarter levels with two to three weeks to go in the third quarter, if that trend line stayed constant, it kind of gets you to where you are now around this $10.5 or $10.6 million number. So Is that generally how the back half of September went? Things were pretty constant, or from your perspective, was there incremental improvement in the business in the back half of September? And then related to that, per Bob's question, are you seeing an impact on procedures in the U.S. or ex-U.S., or simply just cautious that we may see impact?

Yeah. So the second question was, are we seeing impact on procedures in the U.S. or OUS?

Yeah, are you actually seeing procedure impact in the U.S. or ex-U.S., or are you simply just being more conservative that we may see impact here to the extent the resurgence continues?

No, we're seeing cases that are being, you know, like France is our number two market and it's down. And we are seeing cases in the United States being rescheduled. getting pushed off. Now, that's not happening in a wholesale fashion, and it's not happening, I would say, in the United States in a way today that is altogether dissimilar to what we saw in the third quarter. We've been navigating around COVID hotspots, you know, basically since they presented themselves. And when we shut down, we popped back out, and then some number of markets went through kind of a second wave, and we had to deal with those. So, I would say that we're not seeing a, you know, a widespread impact on our business in the U.S. at this point. And we're just, like I said, we're kind of, you know, we'll know a lot more in a couple weeks. Right now, the impact, we keep a really close eye on hospital beds being used for COVID and ICU beds in particular. because when that tops out, they tend to pull back on these elective procedures. So we do have some regional hotspots, but we've had some regional hotspots in the U.S. in the third quarter as well. Going back to your first part of your question, did I answer the second part of your question?

Yes, sir. And the first part was just the quarter-to-date numbers sort of imply stable trends into the back half of September. I just wonder if that implication is sort of how you saw the business performing in the last few weeks of September.

Yes. That's the short story. I mean, we had a really nice quarter. There was obviously some pent-up demand in the front part of the quarter. And if we sort of back that out and look at what we see as the actual demand on a monthly basis, we had a nice progression across the quarter. And, in fact, October was a really solid month for us. So it looks good.

Very helpful. And just two quick ones for me. The first is just how you're building the business here. It looks like, generally speaking, you could add about 40 centers this year. I just kind of get a sense of is that a good way of thinking about how you could build? I mean, should we assume a similar number of center ads in 21 versus 20, or should that number be higher or lower? And just one other kind of related question on just the vaccine topic because it's top of mind is, we're probably going to roll the vaccine out for patients that are at high risk. Would you generally assume, as you think about these severe emphysematics, that they are probably first on the list in terms of high-risk groups that probably get vaccinated? Sorry for these bifurcated questions, but thank you.

Yeah, you bet. So the first question was, I think, specific to how you should think about us expanding. We were adding 15 to 20 accounts per per quarter in the pre-COVID phase. In the COVID phase, we've been adding about 10. So I would say that hypothetically, if COVID was largely in the rear view at mid-year next year, then the front half of the year, we'd be chugging along at about 10 centers per. And in the back part, we would probably be 15 plus per quarter. So I think that's kind of the rate you ought to think about. And it's really largely driven by COVID, which impacts our, it distracts our customers, but it also impacts our access, you know, sort of free access to the hospitals as well, which has an implication. With regard to the vaccines, yeah, I mean, I think that these, the first, as I understand, the first people who are going to get vaccinated or offered vaccination are going to be healthcare workers. I may be wrong, but as far as patients go, I would think that these types of patients, along with others who have significant comorbidities that are at risk of COVID, would likely be, you know, have the option to go ahead and get this pretty early on.

Okay. Glenn, thanks so much.

You bet.

Thank you. Our next question or comment comes from the line of Larry Bickleson from Wells Fargo. Your line is open.

Good afternoon, guys. Good afternoon. Thanks for taking the question. A couple for me. Glenn, could you talk about the timeline here and process for AeroSeal? What are the next steps here? How should we think about that? And I had a follow-up.

Yeah. AeroSeal is something that's off on the horizon. The good news is we have some data on it already. It's an acquired technology. We've done some clinical work. We've got some interesting signals. The meaningful studies are out ahead of us. The first one that we're executing is a European multinational multicenter study. We have already commenced the process, which I'm sure you know is a multi-step process. The first is to go through ethics committee and then you get those sites initiated and then they start enrolling. And we're in the initiation process right now. We've had several ethics approvals. We're trying to get these sites up and running. what impact COVID has on the initial enrollment is to be determined. We are trying to do the study in places like France and Germany that are presently preoccupied with a good bit of COVID. So we'll have to see, you know, sort of how that progresses. But we're expecting to significantly enroll that study across the coming year. So that's where we are. OUS in the U.S., We have already started discussions with FDA. We expect to gain IDE approval next year. But we are, you know, we're quite a ways out as you could probably do the math on this in terms of, you know, getting the sites up and running. We'll likely have a one-year follow-up after enrolling the patients and treating the patients. And so you're probably into, you know, late 2024. in terms of technology that's going to be available in the U.S. We'd expect it to be available in Europe before then.

That's helpful. And one more for me. Could you give us an update on geographic expansion? Are there new markets outside the U.S. that you're excited about and any timelines? Thanks for taking the questions.

Well, I think that sort of the elephant in the room, if you will, is Japan. You know, that's a market we've had a lot of interaction with the PMDA. We're expecting to file there next year. We expect in 2023 to have both approval and reimbursement in place. So that's clearly the biggest market that we're not presently in. You know, it's important to note that certain of the markets, so first of all, the data that we have is fairly recent relative to some of the European markets that we're in. And as a consequence, we're sort of relaunching in those markets. So that gives us a nice opportunity. Some of the markets are relatively new. For example, France, which is our number two market in Europe. So it's our number three market around the world. That has been a great market for us. We've only been in there for a couple of years. So we're very excited about that. And we just had a meeting yesterday, actually, specific to continued investment across some of these European markets in an effort to really take greater advantage of those. And we're, and we, you know, pre COVID, uh, China was a very large and very interesting market for us. Um, it's still small, but we were growing quickly and, um, we were prepared to continue to, to, to deepen our investment in China when COVID hit. And unfortunately, as you probably know, as you can, you know, you can, it's in this COVID is very interesting. You can literally look at the headlines in the papers and project kind of where our business is getting most impacted. And with Asia almost as a whole largely shutting down in response to the COVID virus, cases have basically stopped. So our expansion plans and our investments in China were put on hold, but we're in the process of talking about ways to restart those as we move forward. So that's another market that we're very excited about.

All right, Glenn. Thanks for taking the questions.

Thank you. Our next question or comment comes from the line of Rick Wise from Stiefel. Your line is open.

Good afternoon, Glenn. Hi, Derek. Maybe starting off with reimbursement, obviously really excellent news on the BCBS front with HCSC now covering. And you made the point, obviously, that 90% of cases get reimbursed without coverage, but I've got to believe that's a positive. And let me just remind us the impact that a decision like that has on doctors, patients, you know, time to do it on you guys and how we should think about it.

Yeah, that's a great question. I really appreciate it. You know, it's... Our issue is not with – we've got this incredible reimbursement team. It's incredibly tenacious, and we've got four randomized controlled trials that are published in the top-tier journals, and all of the data within each of these studies is amazingly consistent. So our issue is not really with getting preauthorization. The issue is because it's literally – I think it's 95% of the time when we seek preauthorization, we get it. The issue is with the timeframe that it takes. So if, for example, Blue Cross Blue Shield Association is negative, which made this HCSC double E interesting because they're the number two largest Blue Cross Blue Shield affiliate and they went in a different direction by giving us this approval. that kind of a group could take two or three months to get through Blue Cross Blue Shield, whereas if we've got prior approvals, we can get through in some cases in less than a month. So it does create certain efficiencies for us. We haven't seen any patients sort of fall out of the process through the waiting time, but we have to expend a good bit of energy, and these plans need to expend a good bit of energy. You know, when I think about reimbursement, it's great to get HCSC. It's great to get Select Health. Preauthorization right now is at about 90 for 5%. But we're seeing a significant increase in requests for preauthorization. If you look, for example, in the third quarter of this year versus the third quarter of last year, we've had 125% step up in terms of the number of requests. And in addition to the number of requests going up, we're seeing a reduction in the time to pre-authorization that's considerable. If you look across, for example, all commercial cases, it's come down 35% from nearly 60 days to about 40 days for our average commercial case. So it came down roughly 18 days or 35%. And if you look at, for example, even in a situation where we don't have a green light with the payer, which is Blue Cross Blue Shield Association, Like I said, we're getting those through. The average time in 2019 through Blue Cross Blue Shield was 80 days. We brought that down to 68 days, so it's not a big reduction. That will go way down with HCSC coming online. But the really interesting thing is if you look at our success rate, which I talked about before at 95%, Blue Cross Blue Shield in 2019, we were successful 80% of the time getting preauthorization. And so far this year, we've been 95% successful. So it's a bit of a war of attrition, if you will. You know, everybody's got to kind of look at it. We've got a ton of really good data. And so when we get into the review process, we almost invariably win because we've just got the data.

Very helpful. Thank you, all that color. Another key aspect of your of your commercialization as you highlighted right up front, Glenn, is both training new docs and adding new reps. Can you help us think about, you know, and take any time frame you want. We'll take anything. It's like how should we think about training your training goals for docs over the next quarter or four, whatever you want. And ditto for reps. I mean, I think you said whatever it was, 48 reps. Where are we a year from now? And just talk us through that. Thank you.

Yeah, well, as far as reps go, we're at 42 in the U.S. I assume that was where the question was coming from. Yes, yes, yes. And we're 28 OUS. And I think the way to think about the docs is that they're aligned with the accounts. And I think we've talked a lot about number of accounts and number of doctors. So we're targeting about 500 docs about – I mean 500 accounts and about 800 doctors. So there's a ratio there. So the number of doctors that are doing the procedure itself, that's probably the way to think about it. One of the silver linings, if there is such a thing in this crazy environment that we're in, is that we have developed – remote training, basically. We used to fly people into a training center or bring somebody out to teach people how to do the procedure. And now we've been able to hold multiple physician training classes online, which allows us to expand the kind of profile of the people that we're able to bring in. So, and the other thing that's really great about that is that we're beginning, we've already started and have been very successful at holding these types of information or training sessions to bring referring docs up up up online we were struggling with how do we get those people together for training programs and zoom is is a pretty efficient way to get a very large number of referring docs together uh learning more about the procedure so that's that's been something that's been a bit of a silver lining for us it's also been beneficial from a rep training perspective we actually have a sales training class in right now um And we're doing – not in, I mean literally online right now. And so those folks are sitting at their homes, and they're going through a week-long sales training. And they'll get out in the field, and they'll ride along and cover cases with other reps. As far as adding reps go, as I mentioned, we're at 42 in the U.S., And I would say next year we're going to be at 50-ish, if you will, if I can say such an imprecise number. But we think that we can cover the U.S. with roughly 50. And I think the decisions to go beyond that are really going to be about just subdividing major metro areas and so forth. And I expect we're going to definitely land on a number above 50. But the impetus for that is going to be an opportunity to just subdivide and realize greater efficiency in some of these larger geographies.

That makes sense. One last one from me. Maybe I'll ask the CFO a question. Derek, you talked about R&D and SGA and OpEx, et cetera. And I don't know where others were, but you came in well below my OpEx expectations. Just maybe can you help us think about – R&D SG&A trends in the fourth quarter? Does it look a lot like the third or, you know, how do we sort of frame that, those numbers and the outlook there? Thanks so much.

Yeah, thanks for the question, Rick. So, you know, I would say we will see, expect to see a step up in OpEx in the fourth quarter. Primarily in the SG&A front, I think some of that's going to be due to Public company costs that are regularly going to hit in the fourth quarter because some of those did not hit in the third quarter as we were not yet a public company. And then, you know, continued investment into our commercial infrastructure. R&D spend, we expect to step up a little bit, but we'll be sort of roughly sort of at the level of what you saw this quarter. Again, some of the increasing activity that we are – doing on the clinical front that Glenn described earlier is going to be the primary contributor of an increase in R&D spend.

Thank you. Our next question or comment comes from the line of Bill Plavonic from Canaccord Genuity. Your line is open.

Great. Thanks. Good evening. A couple of questions here. Just first on And thanks for providing about 80% of the accounts up and operational. What level do you think they're operating at today? Do you think they're operating at maybe 70%, 80-ish percent capacity? If you had to take a guess on kind of – because while they're operating, they may not be at full capacity. Just your thoughts there to start with.

Bill, that's a really good question. Yes, you are correct. They are, in fact – They're functioning about 80%. We're sort of, I would say, in the neighborhood of, on average, five to six cases on a quarterly basis. And we were at about seven sort of in the pre-COVID phase. So we're sort of in that neighborhood. Okay.

And then just in terms of U.S. pricing, Has there been any changes? I know there wasn't any commentary, and usually when they're not, it means it's stable, but I'd rather ask the question than not. Yeah, we sell at list. Okay, that's good to hear. And then just in terms of you've talked about this direct-to-patient a little, I think sometimes when companies say that, you get a little nervous that you can spend a lot of money there, and I'm just wondering if you could frame – kind of the activities and maybe any amount of quantification or, you know, if it's a small amount, just qualification, just so we have an understanding of roughly what the plans are there.

You mean in terms of how much money we're spending?

The program itself, like the exactly, you know, I think you're currently rolling it out. It's in a couple geographies, kind of what's the intent there. And then, you know, when we think about this is this, a very small amount per geography, so this is in the five or six figures, not the seven figures, just conceptually how we should think about it.

Yes. I mean, we're piloting it right now. We're in far more than a couple geographies. We are focused on sort of trying to drive folks to our website. We're also trying to, most importantly, drive leads. So that we consider leads, you know, sort of people, first time callers who call, who respond to the outreach and call into hospitals. They may also opt in on an email basis. They may choose to participate in one of, we've had patient information sessions online which have drawn hundreds of patients into those. So it's been very, very interesting. And the response that we've gotten, we haven't spent a tremendous amount of money. I was just going through, well, I won't mention the other companies, but there's other companies doing this that are spending a lot more than we are, but we're not to the point where it makes sense for us really to drive this. As I said in my earlier comments, this is really part of our longer-term growth strategy. But we have seen a real nice responsiveness year over year. In the third quarter, we saw about 140% increase. in web visitors. In terms of the leads that we've gotten, which again are either people who are calling us or opting in on email, we've seen 126% year over year, third quarter to third quarter increase in those. So there is a good bit of engagement that we've seen and we're quite encouraged as we are in the very, very early stages of sort of calculating cost per types of numbers. Very, very, very, very encouraged by what we're seeing on that front.

Okay. And then the last question, if I may, is just on the new account funnel. You know, COVID obviously has an impact on your current customers, but, you know, with new technologies kind of getting in there and educating folks and getting them up and running, you know, as you look at the top of the funnel, the new ones coming in, you know, have in the last six months, you know, what kind of changes have you seen directionally and how should we think about that? And that's all I have. Thank you.

Yeah. In the last six months, we, we added about 20 ish accounts. The bulk of those, the majority of those came in the third quarter. And we do have, we do have a large number that are in process in various different stages. You know, we, we are, It's an interesting process for us because we're not doing business with any of these new accounts. So when we go in, we're negotiating terms and conditions on just establishing this relationship and then going through the step-by-step process to get ourselves set up. So we are in a very good position with regard to our funnel, and as I mentioned earlier, we're expecting that we'll be adding on the order of 10 accounts new centers on a quarterly basis, and then once COVID's in the rear view, then that number will get bigger.

Great, thanks.

Thank you. I'm sure no additional questions in the queue at this time. I'd like to turn the conference back over to Mr. Glenn French for any closing remarks.

Well, thank you all for your time. I really appreciate it and your interest and so forth. We wish you all a very good afternoon or evening, depending on where you are. And, again, thank you very much.

Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. We may now disconnect. Everyone, have a wonderful day.