Pulmonx Corporation

Good afternoon and welcome to Pulmonic's fourth quarter and full year 2020 earnings conference call. At this time, all participants are in the listen-only mode. We will be facilitating a question and answer session towards the end of today's call. As a reminder, this call is being recorded for replay purposes. I would now like to turn the call over to Brian Johnston from the Hale-Martin Group for a few introductory comments. Go ahead.

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 and year ended December 31st, 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 and growth margin and operating expenses, commercial expansion, and the product pipeline development are based on 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 factors section of our public filings with the Securities and Exchange Commission, including the quarterly report on Form 10-Q filed with the SEC on November 13, 2020. This conference call contains time-sensitive information and is accurate only as of the live broadcast today, March 2, 2021. Pomonix Corporation disclaims any intention or obligation, except as required by law, to update or revise any financial projections or forward-looking statements, whether because of new information, future events, or otherwise. With that, I'll turn the call over to Glenn.

Thanks, Brian. Good afternoon, everybody. Welcome to our fourth quarter and full year 2020 earnings call. Here with me today is Derek Sung, our Chief Financial Officer. Today, I would like to share a few highlights and contextualize our fourth quarter results before turning to our outlook and strategic priorities for 2021. 2020 was a major milestone year for Pulmonix, and I'm very proud of the progress that our entire team has made in building commercial momentum and beginning our journey as a public company. Despite the turmoil caused by the COVID pandemic, we were able to scale our organization, grow our commercial footprint, and execute on a public financing that has put us in a strong position to drive our growth initiatives forward once the pandemic subsides. We achieved full year worldwide revenue of $32.7 million and grew our business in the U.S. by over 50% despite ongoing pressures from the pandemic. The fourth quarter demonstrated that while COVID continues to be a constantly evolving challenge, our business remains resilient. In Q4, we recorded worldwide sales of 9.8 million. The quarter started strong as we recorded our highest month of sales in the company's history in October. But the global resurgence of COVID in the back half of the quarter reversed our momentum as lockdown measures and increased hospitalizations inhibited our ability to schedule procedures. Despite the transient pressure of COVID, all signals continue to indicate that the underlying clinical need and demand for our Zephyr Valve solution remains strong, and we believe that the COVID-related slowdown in our business will reverse once the pandemic subsides. We are seeing hospitals work with patients who have had their procedures delayed due to COVID by either rescheduling them to a later date or placing them on a wait list to be scheduled as soon as the hospital allows. Despite the limitations on procedures, interest in Zephyr valve treatment remains strong as we continue to advance patient screenings through Stratix, and the volume of calls to treatment centers and visitors to our website are well above pre-COVID levels. We also continue to see new hospitals starting to use Zephyr valves. illustrated by the addition of 13 new treatment centers in the U.S. in Q4. Through the full year 2020, we expanded total U.S. treatment centers well over 50% and ended the year with 148 centers. On the reimbursement front, we continue to make inroads with Blue Cross Blue Shield Association, securing positive coverage policies from Highmark, the fourth largest Blue Cross Blue Shield plan, which covers approximately 5 million lives, and the Blue Cross Blue Shield of North Carolina. Our Zephyr valve procedure was also moved out of the investigational category by Medical Mutual of Ohio, a plan that covers over 1.5 million lives. As a reminder, approximately 75% of our U.S. patient population is covered under Medicare, which typically pays for our out-of our medically necessary solution, leaving about 25% of our patients covered by commercial plans. Within this latter category, even commercial payers without positive coverage policies have been approving preauthorization requests for Zephyr valves in around 95% of cases. Thus, while we don't expect that reimbursement will be a significant barrier to adoption of our treatment, we do celebrate our commercial policy wins because they reduce the waiting period to treatment for our patients and validate the clinical acceptance of our therapy. Although the COVID-driven pressure and impact on procedure volumes extended through the first two months of this year, we believe the overall outlook for 2021 remains positive given strong and consistent indicators of demand for our Zephyr valve treatment and the promise of a full vaccine rollout by the second half of this year. As such, we expect full year 2021 revenue to be in the range of 46 to $50 million, representing a 41 to 53% growth over 2020. Our business remains uniquely sensitive to the impact of COVID, given that our procedure requires a three-night inpatient stay, our pulmonologist customer Customers remain at the forefront of the COVID response, and our patients remain at high risk with their severe respiratory conditions. Accordingly, we expect continued negative impact from COVID through the first half of the year, but we are optimistic that the rollout of the vaccine will alleviate COVID-related pressures in the back half of the year. Looking beyond the near term, we're forging ahead with several initiatives that we believe will fuel our future growth, chiefly we intend to focus on furthering the strategic expansion of our U.S. commercial infrastructure to enable us to target more of the approximately 500 high volume hospitals performing interventional pulmonary procedures. Since our last call, we've added three U.S. territory managers, bringing our U.S. territory manager total to 45. Looking forward to the rest of this year, We plan to continue building out our U.S. sales organization by increasing the number of regional directors from six to nine and by expanding the total number of territories to 55 by the end of this year. With this expanded sales force, we are targeting to open over 50 new treating centers in the U.S. in 2021, bringing our total number of centers to at least 200 by the end of the year. We also expect that the activity levels of our existing centers will meaningfully increase as the pandemic subsides in the back half of the year. We also continue to build our international sales capabilities and intend to add at least five sales reps and two managers outside the United States, bringing the total number of quota carrying reps outside the U.S. to 33 by the end of 2021. These investments in our commercial organization should allow us to better access geographies and increase market development activities as conditions normalize. While we see an incredible opportunity to develop and capture the existing market for severe emphysema patients who are candidates for our Zephyr Valve, we also remain focused on driving future growth by investing in new technologies to broaden the patient population that can be treated with our products. In particular, we are furthering the clinical development of Aracil, a polymeric foam that is designed to be delivered via a bronchoscope to a targeted region of the lung to treat selected emphysema patients with positive collateral ventilation who are currently not eligible for Zephyr valves. This group of patients represents approximately 50% of all severe emphysema sufferers who are otherwise eligible for for an intervention and thus could significantly increase our addressable market. I am pleased to share that in December we received designation of Aracel as a breakthrough device by the U.S. Food and Drug Administration. While we are still a few years away from potential commercialization of Aracel, the breakthrough designation will provide prioritized and potentially accelerated review by FDA and provides eligibility for Medicare coverage of innovation technology or MCIT. MCIT, a new Medicare coverage pathway, enables receipt of Medicare coverage as early as the same day as FDA market authorization for breakthrough devices and provides coverage for four years. This is particularly relevant as the large majority of our patients are covered by Medicare. In the meantime, we remain intently focused on moving Aracel down the clinical pathway and securing the evidence we need to support coverage in the long term. In summary, despite headwinds, through 2020, we grew our U.S. sales force by over 40%, the number of U.S. treatment sites by over 50%, and our U.S. revenues by over 50%. Looking ahead, we believe we are well-positioned operationally and financially to deliver high growth through 2021 and beyond, and to take the next step in establishing ourselves as the global leader and trusted partner in the assessment and treatment of severe lung disease. With that said, I will now turn the call over to Derek Sung to provide a review of fourth quarter and full year financial results. Derek?

Thank you, Glenn, and good afternoon, everyone. Total worldwide revenue for the three months ended December 31, 2020, was $9.8 million, a 5% decrease from $10.3 million in the same period of the prior year, and a decrease of 8% on a constant currency basis. U.S. revenue in the fourth quarter was $4.9 million, a 4% increase from $4.7 million during the prior year period. The year-over-year increase in U.S. revenue reflects increased sales of Zephyr valves as we expanded our commercial footprint and drove adoption into new accounts offset by the impact of the COVID pandemic. International revenue was $5 million. a 12% decrease from $5.6 million during the same period last year. On a constant currency basis, international sales decreased by 17% as COVID impacted the ability of hospitals to schedule procedures. Gross margin for the fourth quarter of 2020 was 72%, compared to 71% in the prior year period. With the timing of manufacturing-related investments to support our growth, and the impact of stock-based compensation on labor costs, we expect 2021 gross margins to start out around 70 percent and to increase modestly throughout the year as we absorb fixed cost overhead across increasing production volumes. Total operating expenses for the fourth quarter of 2020 were $16.4 million, a 41 percent increase from $11.6 million in the fourth quarter of 2019. Stock-based compensation expense was $2.3 million in the fourth quarter of 2020 and accounted for 45% of the increase in operating expenses from the prior year period. R&D expenses for the fourth quarter of 2020 were $2.5 million compared to $1.6 million in the same period of the prior year. Aside from stock-based compensation, 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 fourth quarter of 2020 were $14 million compared to $10 million in the fourth quarter of 2019. Aside from stock-based compensation, the increase was primarily attributable to personnel-related expenses in sales and marketing as we expanded our commercial operations, as well as public company expenses related to the scaling of our general and administrative infrastructure. Looking to 2021, we expect operating expenses to be in the range of $85 to $90 million as we continue to build out our commercial operations, invest in our aerosol clinical program, and further scale our business. We expect stock-based compensation expense to make up about $9 million of our total operating expenses in 2021. Net loss for the fourth quarter of 2020 was $9.3 million or a loss of 27 cents per share as compared to a net loss of $4.7 million or a loss of $2.48 per share for the same period of the prior year. An average weighted share count of 33.9 million shares was used to determine loss per share for the fourth quarter of 2020 and includes shares issued in connection with the closing of our IPO on October 5th. We ended the year with $231.6 million in cash and cash equivalents as of December 31st, 2020, which includes net proceeds of $201.4 million from our IPO. Turning now to our revenue outlook for 2021. As Glenn mentioned, we expect full-year revenue to be in the range of 46 to 50 million dollars, which represents 41 to 53 percent growth over 2020. This contemplates continued COVID-related pressures through the first half of the year, with the impact being most pronounced in the first quarter. While we do not plan to provide quarterly guidance on a regular basis, given the unique circumstances related to the pandemic, we are forecasting our first quarter revenue to be in the range of 8 to 8.3 million dollars. This reflects the COVID-driven pressures which extended through much of February, but also include our expectation for a stronger March based on current indicators. We expect continued sequential improvement in sales through the remainder of the year, assuming the pandemic further subsides and our expanding base of treatment centers return to normalized activity levels. With that, I'd like to thank you all for your attention, and we will now open up the call for questions. Operator?

As a reminder, to ask a question, you will need to press star 1 on your telephone. Again, that is star 1 on your telephone keypad. To withdraw your question, press the pound key. Your first question comes from the line of David Lewis from Morgan Stanley. Your line is now open. Hi, Gwen and Derek.

This is actually Cecilia on for David. I guess I wanted to start off just asking about guidance, what you're contemplating in terms of recovery in the U.S. versus ex-U.S., as well as really the trends you've seen play out in those two regions through the first part of this year.

I'm sorry. I was on mute. Actually, the guidance part I'll ask Derek to talk about and the trends in the various regions I'd be happy to talk about after that. Derek, the first part of the question was the guidance in U.S. and OUS. How do you see that breaking out?

Yeah. Hi, Cecilia. Sure. So our guidance basically contemplates continued pressure from COVID, but lessening throughout the first half of this year. And it essentially contemplates a recovery in the second half of this year. So with the vaccine coming, and the macro outlook appearing to improve, our assumptions here in our guidance are that we essentially kind of return to begin a return towards normalcy in the second half of this year, both in the United States and outside the U.S., and that's sort of what's contemplated in our guidance.

So we've got just to talk about the trends that we've seen. Obviously, when we last spoke in early November, we were about a month deeper into the European sort of uptick of COVID than we were here. It's really quite remarkable when you look at the shape of the curve and where we were on November the 10th. So we dove into Europe pretty aggressively, and some of the markets have started to pull back out. Places like France and Switzerland have come out more strongly. Now, France was hit by the virus at least a month before us here. But each of the countries is sort of pulling out differently. Germany is slow to pull out. They have actually installed a mechanism by which they want to make sure that they have at least 25% of their ICU capacity in reserve in the event there's another wave. which is sort of an unheard of level of capacity, for example, in the United States, where even in the worst case scenario, you're going to have probably two-thirds of your beds full of just standard ICU patients and a third of them full of COVID patients. And so to keep 25% just open is going to take a little time to get back and going in Germany. In the United States, it was really quite remarkable. We had assumed... We saw this wave coming. We saw what was happening in Europe. We knew that it was going to happen here in the U.S., and so we anticipated the step down, October to November to December, and we had assumed that we would see a step up that would look very much like the step down, specifically in January, February, and March. And what happened was we sort of bottomed out, and it carried into February. basically the first couple weeks of February. So that's kind of the shape of the curve. It was a little less V-shaped and a little more U-shaped, and we have some very encouraging more recent information as it relates to pulling out of that, and it looks extraordinarily familiar to the last two times we got hit with waves here in the United States.

Okay, thank you. That's helpful. I guess if I could also ask, just on your backlogs, what you've seen in terms of dynamics trends versus kind of late summer in the U.S., as well as if you could provide some additional color in terms of what you're seeing on Stratix charting trends recently. Thank you.

Well, as far as backlogs and so forth, I mean, it's really we had an immediate back. Well, I'll just talk about the United States. I mean, it's about 50 percent of our business. Everything else is spread out a bunch about a number of other countries. And in some ways, all these countries are behaving the same as it relates to COVID. It's just a question of, you know, how quickly did they shut down and how quickly did they open back up? But they're all sort of similar general shapes, if you will. So the backlog is immediate. So if you shut down procedures and anybody who is scheduled for a procedure either gets pushed out to a new date or gets put on a waiting list so that when the hospital opens back up. So that's a natural part of the backlog. And Cecilia, as you had mentioned, we also have Stratix scans that have been running through. And so we've had an accumulating number of what we call Stratix Greenlight patients, which is patients that, you know, their CT scan data is run through Stratix, and they're candidates for then going into a procedure, having a chartus executed at the front end, and then in the great majority of cases, valves thereafter place. So we have accumulated a bit of a backlog, and we will be chipping away at that as some of these accounts open up and we typically see that among the first patients treated, as you might imagine, at these accounts when they reopen are those that were rescheduled or postponed.

Great. Thank you for taking our questions.

Your next question comes from the line of Bob Hopkins from Bank of America. Your line is now open.

Oh, great. Thanks and good afternoon. You guys said you are at 148 centers, I think, right now. Just curious, how many of those are up and running right now and doing procedures?

That's a really good question. And I'm going to answer it in just a second. But before I do, I want to clarify one thing that I said in my prepared remarks where I actually – I've got a daughter in North Carolina. And I said North Carolina, and I meant North Dakota. So Blue Cross Blue Shield of North Dakota is where we had the success. So, Bob, you were wondering about active accounts. It's a really good and insightful question. And the last time we spoke, we were lumping that together on a quarterly basis. And you may recall that sort of in the pre-COVID phase, our active accounts were those that had done procedures, bought product in a 90-day period. This COVID situation is so dynamic, and sort of on a one-time basis, we'll talk a little bit about sort of what we saw on a monthly basis, and in one case, in a fractional month, just to kind of give you a sense of how things moved across the year. So if you think about the pre-COVID phase at about 70%, So in a given month in the pre-COVID phase, about 70% of our accounts would be active as per the definition that I just threw out. And then, you know, we bottomed out in an incredibly abrupt way in April where we had 4% of our accounts active. So we never again saw that kind of, you know, bottom. So we rebounded a little bit across the year. In July, we were back up to about 60%. but it was always a bit muted because of this sort of COVID overhang, if you will. In December, we dipped down to about half of what would be considered normal, the low 30s. And as I mentioned, we had expected that we would see that in January as well, and we saw it almost exactly. It was literally 32 in December and 32%. of our accounts were active in January, and we expected then to see a bounce back up, a significant bounce back up in February, and our average across February was actually 33 again. So that's sort of the reality, is the accounts were down at the bottom for a little bit longer. But those were pretty determined accounts, and we see them around the world. Like in France, we're churning away and generating... not too far off from plan, but we're doing it out of much fewer accounts. And in the United States, we saw in the back half of February the re-engagement and re-ignition of a number of these accounts. So those were only 32% of the accounts. In the back half of the month, revenues were way up. They went up about 30% the back half of the month over the first half of the month. or I should say the number of cases went up about 30% or revenues went up a lot more than 30% because a number of the accounts were beginning to stock up for planned cases. But if you look at just case volume, the back half of February was up 30% over the front half of February. And as you probably know, we have resolution on about two weeks of scheduling as we look out. And if you look at this week and next week, it's another 34% bump off of the prior two-week period. So this is what I was referencing before. In each of the last two waves, we've seen a pretty classical and steep ascent out from the bottom. And across this four-week period, the last two weeks of February, and the actual scheduled cases this week and next, you see it again.

Interesting. Thank you for that. That's super helpful. It kind of feels like you're almost back to levels that would suggest as long as you keep on the run rate of late February, early March, that's all you need to do to get to the guidance for this year. Um, I mean, I'm, I could be off there a little bit cause he didn't give us the specific revenue numbers for back half and front half of February, but you know, it feels like a nice recovery. Um, So one, am I directionally correct there? And two, where are we right now in terms of number of active centers? What is that percentage today? I'm sorry if I missed it in your response.

In February, the number of active centers in February or the percentage was 33%. So we're just reigniting those centers. So we still have, you know, if the norm is, 70%, then we would expect roughly a doubling as we go forward here of those centers being active to get sort of up into that range. I think the other thing that I think we talked about on the last call, there's sort of two elements to this. One is what proportion of our accounts are active? And I just gave you those data. And I can tell you that in every single case, they're down because of COVID. So there's not something else going on here. And then you have this sort of standard overhang. You may remember that our active accounts, you know, established accounts were running at about seven procedures per quarter once you get them up and running. And that in this phase that we're in, our established accounts are running at about four procedures per quarter. So we're not only looking to open up these accounts, but also to get them back up to sort of pre-COVID procedure levels. And I think that's what we started to see. We saw that acceleration in the existing accounts in the back half of February. And I expect, you know, we had a new account, a Kaiser account, a big Kaiser account, actually, that just did their first case today. And we're going to start to see more and more of our existing accounts come back online and additional new accounts come online.

Wow. That's great. That 33% seems to be using it quite a bit. That's impressive. Anyway, thanks for the detail. That's it for me.

Thank you very much.

Next question is from Rick Wise from Stifel. Your line is now open.

Good afternoon, gentlemen. Glenn, just maybe let's think about the, or maybe you could talk to us and give us more color on the 65 to 70% accounts who are not active. And my question really is, and I'm sure you're engaged with them, but what are they saying to you? Are they saying, are they giving you any indication of interest and what it would take to get themselves back online? And what do you sense is the holdup? Just maybe reflect on your, you know, the non-active doc and center interactions.

So one of the things you get, so we're super sensitive to ICU capacity and ICU consumption. And if you think about the shape of the curve, you know, sort of this, Rick, the last time, you're the guy that I spoke with last because you had a little conference that was a few days after the last call, and we were right on sort of at the base of the mountain. And we've gone all the way up that mountain in terms of sort of number of cases, and we've come back down almost to the exact same level when we spoke last. But think about another curve that's sort of pushed out, and that's the ICU curve. And so what happens is those beds tend to fill up, and they're not going to empty out for some number of weeks afterwards. So a lot of these hospitals are trying to make sure they they clear and have the ICU capacity, and then they just have to restart their engines. So one of the questions might be, you know, what are the indicators? Well, I think the best indicator is revenue, which is what I just, I mean, basically we've seen, I talked about cases in the United States, you know, 70% of our business is basically trunk stock. So it's, you know, our revenues reflect cases. But if you look at revenues, the numbers are even more impressive than the ones that I just shared with you. I mean, if you look at the back half, of February, revenues were 80% higher than they were in the front half. And that extra revenue was just stocking accounts, putting product on shelf, getting ready for procedures and so forth. So for me, those are really important metrics. But there's a lot of other indicators that point in that direction. I mean, if you look at it, You see an upward trend since the beginning of the year in terms of Stratix accumulations. You see an upward trend on the number of inbound calls into our treatment centers. We see an increase since the beginning of the year, again, an upward trend in web traffic where people are gathering information on the procedure. As I mentioned, we added some accounts. It's Pretty crazy time to be adding new accounts. We added 13 in the fourth quarter. And then, like I said, just the case volume, which we have visibility to as we look forward. Right.

You know, that's great. And I'm not sure this is a relevant question given or it's an answerable question given it's still such early days, but Just out of curiosity, clearly you're calling out again and again, Glenn, that Stratix is growing. It's got to be, I assume, growing more than implants. Is there a ratio of Stratix to implants that you'd want to share? I assume it would typically, or we'd expect it to be more than implant-based, but is it one and a half times normal, or is that a way to think about it?

It's just so hard to give. Those data right now, because of COVID and the faucet being turned on and off with regard to procedures, it's really hard to give you that information. And you got delayed cases. And we are building algorithms that look at the very question that we've already built them, but they get blown up by this. We had three major mountains that hit us of COVID across 2021. So the data that comes out of this when you start saying, well, wait a minute, we got the Stratix scan and then it hit by a wave and basically everything froze for three months and then they had to rewarm them. And, you know, does that mean that the normal time between the Stratix scan and treatment is seven months? No, it doesn't. You know, we don't know. I should say we don't know. That's what it was when you had all those big delays in the middle. But what you're asking for, yes, we are definitely digging deep, but I think we're going to have to get some clear sort of runway out in front of us to be able to gather what I would consider to be, you know, good data. Yeah. I can't tell you the trend lines up on all those things. So I feel, you know, when we last spoke, I was really anxious about what was ahead. And I feel infinitely more comfortable knowing that we're on the backside of this thing and I just saw it moments ago, Biden claiming that everyone's going to get vaccinated by the end of May. Who knows whether that's going to happen? But the point is, is that I think we're headed in a positive direction, and we've got a lot of indications that our business is lining up in that way.

Great. It's wonderful to hear. Two last quick ones. I'll ask them at the same time, just so Derek doesn't feel left out. I know, Derek, you're anxious to give us gross margin guidance for 2021. I mean, I sort of say to myself, okay, fourth quarter was a more, you know, pressured quarter than you might have expected. You still beat my gross margin number. I mean, why wouldn't 21 be at that sort of fourth quarter rate if, you know, if not better? But, you know, why wouldn't it be better, you know, given higher volume? And my last, I'm just curious, you didn't talk about weather, Glenn, at to what extent did weather have an impact on your January, February volumes? Maybe not at all. I don't know. But thank you very much.

I'll take the last question first. As staggering as that snowstorm was, and I'm sure we lost a few cases as a result, all my sales force is talking about is COVID restarts and so forth. So I think it got muted a little bit by the impact of of COVID restarts, but I'm sure we probably postponed some number of cases in various different locations. Derek, gross margin.

Yeah, that's a great question, Rick. So when we think about gross margins for 2021, there's a couple of important dynamics to consider. So first off, we were very happy to see our gross margin at 72%, which I think is one of the highest levels that we've ever seen in this last fourth quarter of 2020. Moving into 2021, there are two dynamics to factor in. One is that we're seeing a significant increase in stock-based compensation expense. So that clearly flows through the OpEx line, as I mentioned, and we're expecting $9 million of the OpEx guidance that I provided to you to be accounted for by this non-cash charge. Stock-based compensation also flows into our COGS through an increase in labor costs, and that gets capitalized into inventory and then comes through the P&L as we sell our inventory. So stock-based compensation expense-related costs to labor drag down our gross margins by about a percent next year. And then on top of that, we do have a couple of manufacturing-related initiatives and investments associated with helping to automate our supply chain and helping to mitigate risk through second sourcing, if you will. And some of those expenses also hit our COGS line next year. So that's the reason why we think we'll kind of start out at around 70% versus the 72% that we saw last quarter. But we do then expect to move up our gross margins steadily you know, by a point or so probably throughout the year as we continue to drive overhead absorption through our increased production volumes.

Thanks for all the color.

Next question is from Larry Bigelson from Wells Fargo. You may ask your question.

Good afternoon, guys. Thanks for taking the question. Just a few for me here. Derek, on OpEx, I think even when you adjust for stock-based comp, it's still the guidance is a little bit higher than we were modeling. So could you give us kind of an apples-to-apples number, the 85 to 90 for 2021 versus what it was, X stock-based comp, adjusting for that compared to 2020? And where is just color on where the incremental spending is going? And I had a couple follow-ups.

Yeah, so, you know, so stock-based comp in 2021, again, as I mentioned, you know, I think that's going to be close to $10 million, call it $9 million or so in contribution, right? So absent that stock-based comp, it was, you know, you're talking kind of $10 million lower, so, you know, kind of $70 million. 75 million or so to 80. And, you know, in terms of the stock-based compensation in Q in 2020, it was relatively low absent Q4, where we did see a significant contribution primarily from the ESPP program. And, of course, this is all related to kind of the very rapid appreciation of of our stock price. So, again, you know, I would, you know, take out about $9 million from our 2021 OPEX, and kind of that's what it would have been without this non-cash charge. Now, kind of in terms of where the OPEX spend is going to go, you know, I would think about kind of a, you know, a few million dollars step up sequentially between, you know, the $16.4 million that we did in in Q4 and what we think we'll do in Q1. And that kind of initial step up is, again, public company costs and incremental stock-based comp charges. And then I would expect to see kind of, you know, a continued slight increase in OPEX through the remaining three quarters of the year. And that OPEX is primarily driven by an increase in kind of personnel-related expenses much of which is related to our commercial expansion of our commercial organization, our commercial infrastructure, as well as some G&A. And then on the R&D front, spend towards our clinical study costs associated with aerosol, again, increasing through the back part of the year, is a major driver for that expense.

That's very helpful. And Just two last ones for me here. What are the next steps in AeroSeal? Just kind of congratulations on the breakthrough status, but what's the path forward here? And just lastly, Glenn, any update on Japan? Thanks for taking the questions.

Yeah. So with regard to AeroSeal, as we've talked about before, we're executing a study in Europe when we last spoke I think we had maybe an ethics approval. We've got a number of them now. We've got three sites that have been activated. We've enrolled a few patients already. So we're off and running on that trial. So that's where we are. We're also planning on submitting an IDE in the U.S. later this year specific to Aracel. So we're marching along. That's something that we are very interested and excited about, but it's off on the horizon. You know, I think sort of best case U.S. market entry at the end of 2024, almost certainly 2025. Probably, we certainly expect OUS before then, but probably sometime during 2024. So those are things that are out in front of us and we're working hard on. With regard to Japan, That, too, is something that we're very focused on. I think we're on schedule as it relates to what we talked about probably the last time, which is to say that we are planning on submitting our application to PMDA later on this year, and we see ourselves commercial sometime probably later in 2023. Thanks for taking the questions, guys. Thank you, Larry.

Operator, are there any questions, further questions?

Operator, it looks like we have one more question on the queue.

Hello, can you hear me?

Yes.

All right, your last question is from Bill Plavonic. Your line is now open.

Thank you.

Excuse me, Mr. Bill Plavonic, you may ask your question. Excuse me, Bill Plavonic, you may ask your question.

Yes, hi. Can you hear me? Yes. Oh, great. Thanks. Dead space there. Just a question on clarification, Glenn, is you mentioned that you're seeing high volumes at the centers that are active. And I guess my only question really coming out of this is, are you seeing patients that are transferring from one center to another in order to get a procedure completed? Or are these your existing customers or just becoming more active?

It is certainly more the latter than the former. We have seen the movement of patients from one center to another, but often it's a center that's not doing procedures, you know, sort of not a treatment center going to a treatment center, which was actually what happened today at a Kaiser clinic. where they were from one Kaiser location and moved to another to have the procedure. So that happens occasionally. And in the military hospitals, it often happens where they'll go to one of the local hospitals that's doing the procedure. But the higher volumes in existing centers, it may not be that it's possible that my resolution on number of accounts is not quite where my resolution is on revenues and case volume, but The indications that I have suggest that existing accounts are doing more procedures, which kind of makes sense to me. I think they just feel more confident as they move forward that there's not another wave that's going to hit, and so they're freeing up some patients on their waiting list is what I'm assuming. Okay.

Yeah, and to your commentary that the average, you know, kind of four per quarter versus seven, is that four at the active centers or four on all the centers? Because what I'm trying to get at is are you exceeding that seven at those active centers to doing eight or nine? And so when we do get the opening back up, what, you know, kind of what can that can translate to?

Yeah, these numbers are probably relatively steady state numbers. And what happens when you come out of here is you get these kinds of, you know, post wave, this being the third, I expect that those are going to be lumpy. And we'll have to see that over time, I expect that we will get back up to seven. During this sort of reemergence, I wouldn't be surprised that if people pull you know, some number off of a waiting list that they, you know, they may go above what they would normally do when they get back to steady state. So I don't think I have a real clean answer to your question.

Okay. Well, great. Well, thanks for taking my questions. I appreciate it. You bet, Bill. Take it easy.

I'll turn the call back over to Glenn for closing statement.

Great. Well, I don't really have a closing statement, but I really appreciate everybody's interest and ongoing support, and we're very excited about what's out ahead. We have navigated through some pretty challenging situations and are very pleased with kind of the fundamentals that we see aligned as we move forward. So thank you very much.

Ladies and gentlemen, that concludes this conference call. Thank you for participating. You may now all disconnect.