Pulmonx Corporation

Good afternoon and welcome to Pomonic's third quarter 2022 earnings conference call. At this time, all participants are in a listen-only mode. We will be facilitating a question and answer session towards the end of today's call. To ask a question, please push star 1-1 on your telephone to raise your hand and you'll hear an automated message saying your hand is raised. Due to time, we will only be able to do one question and one follow-up for today's call. As a reminder, this call is being recorded and will be be playing for purposes. I would like to now turn the call over to Lane Morgan from Gilmartin Group for the introduction comments.

Good afternoon, and thank you all for participating in today's call. Joining me from Pomonix are Glenn French, President and Chief Executive Officer, and Derek Sun, Chief Financial Officer. Earlier today, Pomonix released financial results for the quarter ended September 30th, 2022. A copy of the press release is available on the company's website. Before I begin, I'd like to remind you that management will make statements during this call that include forward-looking statements within the meeting 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 listed 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 quarterly report on Form 10-Q filed with the SEC on August 8, 2022. This conference call contains time-sensitive information and is accurate only as of the live broadcast today, November 3rd, 2022. 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. And with that, I will turn the call over to Glenn.

Thank you, Lane. Good afternoon, everyone, and welcome to our third quarter 2022 earnings call. Here with me is Derek Sung, our Chief Financial Officer. We remain excited about the $12 billion opportunity to establish our clinically proven Zephyr Valve Therapy as standard of care for the over 1 million patients around the world who suffer from severe emphysema and are profoundly short of breath despite high-dose medications. Over the past two and a half years, our business has been severely impacted by COVID surges, killing ICU beds and negatively impacting our procedure volumes. Thus, we are pleased to see that looking forward, despite the continued prevalence of COVID, healthcare systems in most places are adapting to the new normal and we're moving into a more predictable macro environment for our business. Reflecting on the third quarter, we generated worldwide sales of $13.5 million, representing growth of 2% year over year and 7% on a constant currency basis, with $8.4 million coming from the United States, representing growth of 22% compared to the same period last year. While we feel we are moving into a more favorable, steady state, our business in the third quarter was negatively impacted by continued foreign exchange headwinds, in addition to two key dynamics, which we've mentioned on our last call, hospital staffing constraints and seasonality. Hospital labor constraints, while not getting any worse, continue to limit procedure capacity and reduce patient screening across the geographies we work in, and we expect this dynamic to persist into next year. Meanwhile, summer seasonality was more pronounced than we have seen in the past, particularly in Europe. Looking ahead, we remain focused on creating the market for our Zeprovalve therapy, which addresses an unmet need for over a million severe emphysema patients globally who have very few alternatives available to them and is backed by unparalleled clinical evidence. Specifically, we will focus on the three-pronged commercial approach, which we have previously discussed, to drive growth and penetration of our solution. First, training and launching new accounts, that we believe have the potential to be strong Zephyr valve centers. Second, increasing the efficiency and scalability of our base, particularly among our newest accounts, by working hand in hand with our physician and administrative champions to expand procedural capacity. And finally, increasing center utilization by building local awareness of the benefits of Zephyr valves with patients and physicians thereby developing a strong referral network. In terms of account openings, we added 13 new accounts in the US in Q3, bringing the total number of US treatment centers that are performing Zephyr Valve procedures to 261. Even with the seasonal impact from the third quarter, we anticipate ending the year with about 275 total US treatment centers. Meanwhile, we've gained greater visibility into the state of our treating centers as pandemic-related pressure has subsided and staffing-related constraints have become clearer. It has become evident that we need to continue to focus driving efficiency and scalability across our account base and that it will take longer to bring accounts up to maturity. Over the past two quarters, we've seen a strong recovery in procedure volumes at our well-established sites but utilization across our less developed accounts was more intermittent than we had expected. With many respiratory care programs thinly staffed and overstretched, we see opportunity to improve program efficiency and scalability by taking all of our accounts through a series of training and site readiness processes that we have found to be effective at our more developed accounts. In support of these efforts, we have allocated additional field marketing sales and patient access resources to support account development and have adopted a new tracking system to measure our success in implementing best practices with our customers. We expect the impact of these programs to be increasingly evident over the next few quarters, and we have confidence that these efforts, combined with a more normalized operating environment for our customers, will allow us to further enhance procedure rates across all our accounts. Meanwhile, within our more developed accounts, we are also seeing early returns from our efforts to educate referring physicians who manage large populations of COPD patients. We know who these folks are, and we are working to both provide information on our treatment and introduction to the treating physicians in area hospitals. Remarkably, when we meet with a referring physician and educate them on our therapy more than half the time, that physician refers a patient to a treating physician within six months. We believe we have a strong playbook that will drive penetration across accounts while expanding our base of more developed accounts. However, given the increased time needed to fully develop our accounts, coupled with the ongoing hospital staffing dynamics and foreign exchange pressure, We are moderating our full year 2022 revenue expectation to now be in the range of 51.5 to 52.5 million, and we expect global revenue to grow approximately 20% in 2023. In the third quarter, we continued to make significant progress in expanding our addressable market as we grow our commercial footprint and introduce our treatment to new patient populations around the world. We are celebrating a major milestone in our strategic initiative to expand our global footprint. The Japanese Ministry of Health, Labor, and Welfare, MHLW, agreed to approve Zephyr valves to treat severe COPD emphysema patients in Japan following a special panel meeting on October 3rd, 2022. We look forward to bringing our treatment to patients in Japan following the establishment of reimbursement, which we expect in late 2023. As a reminder, we estimate Japan to be a billion-dollar market opportunity with approximately 100,000 patients who stand to potentially benefit from our treatment. Also in the third quarter, we saw two very encouraging data readouts associated with our AeroSeal clinical development program. As a reminder, we are developing AeroSeal to expand the addressable market of our Zephyr Valve solution to severe emphysema patients not currently eligible due to the presence of a gap in the fissure separating lobes of the lungs, which results in collateral ventilation or airflow between these lobes. This collateral ventilation prevents the target lobe from deflating when Zephyr valves are inserted. Approximately one out of every five patients who undergoes our chartist assessment is deemed ineligible to receive Zephyr valves due to the presence of collateral ventilation. AeroSeal is a polymeric foam that is delivered via a bronchoscope to seal the airways leading to the fissure gaps between lobes of the lung, potentially enabling treatment of patients who were previously ineligible for valves due to collateral ventilation. At the European Respiratory Society International Congress in Barcelona, Spain, interim findings from our CONVERT multicenter trial showed that treatment with Aracil in the first 40 patients of the study successfully converted 78% of patients to having little to no collateral ventilation. And these patients were subsequently treated with Zephyr valves with successful volume reduction in the target lobe of the lung. The CONVERT trial is ongoing, and we expect it to be complete to complete enrollment next year with final data presented in 2024. Learnings from the CONVERT trial continue to inform the design of our US IDE protocol, which we are discussing with FDA and expect to initiate sometime next year. Also in the third quarter, the full data set from a single center feasibility study in Australia was published in the Journal of Respirology. Results demonstrated that aerosol not only successfully closed collateral air channels to allow patients with collateral ventilation to be treated with Zephyr valves, but that these treated patients showed clinical outcomes comparable to patients without collateral ventilation who were treated with Zephyr valves. Both the preliminary convert trial data presented at ERS and the published Australian study data bolster our belief that Aracil could offer a compelling solution to expand our Zephyr valve therapy to patients who are today not candidates. In summary, we have taken steps forward on multiple market development initiatives, expansion of our global footprint, and our clinical development pipeline. We anticipate growing our market presence by driving site efficiencies across our account base and increasing utilization in our more developed accounts by geographic expansion and through broadening the array of patients who we are able to treat with our technologies. Our progress across these initiatives, along with substantial increasing patient interest in Zephyr valves, Limited competition in the field and our financial strength provides us with continued optimism for our long-term growth potential. With that, I'll now turn the call over to Derek to provide a more detailed review of our third quarter results.

Thank you, Glenn, and good afternoon, everyone. Total worldwide revenue for the three months ended September 30th, 2022, was $13.5 million. a 2% increase from $13.3 million in the same period of the prior year, and an increase of 7% on a constant currency basis. U.S. revenue in the third quarter was $8.4 million, a 22% increase from $6.9 million during the prior year period. The growth in U.S. sales reflected continued commercial momentum in adoption of our Zephyr valve therapy, which was slowed somewhat by ongoing hospital staffing constraints. International revenue in the third quarter of 2022 was $5.1 million, a 20% decrease from $6.4 million during the same period last year, and a decrease of 10% on a constant currency basis. Our international markets experienced a more pronounced summer slowdown that materialized earlier in July and lasted longer through September than we have previously seen. We attribute this unusual impact to already thinly staffed teams that saw this summer as the first opportunity for an extended holiday since being on the front lines of the pandemic for the past two and a half years. Gross margin for the third quarter of 2022 was 75% compared to 73% in the prior year period. The year over year expansion in gross margin was primarily driven by production efficiencies. We expect gross margin to remain between 74 and 75% next quarter, as foreign exchange impact continues to offset gains in production efficiencies. Total operating expenses for the third quarter of 2022 were $24.1 million, a 23% increase from $19.5 million in the third quarter of 2021. Non-cash stock-based compensation expense was $4.1 million in the third quarter of 2022 and accounted for 30% of the increase in operating expense from the prior year. As a result of our efforts to prudently manage expenses while continuing to invest to drive growth, we are reducing our operating expense guidance for the full year 2022 to $98 to $100 million inclusive of approximately $16 million of stock-based compensation expense compared to our prior operating expense guidance of $100 to $105 million. R&D expenses for the third quarter of 2022 were $4.4 million, compared to $2.8 million in the same period of the prior year. The increase was primarily due to clinical and development costs related to our ARISIL program, as well as an increase in stock-based compensation expense. Sales, general, and administrative expenses for the third quarter of 2022 were $19.7 million compared to $16.7 million in the third quarter of 2021. The increase was primarily attributable to an increase in sales and marketing expenses as we expanded our commercial team and increased commercial activities, as well as an increase in stock-based compensation expense. Net loss for the third quarter of 2022 was $14.2 million, or a loss of 38 cents per share, as compared to a net loss of $10.2 million, or a loss of 28 cents per share for the same period of the prior year. An average weighted share count of 37.2 million shares was used to determine loss per share for the third quarter of 2022. Turning to our balance sheet, we ended September 30th, 2022 with $157 million in cash, cash equivalents and marketable securities, a decrease of $10 million from June 30th, 2022. We remain on track to reach cash flow break even in our current operations with the capital that we have on hand and continue to manage our business to maintain a cash runway of at least three years of forward cash burn until we turn cash flow positive. We've also taken a couple additional measures to provide us with balance sheet flexibility. We recently refinanced our existing $17 million term loan to extend the maturity date out by another five years with at least two additional years of interest only payments and have secured optional access to an additional $20 million in debt financing of which we have no immediate plan to draw down. We also just filed a shelf registration statement on form S3 with the SEC, which we view strictly as a matter of good corporate housekeeping. Finally, turning to our outlook for 2022 and beyond. As Glenn mentioned, we are lowering our full year 2022 revenue guidance to be in the range of $51.5 to $52.5 million, compared to our prior guidance of $55 to $60 million that we communicated at the start of the year. Our updated guidance reflects a foreign exchange headwind to global sales growth of approximately 5% for the full year, which is significantly greater than what we anticipated when we set our initial guidance. and now also reflects our understanding of the ongoing hospital staffing constraints and the additional time required to scale our accounts in this new environment. As Glenn discussed, we believe that we have the programs in place to drive the required scale efficiency and procedure volumes in our new and existing treatment centers, but the time required to do so is slightly longer than we previously anticipated. Accordingly, we expect to grow 2023 revenue around 20%. As usual, we will be providing full details of our 2023 outlook when we report our Q4 earnings next year. And with that, I'd like to thank you for your attention, and we will now open up the call for questions. Operator?

Wonderful, and thank you. Just a reminder, again, if you have a question and you'd like to raise your hand, please press star 1-1 on your phone and wait for your name to be announced. Again, with the limited time that we have, we only have time for one question and one follow-up. Please stand by as we get the first question up here.

Our first question comes from Rick Wise from Stifle.

Go ahead, Rick.

Thanks a lot. Good afternoon, Glenn. Hi, Derek. Maybe I'm going to start with the 2023 outlook. You're one of the few that's sort of brave enough to give us a number and a guide. Maybe talk, if you would, a little bit about your thinking there. You know, just the back of the envelope math, as I look at it, given your 22 guide, it looks like you're talking about a fourth quarter that might be in the $13.5 million, $14 million range. And when I think about the implied number for 2023 in the low 60 million kind of range, that's sort of, when I think about annualizing the fourth quarter, that really doesn't show a lot of growth. And help us better understand your caution there. And this is a long, I'm going to ask one question. I'll just throw a lot into it. But when I see the number of, centers, you've expanded your plans to drive efficiency and scalability. It does seem like a cautious initial stab at a 23 number. Any thoughts in color there would be very appreciated. Thank you.

Hi, Rick. How are you? This is Glenn. I think it's reasonable to characterize it as a cautious number. I think it's very important to us that we set out things that we don't like to have calls like this one where we're reporting on things that we didn't deliver in the way that we said that we would. We look at next year in a very general sense. as, as driving, uh, about 25% growth in the United States and about 15% growth outside the United States, which, which blends to just over 20%, you know, sort of the back of the envelope number. And, and we, um, we, we really want to be sure that, um, I'm going to ask Derek in a moment to, to, to add anything he has here, but we want to make sure that, um, that we're building something that's brand new. We're not going in and swapping out somebody else's treatment. We have learned that it takes a little bit longer to establish the fully developed accounts the way that we need to. And we want to get some performance behind us before we get too aggressive on the growth numbers. One of the things that we are absolutely certain of is that this is a very large opportunity. And we have things lined up, we believe, in a very good way in terms of all of the elements. And we do expect that we're going to tap into this. It's just taking a little bit longer. Derek, do you have anything you want to add to that?

Sure, Glenn. I'll just add that, you know, from a macro perspective in terms of the way that we're thinking about this, and I do like the way that you've characterized this, Rick, as an initial stab because this is an initial stab. We wanted to provide some directional guidance. clearly we will be providing a much more refined look and we'll have a much better visibility on our next quarter call. But, you know, from where we stand today, from a macro perspective, I think the good news is that we are kind of moving out of this pandemic stage of COVID and moving into a more stable environment, you know, where we don't expect to see kind of the en masse shutdowns that we've seen previously as COVID surges come through. And this has given us kind of some of the visibility and uh, and runway to, to, to understand what we need to do to, to, to more methodically develop this, this market. Um, from macro perspective, you know, we do expect that foreign exchange will remain a headwind, um, at least through the first three quarters of the year of exchange rates stay where they are. So that's, uh, going to drag down our, our global growth with 40% of our total sales coming from outside the U S. Um, And then we do expect that some of these hospital staffing constraints that are continuing to persist through the end of this year will continue to persist into next year. And that's affecting our outlook as well. So that's the additional commentary I'd provide.

I'll stop there. Thanks so much.

All right. And again, if you have any questions, please press star 11 on your phone pad so we can put you into the call. All right, our next question comes from Jason Bednar from Piper Sandler. Go ahead, Jason.

Good afternoon. I wanted to start here on the implied guide for the fourth quarter. I think the revenue here would suggest the international business is still going to remain pretty sluggish, but I guess I'm trying to reconcile that against the commentary that we're moving into a more predictable environment. It seems like something's changed and maybe become a little bit less predictable, or it's simply that we've realized that it takes a little bit longer to get some of these accounts going. Fully appreciate the staffing issues and the seasonality that we had in the third quarter, but coming back to the fourth quarter, can you help us understand you know, why the business wouldn't show better constant currency growth than what we're seeing here in the third quarter.

Yeah, so, Jason, we are – I think we're moving into the fourth quarter. We're entering the fourth quarter in really good shape. We exited the third quarter – you know, in a way that was, I think, that was strengthening. And October was a good month for us. So we look ahead. And I think one of the things that keeps us on our toes is we do have some history, particularly outside the United States, of things really slowing down around the holidays. In the United States, we give up the better part of three weeks to the holidays. And so I think that's integrated into our guidance. But having said that, we entered the quarter in a pretty solid place. And I just think we're anticipating that we're going to have some soft weeks as we get near the end here.

Okay. All right. And then maybe picking up on Rick's question, the follow-up, you know, looking to 2023 and thinking about that 20% growth commentary for next year, you know, I agree, it is very helpful and I commend you for stepping out and giving some kind of guidance when a lot of other companies are waiting here a few more months to do so. But I guess it would seem like the challenges here in the second half that we're seeing here in the second half of 22, from a growth perspective, those might maybe then extend into 2023, maybe the first quarter, the first half. So really just wondering if as we try to fine tune things, You'll see if you'd be willing to expand on how you see the growth coming together first half versus the second half of 2023. Thank you.

Yeah, thanks, Jason. This is Derek. I think that's well characterized. You know, when we provide our forward-looking guidance for 2023, and again, it's our initial stab, I think we are looking at the dynamics that we're seeing in the back half of this year. What we're seeing here in the back half of this year is really the first opportunity. We now have kind of two quarters, which isn't a lot, but we have two quarters of kind of visibility post this pandemic era of COVID to get a better sense for where our accounts are and how they're developing and kind of what the ongoing constraints may be. And we essentially kind of expect to see kind of the same dynamic that we're seeing in the back half of this year extend into at least the first half of So that's kind of where we don't want to get ahead of our skis. And, you know, certainly we're not expecting 2023, the first half of 2023, to look anything like the first half of 2022, right, where we saw, you know, just a mass shutdown of procedure volumes in the first quarter when that last major surge came through. But I think we're expecting kind of the dynamic that we are seeing currently in this back half with continued constraints and taking a bit longer to develop Our accounts, we expect it to extend into the first half of next year, and that's driving some of the outlook that we're providing in 2023. All right.

Our next question comes from Bill. Go ahead, Bill.

Hi. Yes, this is Zachary Day. I'm for Bill. My question, and thank you for taking my question, is Do you have any commentary on the Strat-X and what you're seeing with that in regards to the new patient flow at the top of the funnel? And how should we think about, I guess, that in regard to COVID specifically, if there's a connection?

Sorry about that. I was on mute. The Stratix numbers are looking strong, particularly outside the United States. It's an interesting and encouraging sign that our Stratix numbers are looking as strong as they are, particularly in markets where the procedures are presently pretty depressed, places like Germany and France relative to prior year. So I think we're seeing that both in the US and outside the United States, which gives us optimism about what's ahead. But with regard to COVID, I think the short answer is as we look ahead, we don't see a significant reduction in our ability to deliver Stratix scans as a result of COVID. It could be that, you know, staffing could provide some challenges along the way. But the challenges that we face with staffing aren't really specific to Stratex. It's much more likely to be impacting the pulmonary function testing that needs to happen before the cardiac testing that needs to happen before the the pulmonary rehabilitation that has to happen before one of our procedures and so forth, as well as the team that executes the procedure. So there's multiple steps to our process. Stratix is pretty straightforward because keep in mind what feeds into Stratix is the CT scan that is standard in terms of the diagnosis of a patient with emphysema. A patient shows up, says, I'm short of breath. The doctor says, are you a current or former smoker? And if the answer is yes, they immediately order a CT scan, look it over, see what the tissue density is, diagnose the emphysema. And if the distribution looks like they might be a good candidate, then that data flows into Stratix. So I don't think that COVID is a real big impact on Stratix, particularly as we look ahead.

Okay, got it. That makes sense. Thank you for clarifying that. And if I could follow up. So you cited like 5% on the FX headwinds for Q3. It was around the same for Q2, and you said that Q3 was higher than you expected. And do you think that those headwinds are going to be roughly the same moving forward into 2022?

Q3 for a little bit so you think around like five percent like if we were going to have a specific figure does that seem fair yeah so so let me just clarify that so so um so yeah so FX uh on a global basis impacted Q3 about five percent that was similar to Q2 my commentary um was uh in relationship to uh our moderation of our guidance for the full year of of 2022 so when we set our guidance at the beginning of this year, we were not expecting a 5% global headwind to year-over-year growth by any means. It was, you know, we were looking at something on the order of a couple percent. So that is the greater than expected that I was referring to. I would expect that in Q4, we'll probably see a similar sort of 5%-ish headwind to growth and through the first three quarters of 2023. If you look at the exchange rates, I mean, they're almost linear downwards through from Q1 to Q3. So even if assuming things stay the same, I would expect next year we'll see, if things stay the same, we'll see something less than 5%, but it's probably closer to 3%. I think you're going to see a similar sort of drag in the first two quarters. And then again, assuming FX stays at current rates, it might level off a little bit more in the back half of 2023. So right now where we stand, we estimate it'll be maybe 3% to global growth. Yes.

All right. Thank you. Again, just another reminder, if you would like to ask a question, please press star 11 on your telephone and wait for your name to be announced.

Please stand by while we compile the Q&A roster. Our next question comes from Yogesh Parikh.

I have a question regarding aerosol. Is there any way you could give more color on aerosol for the US market and FDA timeline?

Yeah. We're in discussions with FDA, very, very deep in discussions. Essentially, we're moving forward on finalizing an IDE trial protocol that we will execute, a multinational study. It'll be like the CONVERT trial, very much like the CONVERT trial, and that'll be the path to getting U.S. approval. We expect that that study will commence next year. We expect that in 2025, 2026, that product will get to the U.S. market. All right.

We're just waiting for a few more questions to come in for our speakers.

Again, to ask a question, please press star 11 on your telephone and wait for your name to be announced.

All right, so it looks like there's no questions at this time.

Thank you for participating in today's conference call. This does conclude our program you may now disconnect.