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spk00: Good afternoon and welcome to PROSEP Biorobotics Third Quarter 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, as a reminder, this call is being recorded for replay purposes. I would now like to turn the conference over to Matt Baxo from Gail Morton Group for a few introductory comments.
spk07: Thanks, operator. Good morning, and thank you for participating in today's call. Joining me from Procept Biorobotics are Reza Zadnow, CEO, and Kevin Waters, CFO. Earlier today, Procept released financial results for the quarter ended September 30th, 2021. 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 limitations, those relating to our operating trends and future financial performance, the impact of COVID-19 on our business, Expense management, expectations for hiring or growth, market opportunity, revenue guidance, commercial expansion, and future product development and approvals 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 implied by these forward-looking statements. Accordingly, you should not place under 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 final prospectus filed with the SEC pursuant to Rule 424B4 on September 16, 2021, in connection with our initial public offering. This conference call contains time-sensitive information and is accurate only as of the live broadcast on November 4, 2021. Procept by Robotics 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 will now turn the call over to Reza.
spk03: Thanks, Matt. Good afternoon, and thank you for joining us. I would like to acknowledge that this is our first earnings call since we completed our IPO and listed on NASDAQ in September, where we raised approximately $172.4 million in net proceeds. I would like to take this opportunity to say thank you to all those who participated in the offering and to those who invested in the company since. I would also like to again thank the entire Procept team, our board of directors, and most of all, our patients, and the clinicians who care for them. With all of your support, we are well positioned to take the next steps toward our goal of making aqua ablation therapy the standard of care for prostate enlargement, or BPH. Moving to our quarterly revenue results. Our revenue for the third quarter of 2021 was $8.7 million compared to $2.1 million for the third quarter of 2020. In the third quarter, U.S. AquaBeam system revenue was $5 million, U.S. handpiece and consumable revenue was $2.2 million, and total international revenue was $1.3 million. We ended the quarter with a U.S. installed base of 75 AquaBeam robotic systems. We are very pleased with the commercial traction we have achieved following the recent Medicare coverage decision which became effective at the end of 2020. While we are still very early in our commercial launch, we believe our robust clinical data, outstanding real-world patient outcomes, and rapid early adoption indicate that hospitals, surgeons, and patients see the benefits of our robotic system and that we are on the right path and our strategy is working. We are seeing strong utilization from existing customers with even a few accounts having converted most of their respective procedures to aquabulation. On today's call, I want to provide some additional background on the company, and Kevin will later provide additional detail on our quarterly financial results and provide our fourth quarter revenue guidance. However, I first want to address two topics that have had a broad scale impact across the medical device industry. First being COVID. While we recognize the macro impact on elective procedures due to increased COVID cases and staffing shortages in the United States, we saw only a handful of customers affected and temporarily halt cases. That said, our ability to achieve our plan was relatively unaffected both on handpiece and system revenue. We continue to take proactive steps as this is an area we monitor very carefully. Second is the disruption associated with the global supply chain and its impact on medical device companies. Earlier in the year, we made the decision to increase our inventory levels, and we believe we have sufficient material on hand to meet current demand. We are also actively working with our manufacturing partners to ensure adequate product on hand in order to meet our growth forecast. While we do not expect supply chain issues to have an impact on our ability to meet our revenue plans, we continue increasing inventory levels for certain components to mitigate any future risks. Before moving to our financial results, I would like to provide a brief introduction of our company to those who did not have a chance to hear our stories during the IPO Roadshow. Procept Biorobotics is a surgical robotic company with the mission to become the BPH standard of care. In the United States, there are approximately 40 million men impacted by symptoms of BPH, and we expect this number to keep increasing as the population of men above the age of 65 is expected to double in the next 10 years. BPH is the number one reason men visit a urologist, and almost all men suffering from BPH say it impacts their lives. whether it's waking up multiple times throughout the night to empty their bladder or completely avoiding social events altogether. Out of the 40 million men impacted by symptoms of BPH in the United States, there are about 12 million who are actively being managed. Specifically, roughly 4.3 million are watchful waiters, 6.7 million are actively taking medications, while 1.1 million are pharmaceutical fallouts, and only 400,000 undergo some form of surgical intervention. As you can see, there is a significant unmet need and a very large market. The reason patients forego treatment is the dilemma they face with the tradeoff between safety and efficacy. Legacy treatment options, including pharmaceuticals or surgical interventions, whether resective or non-resective, present tradeoffs. And in most cases, the patient does not have a choice for treatment due to the prostate size and shape. For example, a patient can choose a less invasive or safer treatment option, but will most likely receive a lower impact of efficacy. Additionally, if a patient chooses a surgical intervention, he will experience a high level of efficacy and may be willing to accept sexual function side effects as well as potential incontinence issues. Based on the data supporting our FDA clearance and real-world experience, we believe our aqua ablation therapy is poised to become the treatment of choice for BPH, as it does not require compromising between safety and efficacy. Our robotic solution seamlessly integrates image guidance, customized treatment planning, and automated robotic surgery utilizing a heat-free water jet to prevent surrounding tissue damage. This innovation is the only FDA-clear technology that can consistently treat the entire range of crossfit sizes and shapes, and it is independent of the surgeon's experience. The robotic aspect of the procedure enables consistency and predictability in surgical techniques and outcomes. We have compiled three core studies that demonstrate efficacy, safety, and durability across prostate sizes and shapes and surgeon experience. This includes our water study, the only FDA pivotal study randomized against TURB, which is considered the historical standard of care for treating BPH. The study proved superior safety due to low irreversible complications and also superior symptom relief for prostates in the range of 50 milliliters or greater. Following this study, we performed our WATER-II study, which is the only prospective multicenter study successfully completed for large prostates between 80 and 150 milliliters. Similar to WATER, we became the only treatment for large prostates with a low irreversible complication rate and significant symptom relief. Our third study, Open Water is the first multi-center, all-commerce study with real-world results that validates the aqua ablation therapy's safety and efficacy in prostates ranging from 20 to 150 milliliters. Aqua ablation therapy is clinically proven to consistently remove prostate tissue independent of prostate size, anatomy, or surgeon experience with a low risk of irreversible outcomes. Thus, we believe Procept has cracked the code and offers the only solution for men suffering from BPH that is both safe and effective. Thanks to our robust clinical data, publications, and strong KOL and society support, we have made significant progress in all three parts of reimbursement, coding, coverage, and payment. On coding and payment, we have a unique water jet resection CPT code for the procedure that provides reimbursement to the physician and is mapped to an APC level that provides adequate reimbursement to the hospital performing aquabulation. On coverage, as of January 2021, aquabulation has positive coverage policies from all seven Medicare administrative contractors, making aquabulation available for Medicare patients nationally which we estimate represents about half of all hospital-based resective procedures. We also have positive private payer coverage from Anthem, Humana, Healthcare Service Corporation, Blue Cross of Massachusetts, Emblem, and most recently Cigna, which became effective on September 15, 2021. In the U.S., Since January of 2021, we have seen significant momentum in AquaBeam sales, and we believe that is directly related to increased coverage and our core strategy of targeting high-volume hospitals. Our product offering consists of a robot, a single-use handpiece, and an annual service contract. We believe our business model with AquaBeam robotic system and recurring disposable revenues enables an efficient commercial model. We believe both of these factors are strong drivers for our growth. Our initial commercial strategy is to target the 860 high volume hospitals in the U.S. that account for roughly 70% of all resected BPH procedures or about 180,000 cases. Although a high volume hospital is defined as a center that does more than 100 cases per year, These hospitals on average do more than 200 per year. This is a great starting point for us, and we are seeing good penetration and adoption in these centers, particularly since Medicare coverage became effective in January. In order to efficiently target our customers, our commercial approach has been to bring together a team consisting of capital sales reps whose function is to sell our system to increase market penetration while aqua ablation reps focus on educating and training surgeons to drive increased utilization. Lastly, our clinical support staff's function is to support cases and ensure an excellent customer experience. In summary, I believe aqua ablation therapy can truly revolutionize the treatment of BPH. We can consistently treat any prostate size and shape using our robotic irrespective of physician skill. Additionally, we have the first of its kind technology backed by compelling clinical data, favorable reimbursement, KOL support, and a proven commercial strategy. With that, I will turn the call over to Kevin.
spk04: Thanks, Reza. Procept's revenue for the third quarter of 2021 was $8.7 million compared to $2.1 million for the third quarter of 2020. The increase was primarily driven by US revenues, including both system sales to new and existing hospital customers and increased handpiece revenue. In the third quarter, US system revenue was $5 million compared to $600,000 in the third quarter of 2020. In the US, we sold 14 AquaBeam systems and saw average selling prices above $350,000. This represents an increase from both prior year and second quarter 2021 levels. Our ending third quarter US install base was 75 AquaBeam systems. Prior to obtaining Medicare coverage in January 2021, we did place numerous AquaBeam systems under evaluation agreements as compared to a direct sale. Of the 75 systems in our install base, we still have approximately 20 systems under these evaluation arrangements. Even though our install base of evaluation systems represents a near-term revenue opportunity, we are encouraged that over half of our system sales in the third quarter were to new accounts that previously did not have an evaluation system. We expect new accounts to comprise the majority of system sales moving forward, and we are anticipating approximately half of the 20 systems under our evaluation agreements do not convert to a sale. Turning to handpiece revenue. U.S. handpiece revenue was $2.2 million compared to $500,000 in the third quarter of 2020 and $1.7 million in the second quarter of 2021. Handpiece revenue growth was driven primarily by increases in monthly utilization measured by handpieces sold per account compared to the second quarter of 2021. We shipped approximately 840 handpieces in the U.S. in the third quarter. International revenue for the third quarter was $1.3 million compared to $1 million in both the third quarter of 2020 and the second quarter of 2021. This was primarily driven by modest increases in both system and handpiece revenue. Gross margin for the third quarter of 2021 was 48.9% compared to a negative 1% in the third quarter of 2020 and 42.2% in the second quarter of 2021. On a sequential basis, consolidated gross margin improvement was driven primarily by increased system average selling prices. Total operating expenses in the third quarter of 2021 were $17 million compared to $10.9 million in the same period of the prior year and $16.8 million in the second quarter of 2021. This was primarily driven by increased sales and marketing expenses as we expand our sales organization and G&A expenses associated with supporting a larger, growing public company. Net loss was $14.1 million for the third quarter of 2021 compared to a loss of $12 million in the third quarter of 2020. Our cash and short-term investment balance as of September 30th was $320.5 million, while our long-term borrowings totaled $50 million. We believe our IPO proceeds will provide the liquidity and capital resources needed to support and grow our current business. Moving to our financial guidance. We expect fourth quarter total revenue to be in the range of $8.7 to $9 million, which would result in full year 2021 revenues of $33 to $33.3 million. Given that we are still in the early stages of expanding our sales force following our IPO, we expect fourth quarter AquaBeam system unit sales to be comparable to the third quarter of 2021 levels, and we would remind you that system unit sales can vary from quarter to quarter. Regarding system average selling price trends, we continue to expect pricing to vary given the early stage of our commercial launch and expect fourth quarter pricing to be in the $330,000 range, which is consistent with year-to-date actuals. Additionally, we do not expect to realize any meaningful utilization benefits in the fourth quarter from the recent Cigna policy coverage. However, we are forecasting a slight increase in hand pieces sold per account in the fourth quarter compared to the third quarter. At this point, I'd like to turn the call back to Reza for closing comments.
spk03: Thank you again for your time today. Kevin and I look forward to meeting many of you at future investor and industry conferences, as well as individual meetings. Have a great day. And at this point, we will take questions. Operator?
spk02: Thank you. Ladies and gentlemen, if you'd like to ask a question at this time, you will need to press the star, then the one key on your touch-tone telephone. To remove yourself from the queue, you may press the pound key. Please stand by while we compile the Q&A roster. And our first question, coming from the line of Josh Jennings with Cowan, your line is open.
spk05: Good afternoon. Thanks for taking the questions, and congratulations on a strong quarter out of the gate here from the IPO. Resident Kevin, I wanted to just ask about the reimbursement landscape. It's evolving very nicely, as you stated in your prepared remarks, Resident. The additional coverage policy decision by Cigna came earlier than expected. Can you help us understand what's on tap in the private payer decision-making realm? Any timelines that we should be thinking about for additional positive coverage decisions?
spk03: Yeah, thanks, Josh. Yes, we are very happy with the progress we have made in reimbursement on all aspects, as I mentioned, coding coverage and payment, more importantly, the full Medicare coverage and Antem Humana and recently Cigna. We are in continuous communication with many payers, including United, and we'll be submitting our most recent literature as We're going to have follow-up data on five years so that we can change the policy to positive policy. So we are working with United and others, our healthcare economics and market access is in communication with them.
spk05: Excellent. And just to follow up, sticking with the theme on reimbursement, but just the the financial incentive that's in play for Medicare patients with the transitional pass-through payment. I was wondering if you could review those dynamics and then also share with us a level of reimbursement from the private payers as well. And the reason I'm asking is just thinking about the physician fee schedule that came out that may impact some of the non-receptive procedures and the office-based procedures and some of the manufacturers talking about those decisions driving some of the UroLift and Resume cases into the hospital outpatient setting. Is there a financial incentive in favor of optimization treatments in the HOPD setting relative to those non-receptive options as well? Thanks for taking the questions.
spk03: Yeah, thank you for this question. With the recent news that we heard in the past few days. Fortunately, our facility payment, APC level 6, remains at the level it was in the $8,400. The physician fee is in the range of $700 to $800, similar to TURB. So that was unchanged. So for 2022, our payment to the physician and the facility did not change. It stayed the same. And I'm sorry, what was the other part of your question?
spk05: I was just curious. I think some of your competitors with non-resective therapies.
spk03: Yeah, so as you know, we are in the resected market and we are targeting high volume hospitals. Our procedures are done in the hospital setting and they were not impacted. Some of the information were mostly on the office setting. So we are not in the office. We are in the hospital setting.
spk04: Josh, this is Kevin. I just add to that, as Reza mentioned in his remarks, you know, our initial commercial focus are frankly the receptive procedures. And we feel that from an economic standpoint at our levels, along with a transitional pass through, you know, we compare very favorably there. And, you know, really don't see much of an impact or expect much of an impact with the non-receptive procedures and any movement of that side of service should it occur.
spk03: Understood. Thanks for the answers, guys. And then the transit shop pass-through, that is until the end of 2022, that is still in place.
spk02: Our next question coming from the line of Amin Hassan with Goldman Sachs. The line is open.
spk06: Hello, thanks. Good afternoon and congrats on a nice start to your public life.
spk04: Thank you, Amin.
spk06: Sure. Maybe first just a clarification question. I think if we heard you right, the install base moved up by a couple units sequentially to 75. We were probably missing something there in terms of just half the units in the quarter having gone to new accounts. I suggest maybe there's some retirements. Is that what we're missing just to get to that number?
spk04: Yeah, that's correct. So we do have retirements of demo units. And what I had put forth in our prepared remarks is there's about 20 demo units left in the field of meat of the total 75 installed base. And right now we are forecasting that roughly half of those evaluation units do not convert to a sale. And I just think it's important to remember that, you know, we place these evaluation units to drive procedure adoption prior to having Medicare coverage. And what we're finding now is that when we have a direct sale, that typically includes buy-in from the hospital CEO, the physician, the reimbursement specialist, and they're fully committed and invested in their aquablation program, such that utilization in accounts for a direct sale are significantly greater than a demo program. And really, as we discussed during the roadshow, we expect to kind of be through the majority of this demo program by the end of our year and don't plan for this program to be very material to how we operate moving forward in 2022. Okay. Yeah, that's great.
spk06: And just as a follow-up, just to ask the question about kind of these Greenfield units, and that was a good number to hear, that half were in new accounts. And just given that we're all kind of getting to know you and hear how you think about kind of visibility, maybe talk to that funnel of new accounts who kind of exclude the evaluation units, you know, and just think about the green field. You know, how are you thinking about that funnel right now? How does it look like to you compared to what you just put up in this quarter, for example, and what we should expect as you further build out your sales portion exposure?
spk04: Yeah, so just in terms of funnel visibility, I mean, I think we feel we have a high degree of visibility into the Greenfield accounts in the funnel. As Rosa mentioned, you know, having over 860 hospitals, there's obviously a lot of opportunities. We've implemented robust CRM processes around how we're going to evaluate what's in our funnel. We have a stage gate funnel process to evaluate those. With our price point as well, I'd point out, being at our price point, we don't suffer from some of the same, I'd say, unpredictability that perhaps maybe larger capital equipment companies are subject to. With that said, Amit, we are going to have variability quarter to quarter in capital equipment sales on a sequential basis. And that's just the nature of the business. But the short answer is we have a high degree of visibility into our funnel.
spk06: Okay, great. Thanks so much, guys. Congrats again.
spk04: Thank you.
spk02: And as a reminder, ladies and gentlemen, to ask a question, you will need to press star one. And our next question coming from the lineup, Chris Pasquale with Guggenheim. Your line is open.
spk08: Thanks, and congrats on a great start here, guys. Reza, I thought your comments about not really being impacted by COVID or by the hospital staffing challenges were interesting because we've definitely heard from some other companies in the urology space, that that was a meaningful headwind for them this quarter. Do you think that you're just in too steep a part of your growth curve right now to really notice some of that macro stuff, or is there something about your business that you think shielded you from those issues?
spk03: Thanks, Chris. As you know, we are very happy with the utilization that we saw in last quarter. We can talk more about it. We are working with high volume hospitals and generally those are scheduled about one day a week. And we had very few of those accounts canceling cases because of COVID. Some patients had canceled because they had COVID, but overall the number of accounts that we were working with who had purchased equipment and scheduled cases those cases went through.
spk04: I'd also just add onto that, Chris, if you think of our business model, when we sell a new system to a hospital, as I think I just answered in my first question to Josh, that means the account is bought in. And with that, you know, we don't sell systems without having visibility into that account, having the ability to do procedures in the near term. And given how early we are in our growth curve, I think we're just not going to be as impacted, perhaps, as a more steady state business that doesn't have as high a rate of growth. That's helpful. Thanks.
spk08: And then could you just walk us through where you exited the quarter in terms of your U.S. Salesforce headcount, how you're thinking about, you know, where you're going to be at the end of the year and the impact that that has on your ability to ramp the top line in 2022?
spk04: Yeah, so where we ended the quarter, Reza bifurcated our sales force in his prepared remarks into robotic reps, aquablation reps, and clinical specialists. We ended the quarter with roughly 10, 10, and 10 in each of those buckets, which would be a total of 30. And we are currently in the process today of hiring additional capital reps and utilization reps. Many of those folks are already on board in the fourth quarter. The expectation is by the first quarter, the number – of robotic reps and aquablation reps will be approximately double where they were at the end of the third quarter. We're training those reps now. I would remind you, our expectation is that those reps, they really don't become productive until three to six months. But definitely, as we discussed on the roadshow, we felt given the coverage that we've obtained, that it'd be prudent to start hiring the folks for 2022 today. And that's what we've been doing. And we feel good that That sales force is going to be roughly double here as we head into 2022. Great. Thank you. No problem.
spk02: Our next question, coming from the lineup, Dania Antasa with SBB Lyric. Your line is open.
spk01: Hey, good afternoon, guys. Thanks so much for taking the question. Congrats on a good start to being a public company. Reza, my first question for you, I know it's early, but I'm curious if you can talk about how you're seeing physicians adopting aqua ablation. Like, where is it gaining share disproportionately? Is it from the resective surgery market? Is it from a little bit from the minimally invasive market? Are you getting any of those watchful waiters? Sort of how are you seeing this play out so far? And then I have one follow-up.
spk03: Yeah, thanks, Danielle. You know, as I mentioned in our clinical studies and remarks we made, the product is designed to treat prostates from small to very large prostate. It is independent of the size of the prostate, shape of the prostate, or surgeon experience. The logical place when accounts purchase the robot is for larger prostate, where currently those are more complex cases and there are less available treatments that they feel comfortable with. So they start with that. In fact, these are the most complex cases, but then as they do these procedures, they move to smaller prostate sizes. So they are using in very, and that is how we see in these accounts utilization going up because they start expanding this to smaller sizes from 30 all the way to 150 grams. And in fact, anecdotally, we see a few of accounts that have converted most of the receptive procedures to our case. And as physicians gain experience, that is where they go. In fact, that is our goal, our mission to become standard of care so that it covers the entire spectrum. It is from very small to very large, where we go are hospital resected procedures. So when we ask the same question from physicians, I mean, of course, 30 gram prostate, sometimes the answer we get is maybe terp, but it is really all prostate sizes.
spk04: I'll just add to that, Dana. I think it's important to remember the size of the resective market, right? Which, you know, hospital-based resective procedures alone are approaching 200,000 procedures. And in the near term, that's where we're hunting, and that's where we're going to get the majority of our share from.
spk01: Yep, appreciate that. Okay, thank you. And then my follow-up question is just on the CapEx environment in this world of COVID. and the AquaBeam is a capital equipment expenditure for these hospitals. Are there any hurdles that you're seeing from a purchasing perspective in getting hospitals on board with purchasing?
spk04: I don't want to say there's not hurdles because there's always hurdles whether we're in a COVID environment or not, but nothing in the COVID world has caused us to have delays or delays not be able to meet our internal plan for capital purchases. And again, I think I said our current average selling price year to date is around 330,000 US. And it feels that at that price point, we're able to run a very efficient capital sales process, meaning that the hospital can approve a purchase of AquaBeam by the local CEO and CFO. It doesn't need to go to a further approval. And I think at this price point, that's what gives us a high degree of visibility into the funnel and to perhaps not run into some of those issues that a larger capital equipment company would have to deal with at a million-dollar-plus, for example.
spk01: Yep, makes sense. Okay, thank you, guys.
spk04: Thank you. Thank you.
spk02: We have a follow-up question from Josh Jennings with Cohen. Your line is open.
spk05: Hi, thanks for taking the follow-up. I really just wanted to clarify my second question initially because I did a poor job of framing it up. My question is really if some of the competitors with the non-receptive approaches are their argument to CMS to reverse this reimbursement decision to the final PFS and how it's going to be implemented over the next couple of years, but their argument is that surgeons will take their non-resective cases into the OR in the hospital outpatient department. And so is there an opportunity for the surgeon, if they're going to be doing cases, no matter the size of the prostate, in the OR for Aquabean to capture some of the non-resective opportunity earlier than initially expected? Sorry for the poor frame-up earlier, but I hope that corrects my thrust there.
spk03: You know, potentially, again, what is important to, first of all, it's a conversation between patient and the physician. What is important to many patients is durability. And that's what we are talking, no compromise between safety and efficacy. But that's more important. And once that conversation happens, because today there are, small prostates that are happening with aqua beam or other. So potentially the answer is yes, but the most important is that conversations between the physician and the patient about durability and safety of the product. Great. Thanks again. Thanks Josh. Thank you.
spk02: And I'm showing no further questions at this time. Ladies and gentlemen, that does conclude our conference for today. We thank you for your participation. You may now disconnect. Everyone have a great day.
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