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spk03: Good day and thank you for standing by. Welcome to the Q3 2022 Procept Biorobotics Earnings Conference Call. At this time, all participants are in listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 11 on your telephone. You will then hear an automated message advising your hand is raised. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Matt Fasco, Vice President of Investor Relations. Please go ahead.
spk12: Thanks, operator. Good afternoon, and thank you for participating in today's call. Joining me are Reza Zadno, CEO, and Kevin Waters, CFO. Earlier today, Procept released financial results for the quarter ended September 30, 2022. 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 sales and operating trends and future financial performance, 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 certainties that could cause actual results or events to materially differ from those implied by these forward-looking statements. Accordingly, you should not place any 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 most recent annual report on Form 10-K filed with the Securities and Exchange Commission on March 22nd, 2022, and available on EDGAR and in our other public reports filed periodically with the SEC. This conference call contains time-sensitive information and is accurate only as of the live broadcast on November 3rd, 2022. 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. And with that, I'll turn the call over to Reza.
spk05: Good afternoon, and thank you for joining us. I want to take this opportunity to formally welcome Matt Baxwell as our new Vice President of Investment Relations. For today's call, I will provide opening comments and a business update, followed by Kevin, who will provide additional details regarding our financial performance and updated 2022 financial guidance before opening the call to Q&A. Starting with our quarterly revenue results, we are pleased to report another strong quarter where our customers and patients continue to realize the significant clinical benefits of aquabulation therapy. Total revenue for the third quarter of 2022 was $20.3 million, representing growth of 135% compared to the third quarter of 2021. Growth in the quarter was once again driven primarily by robotic system sales and increased utilization from our install base. We believe the combination of positive long-term clinical data, increased private payer coverage, and outstanding real-world patient outcomes continue to drive surgeon interest and hospital adoption of our AquaBeam robotic system. Before providing a business update, let me briefly address the current macro environment, specifically supply chain and hospital capital equipment spending. Similar to previous quarters, we have not experienced material product constraints to meet customer demand. Furthermore, we continue to increase manufacturing personnel and remain close to vendors and suppliers to mitigate any potential supply issues. As we move into 2023, we remain focused on ensuring we can supply our customers with what they need in a way that is high quality and timely. As it pertains to hospital capital spending, we remain uniquely positioned for continued momentum around our AquaBeam robotic system sales due to a multitude of positive factors around our technology, and our early stage of market penetration. First, BPH is the number one reason men visit a urologist, with many men seeking a durable surgical treatment option at high volume hospitals. Additionally, many of these men forego treatment due to the inferior safety profile of current surgical alternatives. With a growing and increasing educated patient population, hospitals are motivated to invest in cutting-edge technologies to ensure they stay competitive and not lose patients to other area hospitals. We believe our AquaBeam robotic system allows hospitals to offer a cutting-edge technology in BPH surgical space. Next, we exited the third quarter of 2022 with an installed base of 139 US systems with approximately 2,700 total hospitals performing BPH surgeries, of which 860 are high volume targets, we are still very early in our adoption curve with a long runway in front of us. It is also an important reminder that the high volume BPH hospitals we target generally have adequate liquidity and have historically prioritized novel technologies to optimize their patient treatment offerings. We believe both of these factors mitigate some of the risks associated with an uncertain macroenvironment. Lastly, given AquaBeam's unique ability to treat all shapes and sizes of prostate, hospitals are now more than ever standardizing their BPH treatment algorithm. This standardization, along with our increased insurance coverage, make aqua ablation a logical choice. In summary, we continue to monitor all aspects of the macroenvironment and the impact on our business. However, we would not be increasing our revenue guidance once again if we were not comfortable with our forecast. Now turning to quarterly business updates, starting with our commercial organization. As mentioned on our second quarter earnings call, our plan was to further expand our field-based commercial team in the third and fourth quarter of 2022, which we are on track to complete. Even with a tight labor market, we continue to see strong interest from high-quality candidates, which gives us confidence in meeting our hiring and growth objectives. As a reminder, our field-based team consists of capital sales reps, aqua ablation reps, and clinical support specialists. Capital sales reps function is to sell our system to increase market penetration, while aqua ablation reps focus on educating and training new surgeons to drive increased utilization. Lastly, our clinical support staff function is to support cases and ensure an excellent surgical experience and patient outcome. Given our strong commercial momentum, excellent real-world clinical outcome, and robust pipeline, we plan to continue field-based hiring in 2023 to further penetrate the market and expand our sales footprint into new U.S. geographic regions beyond what we currently have today. Our goal in 2023 will be for aquablation reps to continue identifying, training, and educating new surgeons at existing and new accounts, while expanding our clinical support staff to facilitate case coverage across our install base. Also given our relatively low market penetration, we will continue to add capital sales reps to the commercial team. We expect to provide further detail when we discuss our 2023 outlook on our next earnings call in late February. However, we are confident that the team we have exiting 2022 will allow for continued robust growth in 2023. Additionally, in September, we also announced a multi-system national contract with Providence, a nonprofit health system with 52 hospitals across seven US states. We are honored to partner with leading health systems such as Providence, who are committed to advancing patient care through next generation innovation and look forward to supporting their growing programs. In addition to Providence, we now have multiple contracts in place with other large integrated hospital networks. As a company, we remain focused on engaging with large IDMs as they provide access to large hospital networks and accelerate the sales process. Next, I would like to comment on utilization and procedure trends we have seen here today. We continue to believe the majority of aquabulation procedure volumes are converted TURP and PVP cases, which are the most commonly performed resected procedures for BPH. On hospital utilization, we are seeing meaningful sequential increases in utilization from our customers. We believe the increase in utilization is attributable to the following factors. Given the predictability, reproducibility, and low learning curve associated with aqua beam robotic system, we are generally seeing an increasing number of surgeons using our system each quarter at our accounts. As a result, we believe an increasing number of accounts are beginning to standardize their respective procedure algorithm in favor of aqua ablation therapy. Additionally, since our clinical data and commercial experience support outcomes that are independent of prostate size and shape, surgeons are using aqua ablation therapy in a broader range of prostate sizes. Specifically, when analyzing patients that are from January 2021 to September 2022, the most prevalent size range treated falls between 60 to 80 milliliters. Since TURP and PVP are typically performed in prostate, less than 80 milliliters, we believe surgeons are beginning to standardize their procedures to aquabulation due to the limitations of surgical alternatives. Next, I wanted to provide a few details around our facilities and operations. On July 1st, we commenced our list on a new 160,000 square foot facility in San Jose, California. From a timing standpoint, we expect all departments to move into our new San Jose location by the third quarter of 2023. Given the growth and momentum we are experiencing at this stage in our adoption curve, we plan to also maintain production capacity at our current location through the fourth quarter of 2023 to ensure a smooth transition. While this could temporarily limit gross margin expansion, the investment we are making to expand operational capacity and efficiency are critical to our long-term success. We are extremely excited to complete our move to San Jose next year as it will expand our manufacturing and clean room footprint by approximately five times what we have today and house a much more robust R&D lab. With the goal of becoming the standard of care for BPH surgical procedures, we anticipate this target footprint will give us enough space for the foreseeable future. Lastly, touching on recent payer coverage policy updates. In the third quarter, we received additional payer coverage from Horizon and other Blue Cross Blue Shield plans. In aggregate, we estimate private payers and Medicare provide aquabulation coverage for a significant percentage of our target patient population. Additionally, on November 1st, CMS finalized its 2023 Hospital Outpatient Prospective Payment System. The level six APC code for aquabulation will provide the hospital approximately $8,558 for each aquabulation procedure, which is an approximate 1.5% increase over the 2022 rates. In summary, we are pleased with our performance here today and continue to execute our strategic growth plan of penetrating high-volume BPH hospitals, increasing utilization by treating their full range of prostate sizes and shapes, and expanding private payer coverage. Given this positive momentum and our long-term clinical data highlighting durability, we believe aqua ablation therapy will truly revolutionize the treatment of BPH. With that, I will turn the call over to Kevin.
spk10: Thanks, Rathas. As Reza highlighted, our revenue for the third quarter of 2022 was $20.3 million, representing growth of 135% compared to the third quarter of 2021. US revenue for the quarter was $18.6 million, representing growth of 152% compared to the prior year period. In the third quarter, we sold 26 AquaBeam robotic systems, generating total US system revenue of $9.8 million, representing system revenue growth of 95% compared to the third quarter of 2021. AquaBeam robotic system growth continues to be primarily driven by sales at high volume BPH hospitals. U.S. handpiece and consumable revenue was $8 million representing growth of approximately 267% compared to the third quarter of 2021. Handpiece growth was driven by an increase in the install base of AquaBeam robotic systems which has grown 85% from the third quarter of 2021. Additionally, we have seen an increase in utilization from our install base, as measured by handpieces sold per account. Utilization per account increased approximately 60% compared to the third quarter of 2021. Handpiece average selling price in the quarter was approximately $3,100. We shipped approximately 2,300 handpieces in the U.S. in the third quarter, representing unit growth of 174% compared to the third quarter of 2021. International revenue for the third quarter was $1.7 million, representing growth of approximately 34%. Gross margin for the third quarter of 2022 was approximately 50%. The increase in gross margin was driven by higher U.S. sales, increased average selling prices, and higher production volume. This was partially offset by increased investments in operations to expand capacity for future growth. Total operating expenses in the third quarter of 2022 were $32.3 million compared to $17 million in the same period of the prior year and $26.4 million in the second quarter of 2022. The increase was primarily driven by expenses to expand the sales organization, increased variable compensation expenses, increased R&D expenses, and increased expenses associated with being a public company for a full quarter. Net loss was $22.6 million for the third quarter of 2022 compared to $14.1 million in the same period of the prior year. Adjusted EBITDA was a loss of $18.3 million compared to a loss of $10.9 million in the third quarter of 2021. Our cash and cash equivalents balance as of September 30th with $249.2 million, while our long-term borrowings totaled $50 million. I also want to highlight that on October 10th, we entered into a new five-year, $52 million loan agreement, of which net proceeds were used to retire our existing $50 million debt facility. This agreement provides additional financial flexibility to execute our long-term growth plan by delaying any principal payments at least to fiscal 2025 and reduces annual interest expense by approximately $2.8 million. We believe our strong balance sheet will provide the liquidity and capital resources needed to support and grow our current business. Moving to our financial guidance. Given the strong underlying momentum in the business, we are increasing our full year 2022 total revenue guidance to be approximately $72.5 million representing growth of 110% compared to 2021. Our updated revenue guidance assumes a modest sequential increase to the number of Aquaboom systems sold in the fourth quarter, with average selling prices expected to be approximately $370,000 for the fourth quarter. Regarding fourth quarter handpiece average selling price, we expect pricing to be in line with third quarter actuals. Lastly, we now expect full-year international revenue to comprise approximately 10% of total revenues. Moving down the income statement, we continue to expect full year 2022 gross margins to be approximately 50 to 51%. Given our 2022 revenue guidance of $72.5 million is 25 to 34% higher than our initial guidance range in March, we now forecast full year 2022 operating expenses to be approximately $115 million. The majority of the incremental spend is due to expanding our commercial team, which puts us in a favorable position to execute on our long-term growth plan. Additionally, operating expenses increased due to incremental variable compensation expenses. Lastly, we now expect full-year adjusted EBITDA to be approximately negative $65 million at these revised revenue and expense levels. At this point, I'd like to turn the call back to Reza for closing comments.
spk05: Thanks, Kevin. In closing, I want to thank our employees, customers, and shareholders for all their support to help us along our journey to becoming the standard of care for BPH. We will continue to leverage our commercial and clinical investments to execute on our long-term strategy. Have a great day and I look forward to meeting many of you at upcoming investor conferences. At this point, we will take questions. Operator?
spk03: Thank you. At this time, we'd like to conduct the question and answer session. As a reminder, to ask a question, you will need to 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 first question comes from the line of Craig Bijou of B of A Securities. Your line is now open.
spk07: Good afternoon, guys, and congrats on another strong quarter. Let me just start, maybe start on the system pipeline and funnel. And I know you guys started the year pretty confident with your visibility into system placements, and you guys are tracking, you know, basically to what you guys said. So, looking at next year, wanted to see, Think about how confident you are in your visibility, you know, five quarters out. And are you guys comfortable with the growth that the street is expecting? And then also, are you seeing any trends within the funnel, you know, positive or negative? So are deals getting closed faster than you would have expected or faster than they were previously? And, you know, are you seeing any talk or mention of capital budget constraints?
spk10: Thanks, Craig. This is Kevin. I'll take that. There's a few parts to your question. First, I'll just address our thoughts around the funnel and how we feel about that. And just to reiterate, 2022 really has been a good year for Procept on the capital side in this environment. We've been able to raise revenue guidance now. This will be our third time. And what we're seeing is that hospitals really are prioritizing and investing today in innovative technologies, even in a challenging environment. And this does give us a lot of confidence as we head into 2023. We're not going to comment directly on 2023 numbers, but I think our performance over the last three quarters, our visibility into Q4, which we do have a very robust pipeline we expect exiting 2022, again, give us a lot of confidence that the momentum that we're seeing in the latter half of 2022 really should continue into 2023. The last point just on that is to remind folks the market we're competing in, it's a large market. And even with all the early success we've had, we're very early in our adoption curve. So the penetration levels that we're exiting the year with, we see no reason why that should slow down as we head into fiscal 2023. So we feel confident about that. Then your last question, just on trends. I think there's two factors that are giving us more visibility and predictability into the funnel today than say nine to 12 months ago. The first is, the tenure of our sales reps is now much elongated compared to where it was nine months ago. So those folks now are fully up to speed. They're comfortable with our process and have a high degree of visibility and predictability. That'd be point one. And then point two, Reza mentioned in his prepared remarks, our relationships with IDNs, that is now much more robust than it was nine months ago. And that gives us a greater level of confidence and visibility into the funnel. So long story short, we feel really good about our funnel and our sales team and our ability to continue to execute on our growth plan on the capital side.
spk07: Got it. And one quick follow-up on the utilization comments that you made, Reza, and I appreciate those. And I understand that you're taking, you think you're still taking most of the volume from TURP procedures, but just wanted to hear from you if you are getting into what would have otherwise been a non-receptive or maybe just bringing in patients from medical therapy.
spk05: Thanks, Craig. That's a good question. In the last year, when we look at the prostate size and patients that have been treated, more than 70% of our patients were below 100 milliliter or gram. In fact, if you look at the bell curve, the majority of those patients are in the 60 to 80 milliliters. These are generally in the hospital setting, are looking for options like SIRP or PVP. And those are the patients we are taking. And the reason we are talking about standardization is that our procedure works on all prostate, whether it is 30 gram or above 100 gram, it works on all of them and the outcomes are the same. So we are, because of the safety, efficacy, but more importantly, durability. Patients who are looking for those options, those are the patients we are taking.
spk04: Thanks, guys. Thanks, Frank. Appreciate it. Thank you.
spk03: Thank you. Please stand by for our next question. Our next question comes from the line of Nathan Trayback of Wells Fargo. Your line is now open.
spk11: Hey, thanks. Congrats on a great quarter. Just sticking to 2023, you mentioned your new San Jose facility. You know, you plan to keep your current location through the fourth quarter of 23, and, you know, you're probably going to have some redundancies. How should we think about gross margins in the year?
spk10: Yes, it's a great question. Great question. Nice to hear from you, Nathan. So again, we're not going to provide specifics on 2023, but I will speak at a high level to kind of trends we're seeing in gross margins. And just at a 30,000 foot level, from a product standpoint, our customers, they've really exceeded our original utilization assumptions in 2022. And that's really caused us to think about being able to deliver product in a high quality and timely manner. And in that spirit, we have proactively made and we are going to continue to make really the necessary investments to expand operations capacity. And what you're seeing in the fourth quarter and what I would suggest is going to continue into Q1 and Q2 is these investments rolling out the cost of sales over the next two to three quarters where we would not expect robust margin expansion in the near term. With that said, this in no way limits our belief that at scale our margins are going to be significantly above where they are today. And the San Jose facility specifically will be an expense in 2023 that will be duplicative, that will not continue into 2024. But what gives us a lot of confidence is when you just look at our product and look at isolating material and labor, both on our hand piece and our capital, those margins, on their own are well above our consolidated gross margins. And that's really going to be a tailwind to the business as we start to scale and get a lot of leverage over our overhead group. But right now, again, just to summarize, we feel making the necessary investments, particularly in this supply chain environment, is the right thing to do to make sure we can meet customer demand.
spk11: Great. Thanks for that. In terms of the United to not cover aqua inflation this quarter, Can you comment on what drove that decision and what steps are you taking to get coverage from them? Is it reasonable to expect that in 2023? And as a follow-up to that, what's the risk that other payers will follow United?
spk05: Thanks for the question. As a reminder, as you know, we have significant coverage with full Medicare coverage and many of the private payers we already have that coverage. And given this range of coverage, our growth over the next few years we don't believe is impacted by lack of coverage from United. But our strategy remains unchanged. We will continue to highlight our strong clinical data, you know, our Water 2 follow-up data on that, and we are committed to compiling information and data and submitting to payers like United. But if you look at other payers, we already have many of the commercial payers and all the Medicare coverage. So we will continue submitting. It's very hard to put a specific date, but it won't impact our near-term revenue.
spk10: And I just want to follow up. This is Kevin. Just the last point on your question. The company's view on United we don't believe impacts any other private carriers at all. This isn't as if United had a positive coverage and then they moved to a non-coverage. This is just United hasn't come to the table yet, and therefore we don't believe this impacts any other private carriers in any way.
spk11: Okay, thanks. Congrats again. Thanks, Adam. Thank you.
spk03: Thank you. Stand by while we get our next question. Our next question comes from the line of Richard Newiter of Truist Securities. Your line is now open.
spk08: Hi, thanks for taking the questions. Congrats on a good quarter. Just a couple for me. Maybe just starting off, I know you guys are really early in your adoption curve here, but we've heard feedback from different companies on the hospital staffing trends. Some saying it's getting a little better, some say it's just not getting worse. Is this I know it probably wouldn't impact you directly, but what can you comment on the trend there moving through the quarter? And if there is hospital staffing impact, would your numbers maybe have been otherwise even higher, if not?
spk05: Yeah, thanks, Richard. So, again, given the relative number of the procedures that we are performing per month, we have not been exposed to staffing shortage challenges that the hospitals are You hear most of our procedures are performed on a specific day every month. And overall, we are getting the impression that the hospitals are doing a remarkable job of managing their risk more than now that we have been now more than two years into the pandemic. So we have not been impacted and given where we are in our penetration. Okay, thanks.
spk08: Maybe just second on the utilization, nice growth there. I'm just curious if you could break down a little bit. It looks like about six per month on average, up 60% year over year. I guess, could you talk a little bit about the stratification there in the different cohorts of account maturity, what the more mature accounts are doing and what the range looks like across those and the newer ones?
spk10: Yeah, good question. The answer is there's a high degree of variability. rich across the ranges. But the one consistent theme is if six is the average, it's fair to assume that accounts that have been with us three to four quarters are definitely above the average and accounts that are newer are below the average. But again, with an install base of 139 accounts, it's highly variable. But over time, we're definitely seeing an increase in utilization at our customers due to, one, current physicians doing more procedures, And two, we're still seeing accounts, even that we placed two years ago, adding new physicians that contribute to the account level utilization increasing. Got it.
spk08: And maybe just one last one, a little longer term. I know ASCs aren't a focus for you now, but the first part of the question is, my understanding is you do have ASC reimbursement. It's just, you know, it's not something that's being done commonly, and it's not an area that you're focused on targeting for some time. So, what do you think it will take for you to eventually work your way into that segment? And, you know, what are the limiting factors there and what should we be on the lookout for over time that will eventually get you there? And if you could also just, again, let us know if I'm right on assuming that you do have adequate reimbursement in that setting. Thanks.
spk05: Thanks for this question. As we have previously said, there are 2,700 hospitals And only 10%, they do majority of the receptive procedures. Only 10% of these receptive procedures are done at the ASCs. So in the foreseeable future, we will focus on these high volume hospitals. And at this point, it is not our strategy because we still have long ways in these hospitals. So we are only 139 out of 2700.
spk04: Thank you.
spk03: Please stand by for our next question. Our next question comes from the line of Ryan Zimmerman of BTIG. Your line is now open.
spk06: Hey, thanks for taking the questions and excited to be on the call today. I want to follow up on a couple of questions that have been asked already, but we've heard from some of the other companies in this space about just broader weakness in urologic visits to the office. And Reza, I was wondering if you could kind of comment on the state of, you know, the office dynamics in urology and kind of how you're expecting those to maybe recover or lack thereof, you know, into the fourth quarter and then into 23. Yeah.
spk05: Thanks, Ryan. As you know, we are, we don't do our procedures. It's not an office procedures in the hospital. And we are seeing good penetration adoption at these high volume hospitals. And that is really the underlying, as we mentioned, BPH is the number one reason patients go see a urologist. And what is helping us with adoption is the technology and the clinical outcome. And that is what we believe surgeons are true drivers of our technology. And with the clinical outcome reimbursement and the fact that this treats the full range of prostate and shape and takes the size, shape, surgeon experience out of the picture, and that allows these hospitals standardizing and using these on all procedures. So we, again, we are not in office and at the, where we are, we have not been seeing any impact.
spk10: And just to tie that back to our guidance and how we thought about the year, if we go back to March, the company's original projections were around four procedures per month per account. And our results now and our current guidance implying somewhere north of five and a half on a full year basis. I mean, for us, it just suggests that if there are macro issues out there regarding patient visits, that the physician interest in new physicians for us are definitely outweighing those headlines that perhaps other companies are experiencing, but we're not seeing it.
spk06: No, that's good, Kevin. Thank you, and appreciate the additional color there. And then just to follow up on, you know, you said earlier, Reza, about, you know, the conversion of TURP and PVP. You know, as you think about the receptive market and the non-receptive market, is there a pivot point at which think about, you know, focusing beyond those conversions of TURP and PVP, you know, because given the fact that you are doing a bulk of the prostates in the 60 to 80 milliliter range, it would suggest that there is opportunity beyond those conversions. And so is there, you know, a penetration level or a point at which you think, you know, it's time to put your foot on the gas and push beyond just this core segment? Thanks for taking the questions, guys.
spk05: Yes. Yeah, thanks. Very good question. We have previously mentioned our short-term strategies addressing receptive at these high-volume hospitals. Of course, our midterm strategy is converting patients who are on medication, and half of those patients are under the care of these urologists. So in those accounts that we are working with urologists, we will provide information and to address those patients who are on medication, and the long-term strategy is, again, half of those patients on medication are under the care of the general practitioner. So, yes, initially we are taking market share from TURP, but as physicians, initially we started product champion They use it on a broader range of prostates, and at the same hospital, other physicians come on board. We increase utilization in the same hospital, but at midterm, we will plan to target those patients who are on medication at the same urology centers.
spk06: Thank you. Thanks for taking the questions.
spk03: Thanks, Roy. One moment for our next question. Our next question comes from the line of Neil Chatterjee of B. Riley. Your line is now open.
spk01: Hi, guys. Thanks for taking the questions. Maybe just kind of following up on that. Just in terms of, you know, other subsegments, I guess relating to kind of clinical evidence buildup, I was just curious if there's any update on the Water 3 study, you know, of aquablation versus enucleation in larger prostates. And then if that's, you know, what your thoughts on, you know, even needing that given that, you know, it seems like you're taking share conversion on the enucleation side.
spk05: So that, thank you. Thanks for the question. That study is happening outside the U.S., the randomized study. The enrollment is ongoing. And it provides, as you know, we perform the only randomized study in the United States against TURP. And then we ran another prospective single-arm study for prostates above 80 gram. And to strengthen that clinical study, we are running this randomized study outside the U.S. for larger prostates. It's just, I mean, we are committed to generating clinical data, and that's what we are doing.
spk10: Just to follow up on that too, right, when we've talked about this, you know, I think our ability to treat large prostates, we're the obvious choice there. So the Water 3 study is really to support improved reimbursement and market access, primarily in Europe. It's really not going to be impactful to our commercialization efforts in the U.S.
spk05: If anything, it could potentially help with some of the reimbursement in countries outside U.S., that they ask for randomized testing.
spk01: Great. Great. Thanks for that. And just one quick follow-up, just going back to the, you know, the discussion on kind of the IDN and health system strategy. So just, you know, nice one. Providence, just kind of curious, I think you alluded to maybe some other, you know, opportunities that you had in third quarter, you know, if you could elaborate on that strategy and kind of what you're seeing there.
spk05: Definitely, we have been working with these IDNs and it shows the hospitals are prioritizing and investing in innovative technologies, and again, this is manifested by getting into this agreement, Providence. They have 50 hospitals. We are in seven of them, and we are working with many of them. So we will continue this strategy going, and that's one of the reasons, gives us confidence that hospitals are investing in innovative technologies and want to maintain patients and not refer them to other hospitals.
spk04: Thank you, and stand by for our next question.
spk03: Our next question comes from the line of Matthew Michon of KeyBank. Your line is now open.
spk02: Thank you. Good afternoon, and thank you for taking the questions. Just a little bit of help if you can around sort of the mix in the fourth quarter of what you're expecting. between system sales and hand pieces and consumables. I believe I heard you say something where you assumed like a modest level of new ads or new installs. And I guess, you know, it's early in the adoption of this, but, you know, the fourth quarter would typically seasonally be a quarter where you'd see a lot more procedural volumes than you would necessarily in the 3Q in third quarter. So just if you can, some moving pieces around that.
spk10: Yeah, so thanks for taking my call, Matt. We do expect, as I said in the prepared remarks, a modest increase in system sales compared to the third quarter. So that would be sequentially a modest increase. And you are pointing out something that we do expect, which is the absolute number of handpieces sold in the fourth quarter will be larger than the third quarter. But it's important to remember that utilization for us, when you add so many large numbers of accounts in any quarter, and I had said on a previous question that it takes time to ramp utilization levels, that this is why you could see from an absolute utilization a sequential decrease in utilization, but an absolute increase in the number of hand pieces sold. Again, we're going to have to see how seasonality impacts the business here as we move forward. I tend to think that given at our stage of commercialization that you won't see the significant impacts in this year or even perhaps even heading into next year that you would expect for a more mature organization.
spk07: Excellent.
spk02: And then just as a follow-up, if I'm modeling it right, it looks like SG&A and other is going to be fairly flat 4Q versus 4Q. versus 3Q. Have you already done the majority of the hiring of the Salesforce, and you got that done in 3Q?
spk10: Yeah, so I'll point out, and I said in my prepared remarks, we did increase full-year operating expense guidance to $115 million. That is about 10% above our original guidance, but our current revenue guidance exceeds the original operating expense parameters by 34%. So even with the increase, we are seeing leverage in the business. To answer your question specifically, we are almost through hiring all of the reps that we had expected, and they will begin to be productive in 2023. And our Q4 OpEx guidance implies about an approximate $1 million step up from the third quarter numbers as well.
spk02: Excellent. Thank you very much.
spk04: Thank you. Thank you.
spk03: Stand by for our next question. Our next question comes from the line of Philip Coover of Goldman Sachs. Your line is now open.
spk09: Hey, good afternoon. Thanks for taking the questions. Wanted to follow up on Matt's last question there, ask a little bit more about the commercial organization. The first half of the question is just to remind us sort of kind of broadly speaking, what level of sort of hospital exposure per rep you guys kind of target within that 860? I guess what I'm trying to get to is sort of where are we today? What did you add in the back half of this year? And sort of broadly speaking, what are we looking for in terms of percentage addition in 2023? Thanks, Phil.
spk10: So we're not providing specifics, but what I will say when looking at 2023 and given kind of our commercial success and momentum, We would expect to hire our sales force at a much more constant cadence than we did in 2022 to give that broad scale coverage to the 860 hospitals that you've referenced. And we're going to continue hiring across all three strata of our reps. It's still important that our aquablation reps identify and educate new surgeons. But the one area in the company with our increase in utilization that I would suggest we're going to expand more meaningfully is our clinical support staff. And this is really to facilitate case coverage across our install base and to make sure that we're not bogging down our quota-carrying aquablation reps with being in cases. And therefore, we're going to expand that clinical support staff. At the same time, given our penetration, we're nowhere near the number of robotic sales reps that will be kind of at full strength. So we'll continue to add, it'll be at a constant cadence, all in the spirit of making sure that we can continue to demonstrate comparable leverage in the revenue versus OPEX line as we head into 2023.
spk09: Okay, that's helpful. Just any idea or kind of semblance of scale that we're thinking about of what happened in the back half of this year and what we should expect in 23 on any one of those three segments?
spk10: If you look at OpEx overall, again, without getting into specifics on 2023, I think, you know, the leverage that we saw in 2022, the ratio of revenue to OpEx is something that I would expect in really year three of our commercialization to be very comparable next year as well, which will allow us to continue to hire reps at that constant cadence I referenced.
spk09: Okay. All right. That's fair enough. Very helpful. Thanks. A little bit more nuanced, but if If I do the math on the hand pieces side, at 3,100 and 2,300 hand pieces sold, $3,100 on average. It seems like there's some other component that's in there. Could you clarify if there is and kind of what scale that other component is expected to be? It looks like it's at least a few hundred dollars per case on average in the quarter.
spk10: Yeah, it's a good observation. So we do have a line, and you'll see this in our 10-Q when it's filed, called other consumables. That's about $800,000 in the third quarter. So that's why your math doesn't tie out directly to the $8 million in handpiece revenue. That revenue is for other types of accessories. And when we have seen our increase in utilization, we are seeing accounts that need to order more scopes. They order more ultrasound probes. And that increase in revenue is a direct correlation to our increase in utilization. And I think, to be fair, that's a run rate that we would expect now kind of moving forward quarter to quarter. As our physicians and our accounts start doing many more cases in any given day, they're going to need more of that peripheral equipment. So that's what you see there.
spk09: Sorry, just on that last bit. So it's not fair to think of that other revenue scaling with case counts, or is it – what was the run rate comment that you made there at the end?
spk10: Yeah, but the run rate was I think 800,000 a quarter is probably a fair way to be looking at it in the near term. If it becomes more material, we'll provide more details at that time. But right now, I think 800K a quarter is a good way to think about it.
spk09: Okay. Thanks for all the feedback, Kevin. No problem. Thanks, all.
spk03: Okay. One moment for our next question. Our next question comes from the line of Joshua Jennings of Cowan. Your line is now open.
spk00: Hi. Good evening. Thanks for taking the question. Another strong quarter. I wanted to just ask one question for you of repeating someone else's earlier. But just on the reimbursement front, we get a number of questions or consistent questions just on the profitability of an occupation. treatment versus TURP or other respective procedure. I just wanted to see, to better understand, I think it's clear the Medicare rates, but I really wanted to ask about the commercial coverage and reimbursement levels for occupation versus some of the other approaches, respective approaches, and I'll just keep it at that. Thanks for taking it.
spk10: Thanks for the question, Josh. So specific to your question on private pay reimbursement versus Medicare reimbursement. We are, for Medicare, APC level 6, which pays the facility approximately 2x what they would be reimbursed for a TURB or a PVP procedure, which we believe is beneficial. With private pay and being early in commercialization, you do see rates that are generally anywhere from 20% to 30% higher than Medicare. But right now, depending on your state, depending on your local geographic area, depending on your carrier, that's a highly variable rate. We've seen rates significantly higher than 30%. But on average, we think about private pay being 20% to 30% higher than Medicare in general. And we think that allows the hospitals to purchase our piece of capital equipment, have a very palatable ROI. We've had some customers that have told us it could be as short as six months on average. We peg it kind of in the two-year timeframe where you could pay back your capital equipment. And reimbursement for us, it hasn't been an issue with us being able to penetrate hospitals.
spk00: Great. That's exactly what I was looking for. Thanks, Kevin. Thanks, Josh.
spk03: At this time, I'm showing no further questions. So I'd now like to turn the call back to Reza Zadno, President and CEO, for closing remarks.
spk05: Yes, thanks everyone for attending our earnings call. I look forward to seeing many of you in the upcoming conferences and have a nice day.
spk03: Thank you for your participation in today's conference. This does conclude the program. You may now disconnect. Goodbye.
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