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spk01: Good afternoon, and welcome to the Procepts Biorobotics Fourth Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. We will be facilitating a question and answer session toward the end of today's call. As a reminder, this call is being recorded for replay purposes. I would now like to turn the call over to Matt Basco, Vice President, Investor Relations, for a few introductory comments.
spk10: Thank you.
spk05: Good afternoon, and thank you for joining Procept Biorobotics Fourth Quarter 2022 Earnings Conference Call. Presenting on today's call are Reza Zadnaw, Chief Executive Officer, and Kevin Waters, Chief Financial Officer. Before we begin, I'd like to remind listeners that statements made on this conference call that relate to future plans, events, or performance are forward-looking statements as defined under the Private Security Litigation Reform Act of 1995. While these forward-looking statements are based on management's current expectations and beliefs, statements are subject to several risks, uncertainties, and assumptions, and other factors that could cause results to differ materially from the expectations expressed on this conference call. These risks and uncertainties are disclosed in more detail in Procept by Robotics filings with the Securities Exchange Commission, all of which are available online at www.sec.gov. Listeners are cautioned not to place undue reliance on these forward-looking statements which speak only as of today's date, February 28th, 2023. Except as required by law, Procept By-law undertakes no obligation to update or revise any forward-looking statements to reflect new information, circumstances, or unanticipated events that may arise. With that, I'd like to turn the call over to Reza.
spk08: Good afternoon, and thank you for joining us. 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 initial 2023 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 fourth quarter of 2022 was $23.8 million. representing growth of 135% compared to the fourth quarter of 2021. On a full year basis, total revenue for 2022 was $75 million, representing growth of 118% for the full year 2021. As I look back on 2022, I'm extremely proud of our commercial accomplishments. having increased average monthly utilization by approximately 50% despite more than doubling our U.S. install base. Given the strong underlying demand for aqua volation therapy, we were able to deliver average utilization of approximately six hand pieces per account per month in 2022. Our initial 2022 guidance assumed utilization of approximately four hand pieces per month. Due to this rate of adoption, and support for acupuncture therapy, I'm more confident than ever in our company's future. As we enter 2023, we believe there are several positive factors which will allow us to continue to execute against our strategic growth plan. More importantly, we believe these underlying fundamentals reflect the business that is laying the foundation to become the BPH surgical standard of care, starting with the care and urology market. We are very fortunate to operate in a market where the number one reason men see a urologist are symptoms associated with PPA. Given an increasing aging population, along with the millions of men who currently forego treatment, we believe underlying market growth will be attractive for many years to come. We also believe urology patient volume at their accounts continue to grow nicely and are above pre-COVID levels. In fact, most urologists have indicated to us that in addition to normal patient activity, a large number of men who have postponed surgery due to the pandemic are now scheduling surgical procedures. Turning to our commercial organization. As mentioned on previous earnings calls, our plan was to further expand our field-based commercial team in the fourth quarter of 2022. which consists of capital sales reps, aqua ablation reps, and clinical support specialists. Speaking specifically about our capital sales personnel, we ended 2022 with approximately 30 capital sales reps, which is a 50% increase from the third quarter of 2022. It is important to remember the productivity curve for capital reps is approximately six months, Over this six-month period, they will be responsible for building out their respective pipelines. Thus, we do not expect the capital rest added in the fourth quarter of 2022 to start meaningfully contributing to U.S. system sales until the second half of 2023, which is factored into our 2023 guidance. Given our strong commercial momentum, excellent real-world clinical outcomes, and robust pipeline. We plan to continue field-based hiring in 2023 to further penetrate the market and expand our sales footprint beyond what we currently have today. Our goal in 2023 will be for AquaVolation 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. As it pertains to hospital capital spending, we remain positioned for continued adoption around our AquaBeam robotic system sales due to a multitude of positive factors around our technology and our early stage of market penetration. 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 aqua beam robotic system allows hospitals to offer a cutting edge technology in the BPA surgical space. We exited the fourth quarter of 2022 with an installed base of 167 systems in the US. We estimate approximately 2,700 total hospitals in the US are performing BPH surgeries, of which 860 are high-volume targets, averaging over 200 BPH procedures per year. Given this large market, we are still very early in our adoption curve, with a long runway in front of us. In terms of our pipeline, the number of opportunities continue to grow meaningfully. When compared to the end of June 4, 2022, we exit February with approximately 30% more opportunities, which have cleared the stage where we assign a high level of confidence to close. Our 2023 guidance is informed by what we are seeing in our pipeline. how opportunities progress, what customers are telling us, and overall close rates. Next, I want to touch on our progress securing IDN contracts in 2022. Exiting 2022, we have signed contracts with numerous IDNs, which will allow for our sales team to operate in an expedited and more predictable manner. The importance of these contracts is meaningful to our ability to penetrate the U.S. market. One of the most time-consuming phases of selling capital equipment involves establishing a legal contract. The strategic benefit of working with IDNs is that the corporate entity has agreed to a standardized legal contract across its hospital network. We anticipate having the majority of IDNs in the U.S. under contract by the end of 2023, which we believe will contribute meaningfully to our future revenue, which provides increased visibility in our pipeline. Turning to increased surgeon and patient interest. As we have communicated to investors over the last 12 months, our primary focus is for aqua volation therapy to become the standard of care for BPH surgery. And to achieve this goal, we have prioritized surgeon engagement and training. Given our robust training and education program, in addition to being in most procedures, our clinical support team has demonstrated its value to surgeons and hospital staff. Our consistent presence in the operating room provides surgeons with more confidence to standardize their practice to treat all ranges of prostate sizes and shapes. Due to the consistent and predictable outcomes, our surgeon customers are realizing peer-to-peer communication has increased meaningfully, resulting in active surgeon growth of 140% compared to 2021 levels. Another metric we track very closely is our net promoter score, which measures customer experience and brand loyalty. As of December 2022, we surveyed our Net Promoter Score, and it was an impressive 92. We believe our Net Promoter Score is a direct reflection of our commitment to partnering with urologists while also providing a high-quality product that delivers superior clinical outcomes. As it relates to specific aquabulation patient interest, we have also seen a meaningful uptick in online search activity. This is particularly noteworthy since direct-to-patient advertising has been predominantly driven by hospitals up to this point. Our current strategy will continue to be focused on surgeon engagement and awareness. However, we believe patients actively representing aqua ablation therapy and following through to see a surgeon is another positive indicator for our expanding product awareness and presence in the marketplace. Next, I want to touch on reimbursement and increased private pay coverage. In aggregate, we estimate private payers and Medicare provide population coverage for a significant percentage of our target patient population. While a few payers have yet to issue a positive coverage policy, given our low penetration rate in the market and the fact that roughly 50% of BPH patients are covered under Medicare, our growth over the next few years should not be limited by additional private pay coverage. Additionally, in the fourth quarter of 2022, CMS finalized its 2023 hospital outpatient prospective payment system. The level six APT code for our procedure will provide the hospitals approximately $8,558 for each aqua volation procedure, which is a slight increase over the 2022 rates. Lastly, with respect to international market development activities. In early February, aqua ablation therapy received a MedTech innovation briefing from the National Institute of Healthcare Excellence, or NICE, for BPH in the United Kingdom. NICE has recognized that aqua ablation therapy is effective for the removal of prostate tissue for people with BPH. Clinical experts said the technology is innovative compared to the standard of care and offers additional benefits such as increased ability to preserve quality of life. Clinical experts associated with the review stated that the technology has the potential to replace TURP and will challenge polium laser enucleation of the prostate for larger prostates. While our presence in the UK is small today, given this updated guidance from NICE, we believe the UK could be an attractive market for Procept in the future. In summary, we are pleased with our 2022 performance and believe the tailwind I highlighted will continue to allow us to execute our strategic growth plan of penetrating BPH hospitals, increasing utilization by treating their full range of prostate sizes and shapes, and expanding private payer coverage. Given this positive momentum, we believe aqua ablation therapy will truly revolutionize the treatment of BPH. With that, I will turn the call over to Kevin.
spk12: Thanks, Rosa. Total revenue for the fourth quarter of 2022 is $23.8 million, representing growth of 135% compared to the fourth quarter of 2021. U.S. revenue for the quarter was $21.8 million, representing growth of 149% compared to the prior year period. In the fourth quarter, we sold 28 AquaBeam robotic systems, generating total US system revenue of $10.4 million, representing system revenue growth of 109% compared to the fourth quarter of 2021. US handpiece and consumable revenue for Q4 was $10.4 million, representing growth of approximately 202% compared to the fourth quarter of 2021. Handpiece growth was driven by an increase in the install base of AquaBeam robotic systems which has grown 114% from the fourth quarter of 2021. Additionally, we have seen an increase in utilization from our install base as measured by hand pieces sold per account. Utilization per account increased approximately 23% compared to the fourth quarter of 2021. Utilization outperformance in the fourth quarter was a direct reflection of strong commercial execution and surgeons taking the next step to adopt aquablation therapy as their treatment of choice for all resected procedures. We view utilization as the true leading indicator of overall market adoption long term. We shipped approximately 2,960 hand pieces in the U.S. in the fourth quarter, representing unit growth of 145% in the fourth quarter of 2021, with average selling prices of approximately $3,140. International revenue for the fourth quarter was $2 million, representing growth of approximately 44%. Gross margin for the fourth quarter of 2022 was 45%. Gross margin in the fourth quarter was negatively impacted by approximately $700,000 of inventory write-offs. The inventory write-offs were related to a lower manufacturing yield on certain components in the disposable handpiece. This issue was identified early in the fourth quarter of 2022, and resolved in the first quarter of 2023. While gross margins in 2022 sequentially declined throughout the year, it is important to point out that this is a direct function of manufacturing overhead expenses growing faster than revenue, along with the one-time charges noted in our fourth quarter, not an increase in standard material cost per unit. Given our favorable standard margin profile of both our robot and handpiece, we have increased confidence to absorb overhead expenses in 2023 and start showing gross margin expansion in the second half of 2023. Lastly, on margins, we continue to make nice progress with regards to our move to San Jose, California, which will increase our footprint by four times to 160,000 square feet. As stated previously, we expect to move into our new San Jose location by the third quarter of 2023. Moving down the income statement, Total operating expenses in the fourth quarter of 2022 were $35.7 million compared to $21.3 million in the same period of the prior year and $32.3 million in the third quarter of 2022. The increase is driven by increased sales and marketing expenses, primarily to expand the commercial organization, increased variable compensation expenses, and increased research and development and general and administrative expenses. Total interest and other expense in the quarter was $3.1 million. As a reminder, we entered into a new five-year $52 million loan agreement in October 2022. As part of this refining, we recognized loan extinguishment charges of $3.3 million in the fourth quarter of 2022. Given the lower interest rate associated with this new loan, we estimate quarterly interest expense of approximately $800,000 to $900,000 in 2023. Net loss was $28.2 million for the fourth quarter of 2022 compared to $18.3 million in the same period of the prior year. Adjusted EBITDA was a loss of $21.7 million compared to a loss of $14.7 million in the fourth quarter of 2021. Our cash and cash equivalence balance as of December 31st was $221.8 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 2023 financial guidance. We expect full year 2023 total revenue to be approximately $125 million, representing growth of approximately 67% compared to 2022. Our capital pipeline remains robust and growing, and we are excited to continue penetrating the U.S. market at an unprecedented rate for robotic surgery. As Reza mentioned in his comments, we had a 50% increase in our capital reps by the end of 2022. Therefore, we expect our new capital reps to become fully productive in the second half of 2023. We also expect U.S. average selling prices to be approximately $375,000. Regarding hand pieces sold in the U.S., we expect full year monthly utilization to be approximately six across our average install base for 2023. Additionally, we expect Cante's average selling price to be approximately $3,100 and for other consumables revenue to be approximately $5 million. Lastly, we expect full year international revenue to be approximately $9 million, representing growth of approximately 24% compared to 2022. Moving down the income statement, we expect full year 2023 gross margins to be approximately 53%. Based on my previous comments and given the current rate of overhead absorption, we expect Q1 and Q2 gross margins to be in the high 40% to low 50% range. Additionally, we forecast full year 2023 operating expenses to be approximately $163 million. This increase in operating expense is associated with strategic investments in R&D, commercial team expansion, and underlying general and administrative costs to support the business and put us in a favorable position to execute on our long-term growth plan. Lastly, we expect full-year 2023 adjusted EBITDA to be approximately negative $70.5 million. At this point, I'd like to turn the call back to Reza for closing comments.
spk08: 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 center of care for these patients. 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 the upcoming investor conferences. At this point, we will take questions.
spk10: Operator? Thank you.
spk01: If you would like to ask a question, please press star 11 on your telephone. One moment while we compile the Q&A roster. The first question will come from Joshua Jennings. Your line is open.
spk07: Hi, good afternoon. Thanks for taking the questions. Congratulations on the strong finish to the year. I was hoping to start with the beginning of this year, 2023, and just get a better understanding of, one, just the capital spending environment and different med device companies are being impacted in various ways. wanted to hear about the Procept experience in early 2023. And then anything you can share on just kind of the cadence of quarterly revenue and assuming that we should see some sequential progression. But is there any seasonality that we should be thinking about as your revenue base has blossomed in 2022 and the 4Q to 1Q transition?
spk08: Hi, Josh. This is Ezra. Thanks for the question. Before I get into answering the question, I wanted to provide some high-level commentary about our enthusiasm starting 2023. Recently, I participated in our global sales meeting and met our newly hired sales rep, very enthusiastic. and we also are seeing pipeline growing, and our interest in the surgeon using our product is ever increasing. With respect to capital environment, we are not seeing anything from a macro level has not changed. We are not seeing any slowdown of the capital going to 2023. I'm going to let Kevin to provide more color on this.
spk12: Thanks, Razan. How are you doing, Josh? some specificity around the capital to your question. When we look at the full year, our total revenue guidance of 125 million, if you parse out the utilization metrics that we provided, you'll back into around 140 U.S. system sales in 2023 for the full year, which would suggest we're going to continue to see the momentum and the pipeline coming to fruition that Reza went through in his prepared remarks. Specifically to the first quarter, which was part of your question, given where we're currently at today, we do expect Q1 US system sales to be somewhere in the range of 25 to 30. This guidance would imply a very similar distribution of unit sales in 2023 as compared to 2022. If you go back and look at last year, about 45% of all of our capital sales were in the first half of the year. and 55% were in the back half. And we think that's a very normal cadence. Perhaps that addresses some of the seasonality that you mentioned in your comments, which would be typical of Q1 in a capital environment. And just to summarize on the capital side, we continue to have a high degree of confidence to achieve our growth targets. Reza mentioned just the expansion of our pipeline with the high-quality opportunities. And this, our expanded field-based capital team, give us a lot of conviction around the capital number that I just provided.
spk10: Thanks for that.
spk07: One follow-up, I think I heard, Reza, you mentioned that you anticipate having contracts with the majority of major IDNs in the U.S. by the end of 2023. Just want to make sure I heard that correctly for one and then two, if it was, if I did hear it correctly. Can you just talk about where the starting point is entering 2023? I know you've had a couple of announcements, a couple of major wins with IDNs, But how big of an opportunity is that? And maybe just thinking about the growth contribution from these IDN contracts, if I did hear you correctly. Thanks for taking the questions.
spk12: Yeah, thanks, Josh. This is Kevin. I'll take that. And just specific to IDN, as Rosa mentioned, you know, we do think that this represents a significant opportunity. We've signed contracts with several, how I would characterize it, with a few to go in 2023 and a few of the larger ones. and how that translates to how we're thinking about capital and how that's factored into our guidance. We do assume that IDNs purchase capital in 2023, so that is in our guidance, but we are not assuming any large multi-system type of orders in any given quarter. We do think this could happen, but we're not factoring that into our guidance at this time.
spk10: Understood. Appreciate the details. Thanks, guys. Thanks, Josh. Thank you.
spk01: Thank you. One moment for the next question. The next question is coming from Chris Baiju of Bank of America. Your line is open.
spk14: Hey, guys. Thanks for taking the questions and congrats on an impressive 22. I know you get this question a lot, so I apologize for asking again, but I wanted to see if you could provide a little bit more color on utilization trends. How should we think about the utilization ramp once you do get a system placed? And has that ramp changed if you look at systems placed in more recent quarters versus the earlier quarters?
spk08: Yeah, thanks, Greg. This is Raza. Thanks for the question. We are very pleased to utilize them across all the install base. As you recall, last year, we entered the year, goal was four per account per month. We finished six, despite the many new accounts that we opened. And that is because surgeons are using it on all broad states, the size range, and more surgeons on the accounts. start using the system and uh they are standardizing the the procedure it takes about three quarters to get to six and uh so despite even for example going to 2023 we are adding let's call 140 accounts we are going from 160 roughly to 300 accounts And we are main, our goal is to maintain that at six. So that is a, we are very excited that our current accounts continue increasing. So getting to six, roughly about three quarters, if that's your question.
spk14: That's helpful. And maybe just to follow up on that, you know, are systems placed now, is it a faster utilization ramp than maybe what you saw in earlier placements?
spk12: It's highly variable, Craig. This is Kevin. Given we're so early in our commercial trajectory, what I will say is that we're definitely seeing in new accounts a greater number of surgeon interest at each of those accounts. So if I go back kind of one or two years ago, we'd identify a surgeon champion, and perhaps that might be the only surgeon performing aquablation in the hospital, whereas today we're seeing when we're placing a system much more surge in interest and more surgeons performing aquablation. I think, again, it's highly variable, but directionally we are seeing higher utilization initially than we were a year or two ago. Got it.
spk14: That's helpful. And then if I can ask on the capital reps and the large number of hires, just a little bit more on the strategy there. Are those going into new greenfield opportunities, geographies that you're not in currently, or is it to handle some demand in existing geographic locations? And then just if you guys could remind us of the rep productivity and kind of what do you expect at maximum rep productivity for the capital reps? Thanks, guys.
spk08: Thanks Greg. So last year we were about 20 capital REFs and we produced about 100 systems. So the productivity was about 45 systems. It takes about six months for a capital REF to get to that level of productivity. The 10 capital REF that we added in the back half of the fourth quarter become, they get to that level in the second half of 2023. And these new REFs that we have added will be new territory. We are expanding territories in large cities like Minneapolis, Seattle, Albany, Charlotte. So these are where they are going.
spk12: And Craig, that's a primary reason that the capital forecast is split 45% in the first half and 55% in the back half of the year. The majority of those new hires that Reza referenced, they are going into greenfield territories where we either did not have a presence or we didn't have a highly focused presence. And we think that productivity is really going to start to come through in the back half of 23.
spk14: Great. Thanks, guys.
spk01: Thanks, Greg. Thank you. One moment, please, while we prepare for the next question. Next question will be coming from Chris Pasquale of Nefron. Your line is open.
spk06: Thanks, and congrats on a great year, guys. I wanted to follow up on the sales force. I appreciate the detail on the capital side. Can you tell us where you exit the year in terms of aquablation sales reps? And then as we think about 23, what are you targeting in terms of growth for your overall rep headcount by the end of the year?
spk12: Yeah, so we made very, so we have a sales force that consists of three types of reps. Reza and myself spend a lot of time going through the capital reps, but we also have aquablation reps who are responsible for driving utilization. And we also have a clinical sales team, which is responsible for surgeon training and case coverage. We didn't provide specific numbers, but you can assume that the percent increase in those buckets was very comparable to the percent increase with robotic reps. So that's the absolute numbers. In terms of cadence and timing, that is something we're going to continue to evaluate throughout the year. Our operating expense guidance does allow us to make investments in the commercial team throughout the year. So what we have today isn't what we expect to end the year, but we do expect to add, and that's encompassed in our guidance. Okay.
spk06: And then, you know, the handpiece ASP has been climbing pretty steadily over the past five or six quarters now. You're assuming it levels out here in 23. Is there any reason you couldn't continue to take price incrementally higher given the favorable economics for the hospital?
spk12: So today, the last few quarters have actually been fairly stable, kind of in that $3,000 to $3,100 range. And that's what we guided to in 23. I think In the short term, that's the price that we'd be looking to charge customers. We feel that's where there's, you know, a win on both sides for both the hospital and for the company. And I don't expect us to take price up on the handpiece in the near term.
spk10: Thanks. Thank you. One moment for the next question.
spk01: The next question will be coming from Richard Newiter of Truist. Your line is open.
spk03: Hi, guys. Thanks for taking the questions, and I'll echo my congrats on a strong finish to the year. Just going back to your comment, 30% more opportunities are, I guess, at a high confidence or in a high confidence cohort within your pipeline or your funnel. I'm curious, you know, with the IDN or greater percentage of IDN contracts in place, I'm just trying to match those two things together to get a sense quantitatively if possible, like how much more visibility you have into the year ahead guide that you're providing today compared to when you provided your guidance at the beginning of last year. Maybe what percentage of your funnel would you have characterized as high confidence at that point in time. And, you know, I'm also just curious, with the IDNs and more kind of established contracting there, does that just mean that the conversion rate and the capital sales cycle of those high confidence accounts gets shortened? You know, help me think through some of those items.
spk12: This is Kevin. How you doing? I'll take your question. And the short answer is we have much greater visibility and predictability into our funnel today than we did a year ago, really just due to the fact that we have another year of commercial experience and history to lean on. So we have a higher degree of visibility today. But specifically to the pipeline and the metric that we provided, that increase in the pipeline of 30%, it's important to note that that is measured by, as we call it internally, deals that have reached stage one, where we've already identified a surge in champion within that account. and we have a high degree of confidence that that deal will close. That metric does not include every deal in the funnel. So the metric we're providing is the metric that we think has a high degree of certainty to close, and we have a high degree of visibility into that deal, which is the primary reason to your question that we feel very comfortable with our full-year capital guide, albeit timing could be variable, as you know, in the capital world. So that's on visibility. To your question on IDNs, Right now, that's really a license to hunt for us. You would assume should shorten that sales funnel from the three to six month period, but we're still very early in that IDN journey and are kind of still evaluating any differences there. But the drafting of a legal contract definitely takes time and having an IDN contract in place shortens that time.
spk03: Okay, that was really helpful. Maybe turning to the handpiece and the guidance on utilization. So you're guiding to, I guess, an average of six per system per month per year. I'm sorry, six per system per month. That's virtually no growth year over year. You know, you guided to four at the beginning of last year. You delivered six. I guess why, you know, how should I think about that? You know, you've been growing your utilization in years. you know, in the teens for several quarters now, you know, I'm just curious, is that just conservatism? Is there anything, you know, that's happened? Is it just a lot of large numbers and it's all getting bigger and that's the way to think about it? Or, you know, does that potentially leave room for overage if things continue to develop as they have been over the last few quarters? Thanks.
spk08: Thanks for the question. Good question. Had the install base stayed the same? Yes, that's a good comment. But as I mentioned, last year, we increased the install base. And this year, we are going to add another, let's call it 140. So going from 160 to 300, we maintaining that utilization means current accounts have to use more than six in order to average to stay at six we are adding we are going again from 160 to 300 new accounts maintaining utilization at six and it takes about three quarters for new accounts to reach that that level so we are very happy with that level of utilization particularly where we are installing so many new accounts okay thank you very much
spk10: Thank you.
spk01: Thank you. One moment while we prepare for the next question. And our next question is coming from Neil Chattery of B. Riley. Your line is open.
spk02: Hi. Good afternoon, and thanks for taking our questions. I think a lot of it might have been asked, but maybe on – I think earlier you mentioned kind of an uptick in patient-driven demand activity. Just kind of curious, you know, any more color there on expectations for that to be a growing driver and, you know, do you intend to launch any, you know, DTC campaigns over time?
spk08: So, yes, we are seeing that the through the hits on the website, but we are not planning to run a direct-to-consumer campaign. When we have new accounts, we provide material. They do reach out to their patients, but we do not currently do direct-to-consumer advertising. It is through the accounts.
spk12: This is Kevin. I think it's important to remember our initial commercial strategy is to cannibalize an existing large and growing market. We're not trying to move patients to a different side of service. The patients at these hospitals are already there. The number one reason men go see a urologist. And there's no shortage of patients to treat. There's just been a lack of viable alternatives to treat those patients. And therefore, I don't think we have the same kind of DTC comparables that perhaps some other technologies may have to embark on so early in our commercialization.
spk10: Great. Thanks for the color.
spk02: And then, secondly, maybe just, you know, anything we should anticipate hearing in relation to aquablation at the upcoming AUA conference this spring or any specific KOL events to raise awareness?
spk08: Yes. Yes. So, there will be some presentations, but the most important is the water to five-year data will be presented. And AUA, we are excited about that. That is what will be presented along other presentations.
spk12: We're also going to have an IR event again at AUA where we'll have surgeon speakers along with the management team that we're going to give an announcement out shortly.
spk10: But we're going to do that again this year at AUA as well. Great. I'll hop back in with you. All right. Thank you.
spk01: Thank you. One moment while we prepare for the next question. And our next question will be coming from Nathan Trebek of Wells Fargo. Your line is open.
spk13: Hi. Thanks for taking the question. I just want to understand the status of your TPT. It was set to expire in December of 22, but it looks like it has been extended by a year. Can you comment there?
spk08: Yes, thanks for the question. So the transitional pass-through, it was for two years and it has increased by one more year. It brings some incremental benefit to some accounts, but it's not in a meaningful manner that would change much, some accounts would benefit. Definitely we are excited about it, but it's not, it doesn't affect every account. It doesn't have any negative impact. It is positive for some accounts. The good news is the APC level six stayed at the level, in fact, increased a little bit over 2022.
spk12: Specific to guidance, Nate, we, basically our sales effort has always assumed transitional pass-through was going away. So even with the extension, it didn't change our thinking about the year in 2023. As Reza mentioned, there may be a marginal benefit for some accounts, but in general, our commercial team has been communicating to customers since the beginning of 22 that this was going away. So we're not in a position where people were buying our system or increasing utilization because of TPT. It was nice to have when we had very limited coverage when we had Medicare only, for example, but given where we're at right now with private payer coverage, given the APC level six that Reza referenced, this really wasn't a commercial driver for us moving forward.
spk13: Okay. Thanks for that. And can you comment on, you know, any changes you've seen in recent trends around the prostate sizes that are being addressed by off ablation? I mean, have you seen procedures kind of move down into the, you know, the smaller end of the prostate? spectrum in the last six months or so?
spk08: So we have been monitoring this for the last two years, roughly, and the majority of the cases are below 100 grams, but the top of the bell curve is between 60 and 80 grams. So, what that shows is surgeons are using this now on all prostate sites. The histogram that we are seeing represents the histogram of prostate patients with BPH. They're using it on all prostates right now.
spk13: Okay. If I could just think one more, and just around the gross margins. So, you know, I understand the first half is going to be impacted by the inventory issue, I believe previously you indicated you were comfortable exiting the year at 55% in Q4. Is that still the case? And how should we think about progression through the year? Thanks.
spk12: Yeah, so progression through the year, Q1 and Q2 will be in the high 40s and low 50s. And then we would expect, as you implied, that we would be in the mid 50% range in the back half of the year, which on a blended basis would get us to 53%. And it's important to note that We just need to grow into the investments that we made in 2022, and we're not expanding the operations team in the same manner this year. And you're really going to start to see the leverage of that team in the back half of the year as revenue increases. Great. Thanks. Thanks, Nate.
spk01: Thank you. One moment while we prepare for the next question.
spk04: the next question is coming from matthew mishon excuse me of key your line is open hey thank you for taking the questions uh just on on r d it was a noticeable step up and really 3q and 4q um you know sequentially on on the r d dollars just can you comment a little bit about where you're where you're spending and and kind of where the dollars are going incrementally
spk12: Yeah, thanks for the question, Matt. So we did see an R&D sequential increase of 2 million in Q4. And a few reasons for that, just philosophically as a robotic company, we're always going to be highly focused on innovation. And we made investments across the board in R&D and Q4. This was in people. It was in products. It was in processes. And specific to products, we're not going to talk about, you know, future platform type of R&D. We are always working to maintain our clinical advantage from a technology standpoint, so rest assured we are working on things like that, but in the near term, we're definitely focused on items that make our robotic system simpler to use, improving workflow, improving the overall design of the system, and that's where we're spending those dollars. And to your observation, you should view our Q4 R&D OpEx as more reflective of the quarterly run rate as we head into 2023. So our 163 million revenue guide That would assume that R&D maintains that Q4 run rate of around 10 million for all of 23 as well. Okay.
spk04: I think that's great. And then just on the increase in your level of capital with Salesforce, I mean, previously you guys were talking about a gradual lift in kind of placements. I think you wanted to maintain a certain level of outcome as you place these devices. Are you comfortable that now that you've hired more people, that you have the right training in place where over the next six to nine months as they ramp and you do start placing in a more accelerated fashion, that you're going to get the same outcomes that you've been getting with the device over the last 18 months?
spk12: Yeah, it's a great observation. And look, while we continue to recruit and hire experienced med tech capital reps, and that's our focus, and we're really happy with the people we're getting, we definitely know that training and education is what leads to success in the field and ultimately clinical outcomes. So we're hiring on the capital front and being very cognizant of that. But at the same time, remember, we're also hiring a comparable number of clinical support staff and specialists. to make sure that our physicians and our patients continue to have the outcomes that they deserve and that what we've seen over the last year. So we're highly cognizant of growing fast, but growing responsibly and not sacrificing patient outcomes. Think about it every day.
spk08: And that was also reflected in the net promoter score that we showed the support we are giving to our customers. 92 is, we believe, is a very impressive number to have.
spk04: Okay, so thank you and great work.
spk09: Thank you.
spk01: Thank you. One moment while we prepare for our next question. Our next question will be coming from Ryan Zimmerman of BTIG. Your line is open.
spk11: All right. Thanks for fitting me in, guys. I want to ask about system sales a little bit. Kevin, you gave some commentary, I think, for first quarter to be in the range of 25 to 30. As we think about kind of the incremental sites of care within a system, are you seeing multiple sites share systems? Just asking because our own diligence suggests we're a bit surprised that that system number isn't marginally higher for the first quarter. And then as part of that question, at what utilization level would you think a site of care can support a second system?
spk12: So just to address the absolute number first, you know, I think a few things there is the sales rep productivity in our expanded field-based capital team really doesn't start to contribute to the number to the back half of the year. That's point one. Point two is the split of capital sales in the first half and the second half of 45-55. Q1, we gave a fairly wide range. We think that split is reflective of what we did last year as well. So there's really no change in whether it's the capital environment or how folks kind of view our system. And in fact, if you look at our first quarter growth, it is actually 70 plus percent growth in the first quarter compared to the prior year. So we're really pleased even with our first quarter growth, albeit on a range of capital sales of 25 to 30. To your last question about multi-systems within a hospital, we don't view that as a main driver of our business in the near term, although I will say we are starting to hear from some customers that potentially would be interested in a second system, but it's not a main driver in the near term. If you look at an average high volume hospital, they do about 17 BPH procedures a month on average. And if you look at just the portability of our system within a hospital,
spk11: The ease of use you really don't see a need for a second system in the near term So we have not factored over time may happen, but right now we are not factoring that in Okay, that's very helpful, and then you know the second question is also around systems for me just because a lot's been asked tonight, but if you think about the 140 or so systems for 23 How would you care like where would you characterize those going in and those purely are? And this is in conjunction with the expansion of capital reps. Are those purely high volume resection hospitals that you're going to target for those 140? Or should we think you're targeting, you know, beyond, say, that high volume, that 860 target that you've put out there?
spk12: So our initial target is 860 high volume hospitals. With that said, we have seen success in medium and low volume accounts. And in fact, if that install base at the end of December 22 of 167, 20 to 30% of those are actually in low and medium volume hospitals. And that's been a nice surprise to the upside. This provides some further metrics there. If you look at the pipeline, right now that pipeline is comprised of about 80% high volume hospitals and about 20% low and medium volume hospitals. Definitely focus on high volume, but we're seeing nice interest from the low and medium volume hospitals as well that are perhaps looking to expand their offering.
spk11: That's very helpful. Thanks for taking the questions. Thanks, Ryan.
spk01: Thank you. That concludes today's Q&A session. I would like to pass the call back to Reza Zagno, CEO, for closing remarks. Go ahead, sir.
spk08: Thank you. Thank you. Thanks everyone for joining our call today. I hope to see many of you in the upcoming conferences.
spk09: Have a nice day.
spk01: Thank you all for joining today's conference call. You may disconnect and everyone have a great evening.
spk10: Goodbye.
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