PROCEPT BioRobotics Corporation (PRCT) Earnings Call Transcript & Summary

I'm one of the med tech analysts here at BofA. And it's a pleasure to have PROCEPT BioRobotics with us today. And from the company, Reza Zadno, CEO; and Kevin Waters, CFO. So thank you, guys. So I guess I wanted to start with just kind of a quick review of Q1 and your guidance. You definitely gave some helpful color on the call and how to think about the cadence throughout the year. So maybe if you just want to start with a couple of highlights from the quarter, and then we'll talk in a little bit more detail about what you guys expect throughout the rest of the year.

So the highlight of the -- thanks for inviting us. Good to see you. For the quarter, we announced $14.2 million in Q1, and we increased the guidance for the year to 54 to 50 -- from $54 million to $58 million, we moved it to $58 million to $62 million. And we are very happy to also have announced Aetna coming on board that covers our procedure. And also we announced approval in Korea and approval of our robot in Japan. And with the robot there's ultrasound, and we are expecting the ultrasound to be a regulated approval for -- in 2022. So these were the highlights of that Q1 earnings call.

Great. And maybe, Kevin, just a little bit deeper on some of the guidance. I think on the call, you provided some color about sequential improvements in systems, hand pieces sold. So maybe if you can elaborate on that and kind of talk about how we should think about the cadence. And if you have looked at kind of what the Street is estimating, and if you think that your message from a guidance perspective is reflected in the estimates.

Yes. So we've looked at the revised consensus. I would suggest that cadence is reasonable. We had highlighted on the call that even with our robust performance in Q1, we sold 22 systems in the U.S, we do expect that productivity of our new reps to ramp throughout the year. And we do still expect modest sequential improvements from Q1 to Q4. At the high end of guidance, that would suggest we'd have a U.S. installed base at the end of the year, somewhere there 160 to 170 unit range. And I think the Street has modeled that appropriately on systems. On our consumable, our single-use handpiece, we do expect incremental handpieces sold to increase throughout the year as we increase our installed base. However, when you look at absolute utilization per account, given that significant growth in the installed base, we expect accounts to take time to build our average utilization. So while incremental handpieces sold will increase, you could actually see, given the volume of new accounts, the utilization per account decrease. And I think the Street, frankly, modeled that appropriately as well.

Got it. Helpful. And then BPH procedures certainly have seemed to be deferrable in some ways. You guys called out some impact. Doesn't -- you guys did really well, so it doesn't necessarily show up in the results. But maybe just kind of what you're seeing from the BPH procedure trend, how it trended January, February, March, and what do you expect from a recovery standpoint?

So we saw some impact of COVID in December, but not meaningfully that could change our ability to hit our numbers. We saw some of that in January, but February and March, we saw a return to what we were expecting. And that allowed us to hit our numbers. And so we have been so far, either because our installed base is limited, being able to meet our numbers. So we expect the rest of the year, absent of any new variant or any unforeseen event, we expect for the rest of the year to continue as is.

And so let's move on to utilization. So it's obviously been very strong for the last couple of years -- or sorry, last couple of quarters. And there's a couple of drivers, deeper use with your existing surgeons, adding new surgeons at hospitals and then getting the systems placed in new hospitals. So I wanted to kind of dive in a little bit deeper into each of those and kind of see what you're seeing. Maybe start with the existing surgeons. So how is the use evolving with your existing surgeons?

Yes, that's a very good question. So as we have said, 860 high-volume hospitals in the U.S. out of the 2,700 hospitals, we target a high-volume surgeon in those high-volume hospitals, and that becomes our champion. The goal is to have that surgeon use the product on a wide range of prostate sizes. And as we mentioned, we saw -- will be presented in the Q1 that if you look at the bell curve, the majority of the cases they are doing now is in the 60 to 80 gram prostate, which mimics, we believe, similar to what actual prostate size of patients are, let's call it from by the way of grams or millimeter. We use them interchangeably. From 30 to above 150, the top of the bell curve is at 70. We see the majority in the 60 to 80. So we are very happy about that. So it shows -- and that's thanks to our clinical support, because as we had mentioned, we have the aquablation rep, the capital rep, but mostly we have clinical support to make sure the physician experience is there. We see this first surgeon uses it on a wide range of prostates, and that is one factor in increasing utilization. And then at the same account, then there's -- typically, there are about 5 urologists that in these hospitals do BPH, we see the second or a third surgeon coming. So these are the factors in existing accounts. The new accounts, definitely, when they purchase the robot, we want them to do a few cases in the beginning to become familiar with the system and get up the learning curve. We see the longer accounts have stayed with us -- so we announced about 5.5, let's say, handpieces per account, and that was the average. Some of them are definitely above 5.5 But it takes about, let's call it 3 quarters from an account would -- a new account to get there. And that's what Kevin was saying, if you look at -- because it's such a limited installed base, new accounts have a big impact on this parameter. So until the installed base increases significantly, we believe this utilization directionally is a good parameter to use as an absolute number. We have to wait until that increases. So it takes 3 quarters for them to get to this 5.5, but definitely, as time goes on, the older accounts keep growing above 5.5. So some of them are above 5.5. Some of the new ones are below that. So that's the distribution. There is high variability in there.

Maybe asking on a specific question on that, and can you describe a surgeon comes on and how that utilization really evolves? You did talk about some standardization of resective procedures could move into aquablation. And I guess more of my question, or what I'm really trying to ask is, is there an inflection point within each urologist that say, "Okay, I want to use this on all -- or aquablation on a majority of procedures? Or is it gradual and kind of a slow step up?

It definitely depends on the user. But as we said in the past, because of the features in our technology, which is image guidance, now they can see the prostate on the side view also, and customized treatment planning because now they see they can decide which areas they want to cut. And then the robot consistently cuts the same way for all prostate size or shape, and then during cutting doesn't use water. So the outcomes, whether it's a small prostate or a very large prostate, is the same. And that is the value proposition. But accounts want to initially obtain their own experience. Once they have their experience, then -- because then there are other surgeons in that account who want to use, it makes sense to standardize because it's the same technique, same outcome, independent of the size or shape of the prostate. So when they purchase the robot, we encourage them to do more than 3 or 4 or 5 per month so that they come up on the learning curve. But depending on the individual, they do cases, they look at their outcomes and -- but we definitely see with time, they increase utilization. And on 5.5, if you -- again, that's average. Some of them are definitely more than that. A high-volume account that does 200 per year, let's call it 17 per month, when we had Medicare-only, what we have access to those is about 8.5. And 8.5 for 5 surgeons and knowing that 1 or 2 are doing our cases, it shows many of them have converted most of their procedures to -- resective procedures to aquablation.

Craig, one of the things we're excited about that's coming up is we're going to be at AUA on -- this week. We're actually here to go directly to AUA. And we're going to have an event on Friday morning that's available to the public, where we're going to have 2 of our physician users speak to exactly your question, how long did it take them to ramp up the curve? What was their initial utilization? How do they select patients for aquablation versus other modalities? And how do they see us standardizing their practice? So we're really looking forward to that interaction on Friday. We'd encourage everybody to listen to that as well.

That's great. And also, I guess a question on, when you do place a new system, and recognizing it's still relatively early, but the move from one doctor, a surgeon champion to the second or third one, are you seeing that happen faster than what you did a year ago, I guess?

So a couple of things. One, when I say we target high volume, sometimes in some accounts, there's 1 or 2 doctors who will start to be the first user. In some accounts, there's one doctor who starts to be the user. And then what we are seeing, there was a turning point for us in adoption was when we received full Medicare coverage. That allowed us to place the robot. But in the last few months, we are seeing a turning point on awareness. We are seeing more and more peer-to-peer communication, and we are seeing on social media, patients sharing their information, physicians communicating with their peers. And we are very excited, the first live conference at AUA. Definitely, we are seeing a level of awareness that has increased.

Couple more on procedures. So we just ran a survey recently, and it looks like half of the procedures, at least from the survey, are coming -- aquablation is used in lieu of or instead of TURP, or where it would have been TURP prior. So is that kind of the -- is that the feedback that you're getting from urologists, from your users? Were they doing TURP before? Or is it also coming from other types?

So today, as you know, when they do BPH, depending on the prostate size or prostate shape, they select the procedure. So let's call one set of procedures below 70 milliliters and one set of procedures, about 70 millimeters, with or without obstructive median lobe. On the enlarged prostate, anything in excess of, let's call it, 80 or 90 milliliter, those are the obvious ones because the safety profile of our product is much better than what some of the other procedures for enlarged prostate. On the, let's call it, below 80 gram, when we asked if you didn't do our procedure, what would you have done most often, we hear TURP, correct.

And last one on procedures, and this is more about the market opportunity really, too. You have plenty of room to run. You're very early stage in terms of resective procedures. I think we have 2% of all respective procedures is our estimate for '22. But bigger picture, the long-term opportunity is pulling in some of the drug dropout candidates. And I want to ask, are you seeing momentum there? Are you hearing it from urologists? And as an investment community, I mean are there things that we can see other than you're doing well or you provided in that comment, where we can actually start seeing those patients come in?

Yes. So as you know, the survey -- last big survey that was done in 2019 before COVID that showed a number of cases in resected and nonresected. '22, because of COVID, 2021 numbers are going to come soon. We'll see. First of all, most patients who get a procedure, whether resected or nonresected, were on medication. So already, almost all of them were on medication. Do we see an increase? Yes, we have seen accounts who have done a good job of increasing awareness for new technologies. And those accounts, whether they are using our product or not, they have done a good job of increasing awareness amongst patients. Mostly on incontinence, erectile dysfunction, sexual side effects, yes, we do see increase those patients. I mean we have anecdotally patients who were on medication for long time, patients who would wake up multiple, multiple times at night to empty their bladder, but they were concerned about side effects. And they decided to opt for aquablation. The short answer is yes, but I -- until we see the 2021 numbers, I can't give you a specific number.

That's -- I appreciate that. And maybe with regard to that, what do you -- what have you guys done from a DTC campaign? And what are the plans kind of moving forward? And how big of a strategic investment do you think you guys are going to have with that?

So our DTC campaign is in the form of working with the accounts that we place a robot. We do not directly advertise for our product, mostly because we have -- as of Q1, we announced a 93 installed base. What we don't want is we do advertise and patients go to us because they do not have the robot. So the accounts we are working with, we provide them with the clinical data they need to advertise for themselves. Having said that, roughly half of the patients who are taking medication are under the care of a urologist. So our intermediate strategy is still, at the same office of urologists, reach out those patients who are taking medication. And then in the long term, the balance of the patients who are taking medication with a general practitioner. But we -- our direct-to-consumer advertising currently is through the hospitals.

So you have enough patients.

There is enough patients. In 2019, there was 300,000 of them.

Okay. No, that's fair. Let's switch to the systems and I'll get the kind of supply chain, CapEx spending environment out of the way. Obviously, it's a big question in all of med tech. So in terms of any supply chain challenges, any issues sourcing raw material? How are you guys handling it? And what is your view of the hospital CapEx margin?

So I'll let Kevin answer the hospital CapEx. As far as our supply chain is, we made a conscious decision more than a year ago, thanks to our Vice President of Operations. We anticipated the supply chain issues and increased our inventory. And also because our, again, installed base is low, so the inventory cost is not that high for us. Yes, the supply chain challenges are increasing. In many cases, we have to look for multiple sources to make sure we are not running out of raw material. We are working very closely with our vendors so that even we understand who are their vendors. And we have been able to manage to mitigate the issues so that we can meet our numbers, and that's by increasing mostly the inventory.

Then on the CapEx environment, I mean we're aware of the comments some of the larger robotic companies have made. But we're so early in our adoption cycle. There's 2 factors that I think are helping us perform, even in this environment. And the first is just the ROI on our system. We have a very compelling ROI for hospitals to now perform aquablation as standardize care, replace many different modalities, which by definition, is not profitable when you're offering a little bit of everything. So we're able to standardize and bring that ROI. And then second, I think it's just the nature of our customers. As Reza mentioned, we're targeting initially high-volume, well-funded hospitals. And these hospitals typically have a greater capital budget than perhaps a smaller regional or community hospital. And at our price point, which is I think the third factor, our average selling price is $350,000 in the U.S., which tends to be below a threshold that would require complex approvals. It's usually done at the local level. And another factor that is helping, we have put forth that we've signed numerous integrated delivery network hospital agreements. And that's really given us a hunting license in these hospital network systems where the pricing is fixed, it's already determined, which allows us to move that capital through the process much quicker than perhaps a larger capital equipment company would be able to do.

Got it. And in terms of meeting your expected demand from the sourcing materials, I heard -- I know you guys bought inventory, as you alluded to, Reza. But no issues to -- basically, to have the supply to meet whatever demand you are expecting for '22?

For '22, no, we do not see an issue there. And despite increasing inventory, but the -- I mean the challenges have definitely increased. In fact, we have increased personnel in the supply chain and manufacturing. So it's more complex than last year, but we are able to meet the numbers.

One follow-up, maybe Kevin. Some companies have made comments about staffing at a hospital and not being able to get a system installed. So maybe just talk a little bit about what the system -- the requirements from a hospital perspective, either staffing or installation process that's with your systems.

On staffing, I mean that could be impacted in 2 ways. The first is, as you mentioned, is with the system installation. And one of the nice aspects of our robotic system is that the installation is not complex. So there's no room modification. There is no construction that needs to be done. It's pretty much plug and play from an installation standpoint. So we don't see any shortages on that side with installation. So next, I would address staffing shortages within hospitals. And if you think about our volumes, we said the average hospital right now is doing 5.5 procedures per month. This is a procedure that I think you can schedule around at these volumes, staffing shortages, and that's what we found. So it's quite common for our sales reps to say the tech of the room is a different tech than was in the room last time, so we are seeing that. But it's not hindering our ability to meet our procedure volumes or case cancellations, anything of that nature.

Great. That's helpful. Want to move on to international opportunities. You guys surprised at least me. I don't know if you surprised others by announcing 2 approvals. I know -- I thought that was a couple of years out. So obviously, congrats on that. But I want to talk about kind of the contribution that those markets can bring, and I know you talked a little bit about it on the call. So let's start with Korea because I know you guys are doing procedures now. So maybe just the dynamics of the market, how big it is relative to the U.S. and how we should think about the contribution -- the revenue contribution this year and then goes on.

I'll talk about the approval, and then I'll let Kevin talk about the contribution and what we see. Definitely, outside the United States, in Western Europe, our focus in France, Germany, U.K., Spain, Italy has been in increasing awareness, market development, reimbursement. In Asia Pacific, countries that are fast adopters of new technologies, and either they like robotics or new technologies in general, and also with a favorable -- with a health care system that pays for these new technologies, Japan, Korea are on the list. So we started that process from a regulatory point of view a few years ago. And Japan, as you know, $120 million roughly operation, with probably half of them more than 50 years old. But in Japan, we obtained approval for our robot. With our robot is ultrasound. So we submitted the approval separately, robot and ultrasound, and we expect ultrasound portion of it to be approved before the end of the year. And in Korea, the reason we went there is because they are fast adopters of new technologies. And they like robotics that definitely, the market is not big as Japan is. What we are doing now in those countries is -- and we know the population, we know the target, but we still have to do a little bit more work on segmentation, understand the hospital base. And in Japan, we have to do a clinical study. PMDA requires that you do a clinical study and [ opting investment ]. I'm going to let Kevin talk about the contribution of Korea.

Yes. Before I get to Korea, I'll just -- international in totality is a market around the globe where we would expect probably anywhere from 10% to 15% of our consolidated revenues, I think, over the next 2 to 5 years, Craig, as we move forward. And I mean that's not really a testament to the international market being small. I think it's more a reflection of just how large the TAM is in the U.S. and just how much we're going to expand in the U.S. over that same time period. There's still some heavy lifting we need to do in Western Europe, and as Reza mentioned, still in APAC on the market development and reimbursement side. So I think of international as much more longer term in nature, with the initial focus on the U.S., but 10% to 15% in the near term. And in Korea in specific, I think we had called out on our Q1 earnings call, we expected about $1 million this year. Moving forward, that's going to improve marginally, but it's a market where we think you need to be if we're going to be a robotic company in Asia Pacific, and really use that to get key opinion leader support, stick our toes in the market. We're working with a reputable distributor partner there. We're not direct. And that's how we're thinking about Korea, initially.

And any color on the Japanese time line? So obviously, you talked about the ultrasound approval, but the clinical study and reimbursement, is there -- I mean how should we think about it? Is it 3 years out? Is it 5 years out?

I would say, historically, if you look at other situations, it's in the 2 years -- 2-year time line.

Got it. And then sticking with Asia, I mean plans for China. You have -- there are other BPH products that...

Yes. So China, definitely a very large market. We have started the regulatory approval there, but it's too early to give any time lines for China. But these are long regulatory approval processes there.

Got it. I think with that, we're getting close to the end. So I think I'll just end it there, and thank you again, Reza and Kevin.

Thank you for inviting us.

Thank you. Appreciate it. Thank you.