PROCEPT BioRobotics Corporation (PRCT) Earnings Call Transcript & Summary

Good afternoon. My name is Craig Bijou. I'm one of the medtech analysts here at BofA. And it's a pleasure to have PROCEPT BioRobotics here. From the company, Reza Zadno, CEO; and Kevin Waters, CFO. So Reza, Kevin, welcome.

Thanks for having us. Thank you.

So we won't talk about it. I'm kidding. So I apologize in advance, but we're probably going to start with a number of system questions given Q1 results. So maybe start there. And you placed 25 systems in the first quarter, the lower end of the range that you had given for the year. So let's just start maybe kind of what happened during the quarter. You talked about a handful of maybe IDN sales that didn't come through. But would just love to kind of get your perspective on what happened in the quarter?

So we provided that guidance. We were in February. We just wanted to give some visibility to our investors how we thought the quarter was going to go. But for now, we are in April, we are confident for the number we gave for the year, 140, and that's based on the visibility we have on the pipeline, the capital pipeline. And the reps who are now -- we have hired them in October of last year. Now they have been with the company for a few months building their pipeline very effectively. They are coming up with their product [Audio Gap] very well. And we signed a large IDN in April, and the goal is to sign the balance of the IDN. I think the majority of the [Audio Gap] have contracts with majority of the, we call them, strategic IDN throughout 2023. So the combination of these metrics and data we have put on pipeline and the reps gives us the confidence for the number we have given. And some of the strategic IDN in Q1, [Audio Gap] decided to push their purchases to Q2. [Audio Gap] saw they have opened up on that. The cadence we gave was, we said 45% of the capital will happen in the first half of 2023, and then 55% in the second half, and we are still on that. And just to give more color on that, last year, we had 20 reps that did about 50 robots in the second half of the year, maybe 2.7 per rep. If you [Audio Gap] second half of 2023, we are seeing roughly 74 robots, and that is with 30 reps, but that's still the same 2.6 per rep. So again, some of those capital moved to Q2. So this is to give you more color on our confidence for the balance update and where and what can kind of see. Kevin, do you want to...

No, that's fine.

Okay. Well, thanks for that, Reza. And obviously, the biggest investor question, I think, coming out of Q1, and as we're sitting here today, is the implied ramp based on what some of the metrics you just laid out, Reza. So you're expecting systems to go from 25% in the first quarter to 38% in the second quarter. It's a ramp that you guys haven't done before. And I think the biggest investor question, appreciating that you guys feel good about the full year, is what gives you the confidence in really getting that Q2 ramp something that we haven't necessarily seen before? And I guess, how do you get investors confident that you can do that?

So this is based on the stage and where those -- stage of those robots are in the pipeline and the confidence level we associate with every deal is based on that [indiscernible] and the fact that we saw these strategic IDNs opening the purchase for the second quarter. If we had seen any change similar to February that we gave a clarity to our investor that where we thought the quarter was going to be, we're still confident on the numbers there.

And then just maybe I'll make 2 further points there. And we had talked about the timing and the shift of those IDN sales in the first quarter. We pegged that at around 5 systems. And if you were to say those would have been in Q1, then I think that ramp really means going from 30 to 33, not 25 to 37 or 38. So when you include those, the ramp doesn't look as significant. And then the other point is, with our pipeline, when we identify a surgeon champion, and that surgeon champion goes to administration, we call that stage 1 of the funnel, we see very low fallout. And the fact that we have more deals in that funnel today than we need to get to the full year number, and primarily the Q2 number, gives us a high degree of conviction around that sequential increase that you see.

And I know you guys aren't going to give an intra-quarter update. But is there any -- I've covered a number of companies that sell capital. And sometimes there's an update of, there were X number of systems that got pushed to the second quarter that we expected in the first quarter. And they communicate that, yes, we did make that sale. And I mean, I guess, I'm trying to ask, is there a way that -- like is your confidence in getting to that number, has it changed at all from when you reported Q1, based on what you've seen thus far in the quarter?

I mean, as you mentioned, we won't give a monthly update on the capital. But based on the stage of those deals and the ones that push through Q2, we feel confident that they are coming in.

Okay. And then on the sales funnel and the percentages, I guess, you've been tracking this for a little while. And has there been any divergence in those percentages? Or have they been pretty consistent? And then I guess the question is really, is there any reason to think that maybe those percentages of completion change at all?

No. In fact, last quarter, we mentioned that when we have a funnel, from top of the funnel, when they come to the stage where, as Kevin mentioned, surgeon champion has been identified, we call that Phase 1 of the deal. When we reach that phase, there is very little, if not none, that drop out. So last quarter, we said that had increased. It was the highest level we have seen. And the new capital reps we have hired, they were placed in new territories, and they are making good progress to filling that funnel and bringing them to the Phase 1.

Okay. Reza, you mentioned some of the strategic IDN targeting. And I believe at the investor event at AUA, you talked about 17 strategic IDNs, and they represent, I believe it's 1,000-plus BPH hospitals and maybe 30% of all hospitals...

Yes, 30% of all hospitals, and so 26% of high volume, 30% of all. So 30% of the 27. So we define them as IDNs that have more than 20 hospitals.

Okay. Yes. And I guess thinking about the -- you announced a sales contract that started on April 1 with the largest IDN. How many of those IDNs are you currently contracted with? I know you said that the goal is to get all of those under contract.

I mean, the goal is to have majority of them. We have a number of them. And some of them, we cannot mention their names. Some that we had approval to have a press release, we have mentioned their name. The goal is by the end of 2023, have contract with majority of the 17.

So what our guidance implies, specifically to IDNs, is that they continue to operate in the normal course of business. And that means we're not anticipating a large multisystem order, for example, in any given quarter. But what we do expect is IDN networks continue to purchase, but that purchase decision is hospital by hospital. And what this contract does is it really allows kind of that predictability to close, uncertainty to close, uncertainty around pricing. That is all already taken care of. But our guidance does not -- we do not need large multisystem orders to get to the implied system number for the year.

And are you guys willing to share what percentage of your installed base is kind of in that strategic IDN network?

We haven't disclosed that. But if you look at the fact that the large IDNs, the strategic IDNs, represent 25% to 30% of all high-volume hospitals, I think that's a fair way to look at how our installed base should shake out over time.

And then one other system question for now, system ASP. So a number of -- in Q1 came in below expectations. You reiterated that you expected it to -- so it came in at $350,000, and you expected it to be $370,000 for the rest of the year. Investors ask questions about whether there was an implication from either demand or market demand. And I guess I just wanted to give you a chance that what was the reason for the lower ASP? And why should we think that, that's not going to be something that will continue?

Yes. I'm going to start by not answering your question, and I'm not going to get to your question, but we're very disciplined on our handpiece pricing is what I would say, right? I mean our new customer pricing of $3,250 is fairly standard. We don't discount the handpiece. And ultimately, we believe that's the main driver of the business long term, and we're disciplined there. With that said, our hospital pricing, it has always been variable between accounts. And it's a negotiation. We'll work with the hospital, perhaps look at their payer mix, perhaps look at the number of physicians they're bringing on board, their anticipated volumes. And we have a fair degree of flexibility in negotiating price. So while ASPs have been relatively consistent on a whole over the last 3 quarters, there has been variability. We've sold robots north of $400,000. For example, we've sold robots less than $350,000. And what I will say is Q1, we don't believe is any type of trend from a macro level where we're seeing weakness or we're seeing more pushback than we normally receive. It is really reflective of a handful of deals being at the lower end as opposed to the higher end. So we don't see this as a long-term trend. With that said, moving forward, while we did guide to average ASPs being $370,000 for the rest of the year, we wouldn't be surprised if we do have variability here quarter-to-quarter. And I'd encourage investors to not look at it negatively or positive either way. It wouldn't surprise me if we have a quarter at $390,000. It wouldn't surprise me if we have another quarter at $350,000. That's going to be variable. And it's important for us to get the robot sold. Ultimately, again, utilization is what's going to drive the valuation of our business. And the $20,000 discount that we're looking at in Q1, on average, I mean, frankly, that represents 1 month of utilization revenue. And if hospitals are willing to purchase a system earlier in the quarter, and we have flexibility to negotiate there, I think that's a trade-off we would make and continue to make. We have nice standard margins on our capital. It's not a drag on our business either. It's not as if we're at the bloody edge of making money on our capital.

Okay. One more question on systems. You guys got United coverage. And if I think back to when you got some of the other larger payers, Reza, I think you actually said that it's a driver of system sales. We think of it as a driver of utilization, but it can be a driver of system sales. So I guess, getting United and the fact that they're the largest commercial payer, what does that do? Or have you seen an impact on system sales since that coverage announcement?

I mean, first of all, it's too early to mention that. But definitely, it makes the job of a -- first of all, United, it depends on territory. Some geographies, there is more United; some areas, the local Blue Cross Blue Shield is more important than United. So short term, it makes the job of a capital rep easier to say that we have access -- 95% plus of the men have access. We needed to have United -- in the long term, to become standard of care, we absolutely should have United, but it makes the rep's job much easier to start the conversation. But too early to say, yes, United [Audio Gap] generate more...

It's almost counterintuitive, right? Because the short-term benefit really is penetration. But the long-term benefit is definitely utilization. And given United really isn't effective until June 1, we did not raise our utilization guidance specific to United. I'll say that. I think we could have seen the 6.5 procedures per month per account without United, but it's definitely helpful. But I think that the true impact is more longer term as opposed to near term.

Let's talk about the utilization. You raised guidance 6.5x from 6x. I know you track utilization pretty closely by cohort of system when they're installed. And that's been kind of, I guess, the newer systems have been tracking ahead of what the older system placement. So maybe just expand on that, what you're seeing? You chose to raise guidance, which I think some investors asked why you chose that time to do it. But I would just love to hear kind of thoughts there.

So last year, every quarter we were saying, because we are installing new system, it was early in our launch. We said the new accounts will bring down the average. And then a few quarters, we saw a trend that new accounts that were coming on board, the ramp was better than the accounts that had started a year earlier. So 2 things are helping for us to change this view, to increase this utilization. One, we are seeing accounts who have been with us in time, their utilization increases. More importantly, the new accounts, let's say, the ones who started in Q1, their start is faster than the one that started in Q1 of 2022, and also more surgeons per account enter. So these are the 3 factors that allowed us to increase the utilization.