PROCEPT BioRobotics Corporation (PRCT) Earnings Call Transcript & Summary

Thanks for joining us. Matt O'Brien, one of the med tech analysts here at Piper. Extremely excited and lucky to have PROCEPT here joining us. From the company, we have Larry, who's the CEO; and then Kevin, who's the CFO of the company. Matt is down in the front row here, making sure I don't say anything I shouldn't. No guarantees there. But thanks so much for coming out.

Thanks for having us.

You bet. So Larry, maybe talk a little bit about the utilization commentary from Q3. I think you said it's not a procedure problem, but it's more of an inventory kind of work down situation. So can you just maybe clarify that a little bit more, just give us a little bit more commentary about what that means?

Sure. Happy to. I think historically, people have looked at handpiece sales as a proxy for procedures. But when you place as many systems as we do every quarter, you have people taking stocking orders. And depending on how long it takes a system to come online, sometimes that inventory sits for a while. I think the other thing, too, is we never really established par values for any of our sites based on their utilization. And from my time at Edwards, we live in a consignment world and par values are everything. You always want to make sure you have inventory rightsized in the field. And so for us, my focus is always on procedure volume. The stocking orders are always going to just sort of be noise in the system. So we feel really good about where procedures are going and where procedure growth is, and that's really our focus and where all of our energy is going. And so I think we talked about having an Analyst Day in February, and I think that's where we're going to really shift probably a lot of our commentary more towards procedures than just handpiece sales. So people have more insights and, I think, how the overall health of the business and how those things are going. But none of our commentary about the guidance reflected weakness in procedure volumes. It was just more a matter of trying to rightsize this inventory. And when we did the analysis, it looks like we probably had more people carrying too much inventory than people not carrying enough. So we made adjustments for that. We built it into our guidance. But from a procedure standpoint, we remain pleased with the adoption of the therapy.

Got it. Okay. And can I recommend Costa Rica or some place very warm in February versus here in New York.

Something like that.

Yes, I'll stick to my day job. Sorry about that, everyone. So just maybe to that point, can you maybe illuminate a little bit when you talk about the procedural growth? I mean, can you just tell us what did procedure growth look like? Because you look at like, okay, we're down from 53,000 handpieces to 52,000, but you're saying utilization is good and procedure growth is good. It's like, well, that doesn't quite reconcile. So how does the underlying procedure growth look?

Well, I think some of the things that we talked about that we're trying to focus on is that when we'd have these stocking orders and then a lot of times, our capital team would sell an instrument, but it wasn't necessarily ready to be installed. And even when it did get installed, maybe they didn't have cases lined up or a lot of those things weren't going as smoothly as they could if we didn't have those warm handoffs. So you would just have inventory just sitting in accounts that wasn't necessarily being utilized, but every new system you're placing out is taking that stocking order and doing that. I think the other thing, too, is if you don't establish par levels for places, then you might have somebody carrying 3 or 4 months' worth of inventory and you don't want that. What you really want is people carrying probably 6 to 8 weeks' worth of inventory. You want to manage 2 months, but it's just exposure for you having more inventory out in the field than what you want. And so I just come from running a big commercial organization where I think when I left, it was about $4.5 billion, and you just wouldn't want to have inventory not being rightsized based on true account utilization. So those are just the things that I think I just -- from running a big commercial business, those are just things I bring to the table. But what's -- for those of you who follow me at Edwards, I never talked about the stocking orders when we launched TAVR. I never talked about it because all of that stocking is going to have to come back out of the system at some point. Everything that I always talked about was procedure growth, procedure volume and how many centers are we adding and how much volume we're actually seeing in terms of cases. The other thing that I will say is when we focus on the procedure growth, some of the things that we really have focused on is trying to make sure that we launch quickly and efficiently. One of the things I learned from when we launched transcatheter sites was before we would train a center, we would make them send us 5 screened cases. And so then when we would take their stocking order, we would show up within a matter of days literally, and they would have 5 cases ready to go and we train them. And that's the way you get through the learning curve. That's the way you build up your referral cadence. That's how all of those things sort of happen. And we just didn't have a very mature process in terms of how we did that at PROCEPT. And so we ran a pilot program on that. We created a launch team, and we started launching instruments following that process. And we just saw a lot of benefits from doing that. And so that's just going to be something that we expand certainly as we go into next year.

And does that drive better utilization then in those accounts pretty...

It drives better utilization. It drives better inventory utilization. It just makes the business healthier. And I think the other thing is my experience at Edwards is when we launch a site and they do really well and they get in that steady cadence, they tend to do well. I think if you launch a site and my experience is that they did one case and then they waited 2 weeks and then did another case and they waited 2 weeks to do another case, they take forever to get to the learning curve, and they don't develop that referral cadence, and they don't even set aside the block time to get into that standard thing. So I think I learned how a site launches was one of the powerful predictors for how they were going to do longer term. And it's just something that I just brought a lot of focus to when I joined.

Got it. And is that something that's been in place now for several months or even longer?

Well, I've only been in place for a couple of months. Yes. So this is something that I think when I got with the management team, it's one of the things we looked at. And again, I think the management team had looked at it, but we had people chasing a lot of different things. And we were asking our field people to do a lot. We were asking them to try to drive procedure growth, obviously, but we were asking them to train. We were asking them to cover every case. We were asking them to train new surgeons. and then a new instrument would show up and then they'd have to go launch that new instrument, which takes a lot of energy and would pull them away from maybe some of their existing accounts. I think by asking people to do less and specialize a little bit more, we can have a dedicated launch team that will focus just on launching. That also frees up the remaining folks to focus on kind of what I call that same-store sale, making sure that we don't lose any momentum that we continue to train the new physicians. So it's just asking people to do less, but what we're asking to do is asking them to do it better.

Got it. And so beyond that, what else have you seen or when did you bring from Edwards do you think you can implement at PROCEPT to help on the utilization?

Well, I think the team at PROCEPT did an amazing job at making sure they launch this brand-new therapy, and they delivered really high-quality clinical outcomes. And I think that's really one of the most fundamental things. I think how many -- I think we've all have examples where some device or therapy looked really good in the clinical trial, and then they got in the commercial setting and it all fell apart because they didn't invest in training or they didn't screen patients properly or all those things. And I think the team has done an amazing job of making sure that, that happened. But I think to some degree, we almost never got out of that mode. We were just always sort of felt like we were the new kids on the block, even though we have probably more Level 1 evidence than anyone on our procedure, on the safety profile and on the things that we can deliver on. And so we just need to enter that next phase of our business where we get our share for all the patients that are being treated today, but also there's a huge opportunity to get patients off the sideline. And again, I hate referring back to Edwards all the time, but the first tranche of patients we went after were either inoperable patients or patients that were high risk that we were converting from surgery over to TAVR. But where the real growth of the business came is when we started getting people off the sidelines. People that said, I would rather die than have open heart surgery. And now all of a sudden we offered a procedure where they didn't have to have a sternotomy and we doubled the number of people that were getting treatment. And so we have to make sure we get our fair share first. But then the second thing is how do we pull people off the sideline.

Okay. So I was going to ask that question later, but let's just get to it now. How do you get guys off the sideline? Guys are knuckleheads. They don't want to do this stuff. There is still complication risk, there is. How do you get people to go and to get this procedure done something they don't really want to admit anyway?

Well, I mean, I'd argue we dealt with the same things with aortic stenosis and transcatheter valves. And I think what people would say was when the cure feels worse than the disease, you'll live with the disease. And I think probably one of the funnier things, the learnings that I've had is I came from structural heart and I come into urology, and I'm like, I don't know anything I'm going to have to learn. But fluid dynamics is fluid dynamics. And when you look at what's happening to the heart when you have aortic stenosis, your ventricle is trying to beat harder to overcome this narrowing of the valve, and it can do that for a period of time until it can't and then you start doing long-term damage to your heart. Well, and we just told people just live with your symptoms. If you go and tolerate your symptoms, you're okay. And we tell the same people that who have BPH. And the reality of it is what's happening is your urethra is getting narrower. Your bladder has to build up more pressure to overcome that narrowing. And your bladder can do that to a point and overcome those symptoms until it can't anymore. And by leaving that untreated, you're doing long-term damage to your liver that can learn -- lead to long-term incontinence and bladder control issues and all these other things. And we haven't done -- we've spent 0 time talking about the damage that you're doing to your bladder during that latency period, during that period of time. I think the other thing about it is when men looked at it, I mean, most men, I'll just speak for myself before I joined, you sit here and you say, if I get a procedure done on my prostate, I have a risk of incontinence and certainly, I'm going to have sexual dysfunction. Like that's just a given. And so like given that that's the choice, I'm going to live with my symptoms, no matter how bad they get. And that's just not the reality of our procedure. We can go in and we can do an excellent procedure. It's completely restorative really when we get right down to it. And our risk of incontinence are insanely low and our risk of sexual dysfunction is really, really low. And we haven't really spent the time telling that story yet. We spent more time talking about the AI part of it or that it's a robot or that it uses water more than the outcomes that we can deliver for the patients. And I think one of the great things is I was able to -- Pooja Sharma, who ran strategy and marketing for me at Edwards, she's joined PROCEPT and she's run this whole playbook for me for 20 years when we were at Edwards. And we know how to do this. Is it easy? No. Is it super fast? Is it a light switch? No. But you can absolutely get people off the sidelines if you have a compelling clinical case to make. We need to lead with our evidence. We need to continue to generate more evidence, but we need to tell our story. And we haven't really -- we haven't even really gotten started on that, to be frank.

But there's a lot of clinical evidence around Aquablation. Can you use that existing evidence on the clinical side? Or do you need to go run a study to show that.

We have tremendous existing evidence. We have tremendous existing evidence that takes out. We can show the durability of our procedure. I think we live in this sweet spot where you have these nonresective procedures and people view them as being like a little less invasive but they're not as effective and they don't really lead to a durable outcome. And that's why we've seen a lot of nonresective procedures kind of come and go. Then you have the resective procedures that they're very effective, but they leave you with a lot of complications and a lot of risk. And we live sort of in this Goldilocks space where we can deliver those resective outcomes, but really almost with a complication profile of the nonresective procedures. And I think that's the most powerful part of the story that we need to tell.

Yes. Okay. And then just sticking on the utilization side, we've seen UroLift get to 20% penetration. We've seen a lot of other therapies get to 20% penetration and kind of peter out. What gives you the confidence that this can get to 20%, 30%, 40%, 50%? I mean, to me, as a guy, like this is the one I would pick not saying that because you guys are sitting here, maybe kicking up a little bit. But like this is the one I would probably like...

We have referral programs available. No, it's -- I think the nonresective procedures always look sexy early, but they start to fall apart when you start seeing the durability data. And when they don't prove to be a durable procedure, that's one of the things. I think that's one of the other narratives that we really need to change when -- I think you have doctors that look at this a little bit as a hierarchy of I'm going to start with a nonresective procedure and then I'm going to work my way down to a resective procedure because the perception is that nonresective procedure is less invasive. But once a device goes through your urethra that's the same size, one procedure, I don't think is any less invasive than another procedure, the invasiveness of the patient. And when we do patient-centric research, the first thing they want is relief of their symptoms. The second thing they want is a one-and-done procedure. Nobody wants to have this done a second time. And the third thing they want is to be able to preserve their sexual function and their bladder control. I mean those are the 3 things. And when you look at the lens at the world through a patient lens, I don't think anything competes with Aquablation in terms of the outcomes we can deliver and the safety profile we can deliver. And I think that's the case we have to make. But it's fine for the urologist to say I'm going to do this procedure and if that doesn't work, I'm going to do that procedure. And if that doesn't work, then I'm going to do that procedure and run down that hierarchy. I don't think that's fine for a patient. I mean I couldn't imagine being in structural heart and having a surgeon say, I'm going to do a sternotomy and repair the valve. And if that doesn't work in a year, then I'll come back and I'll replace the valve and just do another sternotomy and because I view repair as being less invasive than replacement. For the patient getting the sternotomy, the invasiveness is the same. For a patient having a fairly large device going through their urethra, the invasiveness is the same. What we need to do is do one procedure, give the person a complete outcome with the best safety profile possible. And that's what we need to go explain to people. We can give them the relief of their symptoms. We can preserve their sexual function and their bladder control, and we can do it in a really high-quality way.