Pulmonx Corporation (LUNG) Earnings Call Transcript & Summary

Okay. Great. Thanks, everybody, for joining us for the next fireside chat here. As a reminder, I'm Bob Hopkins from Bank of America on the medical device side. Also here with Clay DeMarcus, who works on my team, and we're really excited for the next fireside chat. Pulmonx, I think everybody knows. We have Glen French, the company's Chief Executive Officer; and Derrick Sung, the company's Chief Financial Officer. We're going to have -- I'm going to hand it over to Glen to make a quick introductory a couple of comments, and then we'll fire away with questions. So Glen, Derrick, thanks very much for being here. And Glen, I'll hand it over to you.

Great. Thanks, Bob and Clay. Really appreciate the opportunity and look forward -- I'm really looking forward to this. I just wanted to say that we are -- boy, it's so refreshing to look up on the horizon and not see this COVID cloud building. And nothing will make me happier than to not say that word in any of these calls in the not-too-distant future. We feel really good about where we are as COVID is sort of moving down, certainly in the U.S., and we can see green shoots, if you will, outside the U.S. as well, particularly in Europe. Our StratX trends are up. We -- over the last 5 weeks, they've been strongly up and to the right, and that's not just in the U.S. We're actually seeing a strengthening outside the U.S. as well. Our calls that we get, which are measured both by calls into our reimbursement services group as well as into our accounts where we have tracking numbers. We see those going up significantly. We've seen a significant build in web traffic. We picked up in the first quarter 19,000 -- or 17,000 additional social media connections, and we're now up to 91,000. So we'll soon be at 100,000 followers on social media. Accounts sort of coming out of the COVID phase, are up 60% relative to going in. Number of reps is up 60% relative to going into the COVID phase. And cases are really coming back in a nice way. We saw strength certainly in the back part of the first quarter and carried through into April, which is very encouraging. So again, it's just such a pleasure to be looking off on the horizon and not seeing another building cloud. So very, very pleased and expect to see solid incremental sort of quarter-over-quarter growth in the United States, second, third and fourth quarter. And similarly, in Europe, which represents about 40% of our overall business, 80% of our O.U.S business, we see is also stepping up in the third and fourth quarters.

Great. That's very encouraging commentary. I appreciate your opening with that. And yes, to start, I'd like to kind of stick with the sort of here and now, and then we'll go longer-term as we get down the question last year, so again, appreciate the kind of bullish comments there. I did want to drill down a little bit in terms of what you're seeing OUS. Because unlike many of the smaller companies we follow, it is, at least today, it is a big percentage of your overall revenue. So can you just remind folks that what your 2 or 3 largest markets are outside of the United States and maybe go in a little bit more detail on what you're seeing right now in terms of the pace of the recovery?

Sure. It's been fascinating. Our top 3 accounts or top 3 countries outside the United States, or what we call International, are Germany, France and the United Kingdom. And if I may just take a step back about year-to-date, roughly 50% of our revenue is in the U.S., 40% is in Europe and 10% is in what we call Asia Pacific, which is Asia plus Australia. And so focusing on Europe. We -- Germany, France and the U.K. are fundamentally different markets. We are in about a dozen European markets. And I'm very proud of the fact that despite these COVID waves, which have been massive, and it hit all across Europe. We've been able to keep our revenues pretty much flat, January, February, March and April in Europe, which is really a testament to our team and also reflects the heterogeneity of that marketplace and the way that COVID has impacted it sort of in series. So it's some have gone in, others have pulled out. What that means on a macro basis is that we're at about 85% of pre-COVID levels despite the fact that we've been muscling our way through this situation. Now each month, different countries have made positive contributions, while others have been sort of picking themselves back up after getting knocked down. The way that Europe in particular moves, as it relates to sort of in and out of COVID has everything to do with their health care systems and the sort of capacity, and in our case, ICU bed capacity on a per capita basis. So if you look at the U.S., Germany, France and the U.K., the U.K., by far, has the fewest ICU beds of -- per capita of any of those marketplaces. And what that is meant and what we saw across 2020, in contrast to the U.S., France and Germany, was that when the U.K. got knocked down, it took a lot longer to get back on its feet. So much so that for most of 2020, the U.K. was really never back on its feet. It was literally as it was trying to get back on its feet, it got hit by another way. So the fact that the U.K. is now tracking similar with the U.S., i.e., it did not get whacked by the last wave that went across all of Europe. And actually was saved in the same way that the U.S. was by these vaccinations. We are only now -- we saw the U.S. starting to come out in March, and we're only now starting to see the U.K. come out. Now everybody probably remembers, you've heard this so many different times. The reason why these ICUs are important and the capacity of the ICUs are important is that when they get filled up with COVID patients, pulmonary and critical care specialists are manning those ICU beds. And so our customers get substantially distracted by this and also any technology that may lead somebody to an ICU, particularly an elective procedure, there's a prohibition on restarting those types of procedures. So I think we've gotten hit pretty hard by COVID, and we have a little bit of what we call an ICU bed lag. And the lag in the U.S. and frankly, in Germany and France is more like 2 months. And in the U.K., it's more like 4 months. So we're just seeing some really great green shoots. Ireland is just picking up, U.K. is scheduling a lot of -- starting to move forward towards scheduling a lot of cases, and we're seeing an increase in StratX activity. So everything seems to be aligned for the U.K. to reemerge probably in the tail end of the second quarter. In Germany and France, they're going to come in a little bit later, probably with Germany coming first, followed by France. And -- but these markets have continued to sort of to deliver numbers because some of the largest treating centers in both France and Germany have continued to push out patients. Our current run rate in Germany is about 30% below the pre-COVID levels, which is pretty spectacular to be running at 70% in the face of this massive wave that's consuming all sorts of ICU beds. France is a different story it is a really high-growth market. It was screaming. I mean it was more than doubling each year for a relatively short period of time and went from -- 4 years ago, we weren't in France, and today, it's our #2 European market. So though France has been hit by this heavy wave. If you look to the pre-COVID case run rate relative to where they are today. They're at about 120% of where they were pre-COVID. But they're not nearly to where we expect them to be once this sort of wave subsides. So I don't know if that answers your question, but we're optimistic we see clear strengthening in the third and fourth quarter in Europe.

Yes. No, that answers the question at a very detailed level. I appreciate that. I'm surprised by the comments on France. Encouraged by U.K. And Germany, I might have thought could get back a little bit quicker, but I suppose that's just a function of levels of comfort or ICU bed capacity. What is it that caused a little lag in Germany?

Well, it's interesting in Germany, what they did, unlike any of the other markets is they put an extra 10% buffer into the system. So they basically said -- so for example, if you were to look at where you are, let's say, ICU bed capacity -- or 60% of your ICU beds are filled. What Germany did is they added another 10 -- like an artificial 10% buffer. So if they were saying, we're going to stop procedures at 60% of the ICU beds filled, we needed to drop beds down to 50% in order to restart things. When they put an incremental 10% buffer. And so we've had to kind of pull ourselves down below that artificial floor, if you will, to get it restarted. So I think you're just trying to be conservative. They were really surprised. Merkel was talking about opening everything up. And then less than a week later, they literally shut the country down. So the steepness of the curve was really startling, particularly in Germany.

I know it's a small percentage, but what are you seeing in Asia Pac?

We see ourselves -- so Asia Pac for us right now is China and Australia, for all intents and process. So we have a little bit of business in some of the other markets like Hong Kong and Korea and Malaysia. But really, 90-plus -- more than 90% of our business is between China and Australia. Asia Pac going forward, we have opportunities that we're going -- we're back to pre-COVID levels -- we're arguably ahead of pre-COVID levels, depending on how you want to measure it in -- in China, and in Australia. The real opportunity going forward, the big opportunity to drive that to beyond 10% of our business is opening up Japan. And we've made a lot of progress there as of late. Specifically, we actually just hired our first -- I might have mentioned this on the earnings call, I believe I did. We hired our first full-time Japanese employee. He was somebody that we've known for quite a while, several people in the company know her well. And we have engaged an array of consultants. We've had ongoing interactions for over a year with PMDA. All the feedback we're moving forward on submitting our [ shonin]. And all the indications are that we're not going to have to do a Japanese study to get us on to the Japanese marketplace. And so we will move forward with the regulatory process and the reimbursement process and project that we'll be on for that market sometime in 2023.

Okay. Okay. So obviously, we have your Q1 numbers for revenues outside the United States. Derrick, I was wondering if you wouldn't mind commenting on -- in terms of the guidance for 2021 sort of just generally, what you're assuming for the full year outside the U.S. as part of that guidance?

Yes. So as Glen mentioned, what we saw kind of through the first quarter outside the U.S. was that given the mix of our business, kind of -- we saw our recovery stall out, if you will, right? So starting the beginning of the year, January, February, kind of the recovery started and then just stall. But we didn't actually see a decline per se because of that mix, as Glen talked about. So I think going into the rest of the year, we expect that continued sort of stall, if you will, maybe flatness in Q2. And then, as Glen mentioned, in the back half of the year, Q3, Q4, we'd expect to see kind of a sequential increase in revenue quarter-over-quarter. And that's basically kind of a year -- sorry, a 1 quarter lag versus what we expect to see in the U.S., which is most sequential growth starting Q2.

Okay. So in the full year 2021 then, roughly, do you think the percentage of revenue outside the United States, how would that compare to what you're seeing here in the first quarter?

I think it kind of -- it flips. It's a good question. So in the first quarter, we're kind of 45% U.S., 55% O.U.S. And I would expect that kind of through the remainder of the year, starting the second quarter, we'll see that kind of flip. So it's probably -- it's going to be skewed more maybe 55% U.S., 45% O.U.S, roughly.

Okay, okay. So it sounds like maybe a little bit of conservatism built in there on the O.U.S side based on the comments there, which is understandable given the uncertainty. But encouraging discussion. I also want to understand, to switch to the U.S. a little bit to understand kind of just on this metric that you guys have been willing to provide us total number of active centers. It's been a very helpful way to frame what's going on. And Glen, I was wondering if you could just kind of give us maybe an update on your thoughts on the progress you're making in -- on that metric in percentage of accounts that are active.

Right. So right now coming out of the first quarter, we had about 68% of our accounts active. In the pre-COVID phase, we were in 80% to 90% range. So we're still soft relative to where we were in the pre-COVID phase. But having said that, we're -- we stepped up significantly across the months in the first quarter. So we would anticipate that the second quarter will be significantly stronger as it relates to active accounts. So that's -- those accounts that have purchased product, done cases in the first quarter, are considered active accounts. So we see these accounts coming back quickly. And again, we'll be I'm sure I would expect -- I shouldn't probably say this, but I mean, I think we're going to be -- we would expect sort of getting into a normal range in the not-too-distant future in terms of active accounts. I think that one of our longer-term areas that we've talked about as well. So we talk about activity, getting the accounts back and up and running. And then we talk about productivity. And that's a little bit more complex of an area. I don't know if you want me to go down that path. But that's something that we're also focused on. But that will -- productivity will -- getting back to pre-COVID levels in terms of productivity will lag activity. Because if there's a -- our productivity numbers were predicated on basically a 1-year unobstructed run toward COVID. And that's where we established those numbers. So we've got some time before these accounts that were brought on during the COVID phase that it was literally like turn it on, turn it off, turn it on, turn it off, where the accounts that are coming back most quickly are those that put stride pre-COVID and we just still need to get -- we need to get the newer accounts on stride before that mean number is going to be moving up.

Yes. Actually, what's -- just to remind me, what -- how many accounts did you have pre COVID? What's the percentage of accounts that you have today that were kind of open during COVID that kind of need some further time to mature versus the percentage of accounts that you have that were done pre COVID, roughly?

Yes. So when I talk about productivity, I'm talking about where we demonstrated a really quite clear step up between like what a new account does in the first quarter after they're activated. What they do in the second quarter, what they do in the third quarter and what they do in the fourth quarter. And so when we're talking about productivity, we're typically talking about where the accounts get to after a year of sort of catching stride. And so the answer to how many accounts did we have that were a year or more along at the time that COVID hit, it's on the order of 40. It's 25% of the 160 that we presently have. Now there were a number -- we -- that doesn't mean we have 40 accounts when COVID hit. I don't know, Derrick, maybe you know what the number was, but it was quite a bit larger than that coming out of 2019. But all of those accounts that came after had this turn-on, turn-off phenomenon. So in some ways, the only data that we can really rely on is, okay, now that we are where we are, which is there's no cloud on the horizon, particularly in the U.S., or basically anywhere. Then is it going to take a year to get these folks back up to that, we don't know. So we project sometime next year, we'll be back at that level and then be pushing beyond.

Okay. Okay. And then the other question just goes to the productivity comment. When we -- a lot of the doc checks for your company, are really pretty extraordinary in the level of bullishness in the clinical community on what they think will happen once everything is kind of working in terms of referrals and awareness. And so the calls go extremely well. And so from your view, Glen, what needs to happen to kind of make that a reality? What are the things that you're working on strategically to kind of fill that funnel and get to that level that the doctors -- that most of the doctors we talk to think is possible. Like what has to happen there?

Yes. Let me -- and there's 2 things I'd like to comment on, and I'll get to your actual ultimate question. But this idea that everybody is bullish. It's just -- I think it's really reflective of the fact that there's a -- there's a patient population who's living in a world that's getting narrow and narrower because it's a progressive disease. They're typically going to their physician at a time when they're having difficulty doing the things that they really want to do in their life, spend time with their grandchildren, get out of the house you walk up the stairs to go to their bedroom. I don't want to move my bed down. And so the clinical bullishness is about a needy patient population that's not being well served by what's available, and there's this technology, which on top of the best available medications and the appropriate doses can take these patients to a place that they can't get to otherwise. Now the physician population that's doing this treatment is also very excited, not only because of they're trying to help the patients but because these interventional pulmonologists on a daily basis are dealing almost exclusively with cancer patients, lung cancer patients. They're staging their disease, and they're constantly giving people bad news. Answer is not the kind of cancer you want to get if you have a choice. So the point is, is that for the first time, these physicians are able to do something for a needy population and actually take patients to a substantially better place. So what do we need to do to Ignite this? So it's a 3-step process, and we're working on this in staggered parallel. First and foremost, we need to make sure that we have -- we find the right kind of physician champions preferably 2 or more in a given institution. We need to make sure that we set up the support structures or help them set up to support structures to take patients efficiently from the front door to the procedure table, and we work very, very hard on that, and we want to -- we're very, very clinically focused. And then when we have that in place, then we focus on the referring physicians that are around that particular treating site. We know who they are because we're able to get our hands-on drug data and look at cocktails that are given typically to patients with severe emphysema. So we can see who the high prescribers are. Who the physicians are in the community, whether they be pulmonologists or internal medicine physicians that are managing the bulk of patients with severe emphysema. And keeping in mind, if the treatment algorithm is just turn up the drugs, layer them on top of each other, put somebody on oxygen, move their bed from upstairs to downstairs, you don't have to be an expert to manage that patient. So it's important that we have this prescribing information to identify where they are. And 2021 and 2022 are really all about the referring physician. Roughly 80% of our patients come through these referring physicians. We've done a great deal of market research. We've established that there's a good bit of awareness with the referring physicians as it relates to our technology. But there's not as clear an understanding of exactly what the patient profile is. And we've demonstrated through very simple means the ability to take people up on the probability of referral curve from, say, 50% to 70% by just reading a paragraph about this is what the patient looks like. These are what the results of the procedure are because the magnitude of benefit we deliver is really quite extraordinary. I think I mentioned that 80% of our patients flow through these referring docs, 20% of the patients see something on TV and go directly to the treatment center and say, okay, I want to be -- you guys help me with this. Now so we get this site set up. We make sure that the referring physicians in the area are well, well understand what it is we're offering and what the benefit is and often use things like Zoom to bring the treating physicians together with the referring physicians. And then we've demonstrated the ability through social media to move patients and to move them efficiently toward the procedure. And we -- this footprint that we've been establishing and expanding in the digital world has been very efficient for us. But we have to be careful that we do this in the right order. That's why we're so deliberate on setting up these accounts. I mean some people might look at us and say, well, you're targeting 500 accounts, you're only at 200. Why can't you be at 500 at the end of next week? We have to make sure that they're ready for the wave that we're going to -- that we want to very deliberately generate to move toward those treating centers. So that's what all falls into place. And that's where we go from activating -- activation to productivity to increasing same-store sales. And we really see that curve, that inflection sort of happening sort of into the coming years, if you will.

And in those 40 accounts that have been -- yes, in those 40 accounts that you highlighted earlier that have been on board for a while, where things are going really well, where this is all kind of come into place, what do you see in those accounts in terms of procedures per quarter or a year or whatever, like what happens when it works?

Well, when it works, I mean, if you look at the pre-COVID phase, we could take an account from $0 to $1 million run rate in a year or so. That wasn't the norm, but that was not uncommon, sort of moving on that sort of slope. So though our average productivity in those 40 accounts might have been 7% or 8 procedures in a quarter, we did have accounts that were running toward 25 in a quarter. So it can be quite positive. The challenge with the centers, now keep in mind that the centers that we're dealing with, if there are 5,000 or 6,000 hospitals in the United States, we're targeting roughly 10%. So we're sub-selecting sort of the major referral centers. And in many cases, the lung center, if you will, in your geography. So for example, if you were to say, what's the #1 lung center in Philadelphia? It wouldn't be Hospital University of Pennsylvania, it would be Temple University hospital, Henry Ford Hospital in Detroit, Johns Hopkins. I mean some of the hospitals are the sort of the top hospital in that area. They're all big centers. They tend to be -- because they're lung centers. They also tend to be COVID centers. So the biggest wave of patients that get COVID are probably headed to Johns Hopkins or to Temple or to a Cornell Medical Center or Henry Ford Hospital or University of Chicago or what have you. And those are -- so these established centers, in many cases, have gotten a disproportionate brunt of this on and off with COVID. But goodness will is coming back into many of these centers, and we expect them to get back on that slope. Certainly, those 40 centers that were up and running for a year pre-COVID are, in fact, the ones that are coming back fastest. If you look at those who've been with us for a year, who weren't with us for the year before COVID, to compare it to that group that got an unobstructed 1 year running start. That first group with the unobstructed 1-year running start is about 20% more productive today, than the other cohort. And it has everything to do with the on and off that is really disruptive to getting somebody just like off the ground in the right sort of way. So what we're -- the good news is no more clouds, no more massive bumps that we anticipate. And we'll get people onto that curve across the board.

Okay. Great. Last question for me is just wanted to get a quick update on Olympus. Is there anything new going on there? I mean I assume I know the answer, but just wanted to check.

No. Olympus is a great player to have in the marketplace. We like our technology. It's different. I mean they have a valve. We have a valve. Our valves are very different. We've got 4 randomized controlled trials, 3 metrics in each of them. We hit on all 12 opportunities. They have 1 successful trial that hit on 2 out of the 3. We compete very favorably with them. And we enjoy having them in the market, helping us make the pie bigger. We continue to -- I think perhaps one of the most striking things was in the fourth quarter. I think everybody saw that we had announced in the fourth quarter that we had treated -- was it our 20,000th patient and they coincidentally put out their release that they had treated their 500 patients. So we're plugging away.

Got it. Right. Terrific. Well, Glen, Derrick, thanks very much for your participation, and we've kind of run out of time here. But hope you have a good rest of the conference, and we really appreciate your willingness to have the chat with us.

Thank you very much. Appreciate it. Bye.

Excellent. Okay. Thanks, guys. thank you very much. Yes.