Pulmonx Corporation (LUNG) Earnings Call Transcript & Summary

Good morning, everyone, and welcome back to JPMorgan's 40th Annual Healthcare Conference. Very excited to have you all here this morning. I am thrilled to introduce Pulmonx to you this morning. Here we have Glen French, President and CEO, who's very excited to tell you a little bit more about their story. So I'll hand it off to you. Glen, thank you again for being here.

Lisa, thank you very much. And particularly given that you're in San Francisco, and it's 4:30 in the morning, thank you very much for being here, and I look forward to talking to everybody. So the -- I'm here today to talk about Pulmonx. I'm the CEO of Pulmonx. I've been with the company for about 7 years and have been in this interventional pulmonology space for the better part of the last 25 years. I'd like to -- as I move through this presentation, I will reference the slide numbers. My understanding is that everybody has the slides in front of them and can toggle through as we go. Forward-looking statements on Slide 2. I think these are familiar to most. I'll start with Slide 3. In summary, we have a very large opportunity. We'll get into detail in the presentation about this. We have selection tools that enable us to identify the patients that are most likely to benefit. We have a minimally invasive treatment. We've taken this through 4 randomized controlled clinical trials, all of which have been successful. We have put out more than 100 scientific publications as a result of the consistency and the amount of the data, we're broadly reimbursed around the world. We have a global footprint. We've treated more than 25,000 patients in more than 25 different countries. And we've got a pipeline of technology that I'll talk to you about that includes our next program that expands our total addressable market. And my background is very similar to the background of many of the senior managers and folks throughout the organization who have been committed to the area of interventional pulmonology for, in some cases, decades. Going on to Slide #4. Emphysema is a big problem. It's about 25% of chronic obstructive pulmonary disease. So it's a subset. Chronic obstructive pulmonary disease is divided into 2 parts: emphysema and chronic bronchitis. It's a -- emphysema is a problem with air trapping. There's tissue destruction from emphysema and air trapping in the lung. It's an issue of getting air out of the lung, not getting air into the lung. Some have referenced an analogy of having a 1- or 2-liter empty bottle in your chest cavity. That is just simply trapped gas, which is space occupying, which inhibits the expansion of the healthier tissue. So the goal of treatment in emphysema is to reduce that trapped gas and allow the healthier tissue to expand in its space. And COPD is the third leading cause of death worldwide. So it's a big problem. And there's a classical downward spiral that you can see on the right-hand side of this slide, where the shortness of breath and inactivity leads to further decompensation. Going on to the next slide, Slide #5. The spectrum of treatment options which, before the introduction of these valves, included medical management and pulmonary rehabilitation, noninvasive types of treatments. It's a mechanical problem essentially and so the medications really don't work that well on opening up the airways because the airways are closing down due to the destruction of tissue that surrounds them. So normally, there are tethering forces that keep these airways open. And when those reduce, the airways become floppy and the process of exhalation leads to the closure of those airways abruptly and the inability to empty gas from the lung. So there was this concept that, well, maybe we can go in with a procedure called lung volume reduction surgery and take out the offending areas of the lung and allow healthier tissue to expand in space. The problem, of course, with that procedure is that you need to have a distribution of disease that's truly accessible, and emphysema isn't always perfectly out on the edges where you can just clip it off with a surgical procedure. But the much bigger challenge with lung volume reduction surgery is that the patient who is, almost by definition, fairly critically ill, severely ill, they can't withstand the insult of the procedure. And as a consequence, that procedure is not done very often because of that. And as far as lung transplant goes, these are older patients that are -- that have a multitude of comorbidities. Often they, too, are either not strong enough to withstand the insult of the procedure. Or frankly, with a limited supply of lungs, they're just way down on the list. Next slide, #6. Our procedure and our effort. We have a hyperinflated upper lobe in the upper left-hand corner here, you can see that on the left-hand side. You see a horizontal line, that is the bottom edge of the upper lobe and it's pressing down on the lower lobe. What our treatment is, is our little valves that we put into place. They're self-expanding valves. They've got a [indiscernible] that expands and it has silicone that covers it in a little ductile valve that's right in the middle of that mechanism. And we place these into each airway that feeds the area of the lung that we're looking to reduce. And the one-way valves allow air to exit that area but not go back into that area. You can see the placement of the valve through the working channel of a standard bronchoscope in the second upper middle graphic that's on this slide. The third as well. And then the fourth as it's seeded in that airway. It affixes to the airway valve through simply radial force. So it just expands and pushes its way and holds on actually quite tenaciously. And what ultimately happens in the properly selected patients is that the air in that target area will come out and will not go back in and the healthier tissue is able to expand in its space. The patient journey is basically a standard COPD workup with pulmonary function tests. We have a couple of different assessment tools, which I'll talk about in greater detail in a slide or two. One is the StratX system, which is a quantitative CT analysis software, and the other is the Chartis assessment system which we have. We place these valves and then the patients stay in the hospital for 3 nights under observation, they just rest. And in most cases, it's an entirely uneventful 3-day period. The diagnostic or patient selection tools that we have are looking at the question of collateral ventilation. On the left-hand side, you see a graphic of a lung. It has 2 lobes. Those lobes are divided by what is called a fissure, into an upper lobe and a lower lobe. And on the left-hand side, you have a complete division or a complete fissure. And on the right-hand side, you have an incomplete fissure. We are all born, about half of us, with a complete fissure and about half of us without a complete fissure, with an incomplete fissure. It's not at all relevant to anybody for any reason other than if you have emphysema and you're looking to get our treatment. If you were to place valves in the patient on the left-hand side, in the upper 3 airways that feed that upper right lobe, you would reduce that down because the air would exit, it wouldn't go back in. If you were to -- in contrast, on the right-hand side, if you were to put valves into the 3 little airways that feed that upper lobe, it would not come down. Air would exit through the valves, but it would simply refill essentially through that back door through collateral ventilation. So the patients that we treat today with valves are the ones on the left, it's a little bit more than half of the opportunity that exists, and I'll get into the total addressable market in a couple of slides. The StratX report, which I mentioned earlier, is the first of our tools, we're able to utilize CT scanning data. Patients with emphysema have significant tissue destruction. And basically, the primary way that they are diagnosed as having emphysema is through a CT scan. So they look at the density of the tissue on CT and they compare it to normative values. If you have a very low-density lung and you're a former smoker and you're short of breath doing things you used to be able to do yesterday, then you probably have emphysema, you definitely have emphysema. So what we do is we take those data. We download them into our quantitative CT analysis software. We reconstruct that fissure plane, that division between, and we see how complete it is. If it's substantially complete, then you're a candidate to move forward and possibly get valves. If not, then you're a CV-positive patient and you're not a candidate for valves. You schedule the procedure and those patients that are greenlighted on the StratX quantitative CT analysis software, they're scheduled for the procedure. And they're at the front end of that procedure. We go into the target area that we're looking to reduce and we expand a little balloon catheter that's connected to a computer like device that's off to the right here. And it measures at that point changes in pressure and flow, essentially simulating the procedure. If the StratX analysis that I just spoke about indicates that there's a liter of volume in the target lobe and 2 liters of volume flows through this catheter, you know there's collateral ventilation. On the other hand, if you see the volume slowing down and the pressures raising in the area that you're looking to treat, you know that the patient is collateral ventilation negative and they're a good candidate for our treatment. About 80% of the time, we do a Chartis on a patient we end up placing valves. Next slide is Slide 11. One of the things that really differentiates us and has cleared a path for us from a commercial perspective is the amount and quality of the data. We've executed 4 randomized controlled trials published in the best journals that are out there, either in the pulmonary space, which are -- is the American Journal Respiratory and Critical Care Medicine or in the New England Journal of Medicine. These studies tend to look at 3 different domains. In this case, you can see on the right-hand side lung function, which is measured by forced expiratory volume at 1 second; exercise capacity, which is measured by 6-minute walk distance; and SGRQ, which is a quality of life measure which is validated, St. George's Respiratory Questionnaire. The red line that appears horizontally on each of these graphs represents what is considered to be a clinically meaningful magnitude of benefit. So when you do a study, you need to deliver 2 things in the eyes of the marketplace or FDA or whomever. One, you need to deliver a meaningful effect, something that is a validated clinically meaningful magnitude of effect, and it needs to be statistically significant, i.e., not just they are due to a random event. In each of these 4 trials, on each of these 3 measures, we delivered both clinically meaningful and statistically significant results. And it's been -- each of these studies, as I mentioned, has been published. Next [ trial ]. We have a longer-term data as well, which is suggestive either retrospective data or data that was approaching but didn't quite reach statistical significance on the left-hand side here. This is some older data. You can see that these patients were treated, in some cases, out 10 years ago and, in other cases, 14 years ago. On the left-hand side, it's a population of 450 patients. On the right-hand side, it's closer to 20 patients. But in the early days, before StratX and Chartis were invented, all comers were treated with valves. And what it showed was, which we would expect about half of those patients are going to be CV negative, about half of those patients are going to be CV positive. In the CV negative patients, you're going to see what is called atelectasis, which is another word for lung volume reduction. So the goal is to try to reduce hyperinflation. So lung volume reduction is the goal. These 2 lines on the left-hand side show those who achieved atelectasis and those who did not and survival benefit was accrued to those who did in both studies or both retrospectives. And on the right-hand side, you can see benefits in terms of respiratory failure and things that can send patients into the hospital as well, so longer-term indications of benefit. All of this data, taken together, was significant, and it has led to us being included in national and international guidelines, the global guidelines for the treatment of COPD or the gold guidelines, but we have a multitude of other guidelines that we're included in. And it provided a backdrop for expedited approval and breakthrough designation by FDA and establishment of reimbursement on -- basically in most of the major markets that we participate in. The global TAM is reflected here. It's [indiscernible] $12 billion TAM just in these CV-negative patients that we talked about, it's about 3.8 million patients that are diagnosed with emphysema just in the United States. Emphysema is a continuum. So from diagnosis to death, it's a progressive disease. It's about 10 years. And so 3.8 million patients, you have to be severe enough on that spectrum. So about 1.5 million of them are there at that point. If they're not there yet, they'll get there tomorrow, so to speak, since it's a progressive disease. About 80% of those patients have hyperinflation. And we're solving for hyperinflation. So that takes the addressable market in the U.S. down to 1.2 million. And then when you consider backing out those that are CV positive and those who, due to comorbidities, are not good candidates for a bronchoscopic procedure, you end up with 500,000 patients in the United States and another 700,000 patients in the most developed parts of the world, Europe and Japan and so forth. So next slide. We are commercial in 25 different countries. One of the things that's very distinguishing about the company in addition to the wealth of clinical data we have is our global footprint. We have -- we're eyeball-to-eyeball with interventional physicians and pulmonary medicine around the world. I would hold up our organization against virtually anyone else's in this therapeutic realm. We are predominantly a direct company. So 96% of our revenues are actually running through direct in our organization and only about 4% of our revenues are through distribution. We have 54 sales -- quota-carrying sales representatives in the United States, 34 outside the United States. And they all continue to be expansion opportunities in these geographies. The approach that we take is really quite straightforward. We identify sites, centers and people who are the right folks to execute this procedure. We're taking a centers of excellence approach, where we're targeting in the United States about 500 centers and about 800 physicians to execute this procedure. Once we have them up and establishing best practices to enable the sites to take patients essentially from the front door to the procedure efficiently, we turn on the referral networks. It's very important. About 80% of our cases come through the referring physicians. So we need to make sure that they're both well aware of the magnitude of the benefit that can be delivered by this treatment. Many of them are accustomed, over the last several decades, to be simply treating their patients through medical means. So this interventional approach is something that's new to them. And they have to feel good about and understand the folks that are doing the procedures. So there's a lot of introductions that are going on between the referring physician and the physician who's executing the procedure. And of course, vehicles like Zoom have made that process a little bit more efficient than maybe it used to be. And then ultimately, we've got on the -- approaching 150,000 different connections to people through the various digital means that have demonstrated the ability to cost effectively move patients toward those referring physicians. Again, 80% of the patients flow through them. 20% will hear about University of Chicago is doing this procedure and find their way there directly. And then ultimately, we need to make sure that these things are -- these elements, the first, the treatment sites; the second, the referring physicians; and the third, going direct to patient, are executed in series so that we don't frustrate the system. We are significantly focused right now on expanding this referral network at the present time. As far as sort of where we go from here, we talked about the existence of these patient selection tools. Every time we get a StratX green light, we take them to valves. Every time we have a StratX red light, we send them home. So we're very interested in making sure we have therapeutic options for those patients so that we can solve the broad array of challenges for these patients with severe emphysema. We specialize in minimally invasive interventions. I think we've got an unmatched global footprint that has us commercial in more than 25 different countries. And we have, as I mentioned at the outset, a very experienced team. Right now, we're targeting CV negative with our Zephyr valves. Moving across Slide #20 right now. In severe CV positive, we have an injectable polymer called AeriSeal that we're presently studying in Europe in a multicenter, multinational feasibility trial. Have a lot of early clinical data that suggests that this might be a very helpful technology for the treatment of CV-positive patients. And then ultimately, we're keeping a close eye on developments in the chronic bronchitis space. You may remember at the start, I talked about COPD having 2 subcomponents under that umbrella term. One is emphysema and the other is chronic bronchitis, which is really a problem of excess mucus production. The next slide and, frankly, the last slide is Slide #18, which gives you a summary of where we were. The last reported quarter is the third quarter, where we delivered $13.3 million of revenue, $6.9 million in the U.S. and $6.4 million outside the United States. So we hear from a lot of people it's unique to have about 50% of your business in the U.S. and 50% outside the United States. Our gross margins in the third quarter were 73.4%. And we finished the quarter with just over $200 million of cash on hand. As you look to the graph on the right-hand side, you'll see it looks a little choppy, and that's a direct reflection of COVID. As you can see, sort of presenting itself in the first quarter of 2020, basically fully impacting the second quarter to a spectacular extent and then sort of pulling ourselves back up and then dealing with each of the waves. We tend to be pretty sensitive to COVID because the physicians that are doing this procedure are, by definition, pulmonary and critical care specialists. So when COVID waves come through a specific geography, our treating physicians are quite distracted. An additional challenge that exists in terms of this procedure is we're treating patients that have very severe disease. And as a consequence, they -- if any -- if they stumble at all along the way, and it happens maybe 5% of the time, our patients can find their way into an intensive care unit bed. And so as COVID raises in an area and the sensitivity around maintaining capacity in the ICU goes up, our procedures tend to be pushed off. The hospital administrator will ask, well, if the patient is still going to be here in 2 months if we don't do this procedure, why don't we hold off if there's any chance that they're going to go into the ICU. So we've been able to manage our way. I think a lot of people have said it's interesting the way we've been able to deliver. I think that reflects the fact that COVID presents itself sort of regionally and moves around. A good example of that is in the third quarter, we saw COVID dramatically impacting Texas across through Florida and into the southeastern part of the United States. And then in the fourth quarter, it freed up in that area and then moved north into the Midwest and, in some cases, the eastern parts of the United States. So as -- because we've got 200 roughly accounts in the United States, more than 400 centers around the world, as COVID has moved in the areas where it's been light, we've been able to do great work. A good example of that is, if you look in the third quarter at sort of high-impacted COVID areas versus low-impacted COVID areas, the high-impacted COVID areas revenues were down over prior period by something on the order of 30%, whereas revenues were up in the essentially unimpacted areas by 80%. So we're very sensitive to that and have been able to manage our way through it given the regionality or the way that COVID has moved in series. Omicron, of course, presents an immediate challenge in that, it's basically not going in series, it's hitting all at once. So obviously, we're in a heavy COVID phase as we move into the first quarter here. We are optimistic that this will be a short window. And we're also seeing the same news that everybody else is as it relates to the possibility of Omicron providing some level of protection for the broadly impacted folks that end up getting it. So the fundamentals and the indicators that exist within our business are remarkably strong, indications related to StratX scans that are out there, scheduled cases, growing array of people that are touching the company through Internet avenues and the kinds of activity that we've been able to generate during softer times between these COVID waves has been -- it puts us in, I think, a very strong position as we look ahead to an impacted first quarter and then lightening up across and great strengthening as the year proceeds in 2022. So in closing, I really appreciate everyone's time. And for those of my colleagues on the West Coast, thank you very much for getting up so early. We're very excited about the future that's ahead and appreciate your time. Thank you very much.