Pulmonx Corporation (LUNG) Earnings Call Transcript & Summary

Thank you, everybody, and I can still say good morning for another 15 minutes. But I'm Joanne Wuensch, the Citi MedTech analyst, for those of you who don't know me. I'm very pleased for this session to have the management team from Pulmonx, both Glen French and Derrick Sung, join us. So thank you for joining us.

Thank you.

I have a whole list of questions here, and I can trash them now because last evening, you -- some may call it pull the band-aid off. Some might say conservatively. I'd be curious your view, updated everybody on guidance. So I think that's where we should start.

It's been a little buzz around the guidance. So, yes. So for those who might be new to our story, we're a company that deals with patients with severe emphysema. We're targeting the hyperinflation that exists in these patients. And it's a real problem in that space-occupying hyperinflation inhibits the ability of healthy tissue to expand in the lung. And as a consequence, there was a surgical procedure that was conceived of about 50 years ago where they would open up the chest cavity and take out the offending tissue and allow healthier tissue to expand in its space, but the morbidity and mortality associated with that procedure was so great that a number of companies set out, maybe 20 years ago, to try to come up with a way to execute the procedure through a bronchoscope. And we have a technology that's been tested in 4 randomized controlled trials. All the data are super consistent. It's reimbursed around the world. And we were in this process of initiating scaling in the United States and COVID hit. And the challenge with COVID, of course, is that it's a pulmonary disease. Our patients have this severe form of emphysema, and the physicians that do our procedures are pulmonary and critical care specialists. So to the extent that they get distracted by having to serve an ICUs and deal with waves of COVID, it has impacted our business very directly through the various ways. To this point, over the last couple of years, COVID has presented itself in series. Meaning like when things are really ugly in the Southern United States as it was in the third quarter between Texas, all the way to Florida and up the East Coast, things got a lot better in the fourth quarter in that region while the disease sort of moved up or the virus moved up into the upper Midwest and so forth. And so along the way, over the last couple of years, we've been able to navigate our way around COVID pretty reasonably, all things considered, never really catching stride across an entire market. But given that we're in 25 different countries, over 400 different accounts, when one area was down, another area was up. And we are able to throw some numbers out. And then Omicron shows up. And unlike every other wave that had happened before, if you look at all of our top 10 markets around the world, the peak of Omicron hit each of them within a 2-week window. So plus or minus 2 weeks, it hit everywhere that we're doing business. And it hit in a big way, 10x as many infections in some countries, 5x as many in others. And even though a smaller proportion of patients end up in the ICU, a lot of patients flowed to the ICU. And as a consequence, our view on the first quarter, having gone through about half of it, has been modified. And it creates sort of a launching off point that's fundamentally different than what we had anticipated. And that was reflected in the guidance that we presented yesterday. Having said that, we are in a stronger fundamental position today than we were coming into 2021 by a wide margin as measured by number of reps, number of accounts and engagement with both our training physicians, our referring physicians and then also patients themselves. So we feel very good about the fundamentals, but we had a blanket that went across our entire business in the first quarter, and that's the biggest component of the guide.

Okay. So I want to get back to some of those fundamentals because last evening, you gave some really interesting statistics. You're in over 200 hospitals. You've got a goal for 280 this year. You're in 54 sales territories. Help us understand how much you've scaled just in the last 12 months despite all of this?

Well, we've increased the number of accounts across the year by more than 40%. We've scaled our commercial organization, both our sales organization domestically and around the world. We're in 25 different markets, 98% of our business is direct. So our footprint is important to us, and we've scaled our global marketing organization as well and have initiated a number of different programs that combine both that marketing and sales effort. These things have been interrupted by COVID crosswinds. And although this current situation, or at least what is now receding, is unmatched in terms of hitting everywhere all at the same time, I guess the good news is 2 years ago, no human being had antibodies to COVID. And today, a recent report out of the U.K., at least in that geography, indicates that more than 98% of people in the U.K. now have antibodies. And my guess is that the U.S. numbers are fairly close to that. And as a consequence, as we look ahead, we expect that would be much more smooth sailing than what we've experienced at least over the last 2 years.

So one of the things you and I talked about last night was outside of the COVID impact, was there anything that changed for you? Was there a change in reimbursement? Was there a change in the competitive landscape and the clinical data associated with the product? And last night, your answer was no.

Hasn't changed.

Hasn't changed. Okay. That's good to know.

Yes. We do have a competitor, and we have competed against this competitor for a number of years, and we do quite well there. We have a great majority of the share. And it's just simply a reflection of the fact that we have -- we've done all the work. We've got 4 randomized controlled trials. There -- typically, there's 3 measures that are looked at in each of those studies. We delivered both clinically meaningful and statistically significant results on all 3 measures in all 4 studies. And so our data are very solid. We have patient identification tools that allow us to essentially stack the deck, if you will, i.e., if you know that the patient is likely to benefit from the treatment prior to delivering the treatment, it gives you an inside track to having a happy patient at the end. So we're good on that front. From a reimbursement perspective, things have strengthened. 75% of our patients in the United States are covered by the government, so Medicare, Medicaid, 1/3 of that goes through managed Medicare. So the private payers are managing 25% of -- they're paying for 25% of the patients and managing another 25%. So the process of gaining pre-authorization has become increasingly easier as we have gotten more and more coverage. In the last quarter, we picked up 50 million lives. Most of that, 60% of that came through flipping Anthem, the biggest part of Blue Cross Blue Shield Association. So 99% -- 98%, 99% of the time, we seek prior authorization, we get it. But we celebrate each of these wins with payers because it reduces the time it takes to get that prior authorization. If in a Blue's plan that's negative, we have to go through an appeals process. We win almost every single time, as I just mentioned, 98%, 99% of the time. But it can take 3 months. Whereas if we have a green light from a payer, it can be -- we can get going in a week or 2. So it's -- there's a significant advantage for us. And our reimbursement team is incredibly tenacious and has been shopping down the Blue Cross Blue Shield one limb a time, with the biggest limb being lopped off in the past quarter.

And are there other large limbs that need to be lopped off? Or do you feel like at this stage, the big pieces are taken?

Right now -- so basically, for us, a plan having a negative position is a challenge, and that's where we realize that delay in time. It doesn't mean that the patients aren't going to ultimately get the treatment. Every major -- we've only got one major group, and that's Blue Cross Blue Shield Association that's negative. But by chopping off the limbs of the tree, we've got 2/3 of the covered lives under the Blue's plans themselves that have already flipped positive. So we do have another 1/3 that's left. And it's a bunch of smaller plans, so it might be 30 different plans that total 1/3. And we'll just keep chipping away at those in the same way. When you go to a plan and they say, well, this isn't covered. And you go through an appeals process, and they have to bring in independent outside folks and they lose 100% of those arguments or 98%, 99% of those arguments, it's just a matter of doing it 10 times before they say, we should just flip positive on this. Because every time we're asked to approve it, we've approved.

Okay. When you think about patients who are delaying their procedures because of what we've been going through, what happens to them? Do they come back at a later date? Are you building the funnel? Is this just a matter of pushing patients 2 quarters forward?

Yes. So let me just be clear that patients don't delay their procedure. One of the questions that's popped up, because our patients have severe emphysema.

Right.

They get a cold, a really bad cold and it can kill them. So one of the questions was, are all the patients during COVID going to be afraid and not seek the treatment? And in fact, what we saw was that the patients are always ready. They say welcome to my world. I'm always afraid of what can bump me off. And I'm ready to have this procedure done as soon as the doctor is ready to have the procedure done. And so they're the ones -- they are -- the patients that were scheduled whose procedure gets canceled and/or delayed as a result of a COVID wave coming through a geography, create the cracking pressure that gets that physician back up and running again when that wave abates. Because they're the ones who are calling up saying, when can I get my procedure? When can I get my procedure? Because they're crippled by this disease. They literally -- the American Lung Association says, if you can't breathe nothing else matters. It's very much the case for these patients.

Okay. Let's talk a little bit about physician training and how many facilities do you have at the current time? Do you plan on opening it up? Have you moved any virtually?

Well, we moved a lot virtually over the last couple of years. And we have determined that we like -- our doctors like face-to-face better than they like virtual. And I think probably anybody who's on this call knows that when you're on a Zoom call, I'm not doing it now, but everybody is multitasking. And it's really hard to get people fully engaged on a Zoom call. And as a consequence, we have heard and we observed. And so we have moved as rapidly as we could back to training in a live forum. We have done that historically at a key center in Philadelphia. We've recently opened up a center in the Midwest and have started scheduling training classes there. These training classes tend to be relatively small, somewhere between 5 and 12 physicians are in that class. It's a full day of hands-on, both in sort of a laboratory environment as well as a classroom environment, and ultimately, going in and observing 1 or 2 cases. So it's -- I think it's a great opportunity for the physicians to get together with their colleagues and talk about -- and they often bring, and I think they're required to bring a specific case or 2 with them that they then discuss as well. So it's a very, I think, rewarding part of the process. It's quite a -- we make our physicians jump through a lot of hoops intentionally, not only to make sure that they're well trained, but to also make sure that they're fully engaged. And everybody ends up going through that in a way that I think -- where they feel really good about it. And it's a great backdrop to them than going back and treating their first patient typically within the next week or 2.

So you have a facility in Philly, you opened another one in the Midwest. I think you have a third one, if I'm correct.

Yes. We -- so there's a training and this collaboration and the talking about cases and talking about best practices has really opened up for us an opportunity, we believe, to do follow-on interactions as well. And we have another center that's an incredibly well-oiled machine as it relates to its entire overall team at that center that we're looking to leverage. And as a consequence, we are in discussions with possibly opening up a third center. But it probably won't be for kind of that initial training in the way that I just described it, but perhaps more holistic where you've got a great site that's gotten to a certain point, and they're looking for discussion around best practices and how to go from being -- these kinds of accounts that get to sort of the $1 million level, 25 cases a quarter, who want to talk about how do I get to the $2.5 million level? And what kind of resources do I need and best practices and so forth. And so I think that, that's probably going to be more of the focus of this other training center.

There was something you said to me last night, which I wrote down, which is, I'm paraphrasing here. That the noise you're hearing from physicians is deafening. And you started to talk about in this portion of our conversation the number of physicians that are "opting in" as you sort of have moved throughout the last couple of months. I thought that, that was really interesting. How do you think about deafening noise or opting in or physician engagement is rather, the right phrase.

So I think -- so just to be clear, I think I merged perhaps a discussion around physicians into one that was around patients, but I'm happy to talk about both. So physicians -- everybody got shut down. Never before has it happened throughout all of COVID. There was never a time when every geography got whacked at the same time, and that just happened. So I think as it relates to the buzz that we're hearing from physicians is that different centers are stepping out of this, at different time points and in different geographies. But everybody -- it's really remarkable. I mean plus or minus 2 weeks, everybody across our top 6 global markets got hit at the same time. And all of them have a 2- to 4-week ICU lag. Meaning that while infections go up, the ICU beds don't fill up until a couple of weeks later. And so as they're coming off the backside of that, some centers are coming out now, have already started to get the engines moving. And others are -- have specific dates on the horizon between now and, say, the middle of March. So that's kind of what's happening on a global basis. And we're hearing a lot of buzz from these physicians who are reaching back out to us with some degree of excitement saying we're getting ready to go, we just got the green light. We're targeting our first patients in late March or -- and we just got a call yesterday where one of our biggest centers in the United States was all excited and said we thought it was going to be on the 20th of March, and now it looks like it's going to be the 10th. So they were super -- they were super excited to get going. Now on the patient front, let me just back up a second. We have 3 elements to -- that we need to really focus on. Because unlike so many medical technologies that are incredibly important that come in and replace something else, like we've got a less invasive approach, a better approach, whatever. They're swapping their technology out for another technology or procedure. That's not the case for us. These patients are almost invariably treated with drugs alone. And those drugs don't solve the problem, which is tissue destruction in emphysema, which creates this air trapping. We believe the air trapping allow healthier tissue to expand. So a mechanical problem, mechanical solution essentially. And so what we -- we need to make sure that our treating physicians and those centers are pristinely well trained. Then we need to make sure that the referring physicians that are surrounding them that control these patients are aware of our technology and the magnitude of the benefit we can deliver and are well introduced to the person that they're going to hand their critically ill patient off to or severely ill patient off to, to do this procedure. I want to know what their credentials are and what experience they have and have the knowledge that, that patient is going to reverse their -- and come on back to them after the procedure. And then the third element is the patients and activating the patients as they move along. But we have to do this in series, of course, going to the referring docs without having the treating docs in place doesn't work. And because 80% of the patients go through the referring physicians -- we need them to be where they need to be. But like last night, what I was referring to as it relates to our interaction with patients, because -- we've been on the market now for a few years. We've been growing nicely in the face of COVID. We have some centers that are quite well established, and we've begun the process of moving patients towards those centers. There's essentially 3 ways we interface with these patients or 3 metrics that we look at. One is engagement over the Internet. We've seen and we talked about in our announcement yesterday, more than doubling. We got about, as of today, about 150,000 people who are engaged with us through our various social media channels. But that's kind of the most distant ways to be communicated. Much closer to actually engaging with the patient is for those patients themselves to opt in. And that's what I think you might have heard me say last night. We're seeing dramatic increases in the number of patients that are giving -- authorizing us to interact with them to ask questions like what don't you -- what is your base understanding about this procedure and to help guide them essentially through the journey. And this is something that I know Inspire does really, really well. But it takes them down that path to the point where they want to pick up the phone and call somebody at that center. And that third metric that we look at is inbound calls to our treating centers, which has also more than doubled across the last year. So in the face of all this crosswinds of COVID and so forth, we have delivered more than a doubling of social media interactions. Depending on how you want to calculate it, 6 or 8x as many people who opted in across that period of time, a 5-digit number. So with a lot of people. And then these calls into centers more than doubling across that period of time. So the foundation is great. If it wasn't for Omicron, I think we'd be in a fundamentally different place. But what we talked about yesterday and why and how we reset our expectations for the forward going period is almost 100% described by this sort of wave that hit all of our markets, all at the same time in a historically intense way.

That's a great explanation. I do want to shift a little bit, talk about our international business, which is about 50% of total revenue. And you are expanding into certain Asia Pacific markets. If you can give us an update on those efforts, that would be great.

Yes. So we've been growing in the United States faster than we have in other markets. We get a lot of leverage in the United States. There are things you can do that are illegal in other markets, direct the patients and so forth. You can't do it in most places outside the United States. So as we did finish the year at about 50-50, about 80% of our -- or 85% or 80-plus percent of our business outside the United States is in Europe, so -- in our big -- so we've got a number of big European markets as well. But one of the biggest markets that we see that's out ahead of us is Japan. And we, at the end of last year, submitted for regulatory approval with Japan, we estimated that, that will take about a year. We've had very meaningful engagement with the PMDA in Japan. They've been great and largely pretty predictable at this point. So we are anticipating that by the end of this year, we will have regulatory approval. In series with that, you then roll immediately into reimbursement, which we see taking 6 or 8 months or something on that order. The point is that we're anticipating revenue: one, from Japan in the back half of next year. But we're very excited about the opportunity. It's about a $1 billion market opportunity -- 100,000 patients. And it's also kind of, I mean on some levels, I've been in this business for 25 years in the interventional pulmonology space, and probably nobody has their fingerprints more on interventional pulmonology than the Japanese do. So it's wonderful to enter into that market. We will do so very deliberately. It's a hierarchical sort of medical structure or culture in general. And as a consequence, there will be a handful of accounts that will be the first to -- we will engage, and a handful of global experts, but certainly national experts that we will be working with to get off the ground. So we'll start a little slow in Japan, but we see Japan potentially being our second largest market over time.

I muted myself, [indiscernible]. Do you have to hire a sales force that would -- are you going to go through a distributor?

We are about 98% -- I mean, we're north of 95% direct. And basically, what we'll do -- with the exception of the United States, I think every market we've ever entered, we enter through distribution. We structure a deal that allows us to fairly easily transition to direct and then we flip direct when we reach a critical mass. In Japan, we're going to start direct. And now there may be sort of the last mile need for a distributor as there is in a place like China as well, but there's not as many layers of distribution in Japan. But we will have our own people. We're in -- we've hired our first employee in Japan last year. We have an open search for a General Manager that we're in the process of executing. And we will likely, late this year, early next year, start hiring some representation who can go out and engage some of these key centers and talk a little bit about -- again, we're not going in and replacing an existing procedure. Last year, we did 5x as many of our procedure as the surgical analog were done on a global basis. So that technology -- that surgical technology is just not applicable for most patients because they can't withstand the insult of the procedure. So we'll get our feet on the street there, and we'll be able to do that. We'll probably have our first employees in place, sales employees in place even prior to certainly getting reimbursement and maybe even before we get approval.

And now are there other regions or big pockets that you're like, okay, after Japan, which makes it sound like you're going with that. But what comes next? Are there other large areas?

So we are in basically all the major markets in the world for MedTech once we get into Japan. But we're not in, in the way we'd like to be. We were doubling year-over-year in China, albeit off of a small base. And Asia, in general, but China in particular, has taken a certain approach to managing COVID, which has -- it hasn't -- our business flattened out in China as a result of COVID. But we fully expect, with the population bases that are there, there's tremendous opportunity in China, and we see that as being highly leverageable outside the United States. We've also -- we're in the midst of -- we had major markets in Europe last year growing; Spain, 75% Denmark, something on that same order; Belgium, same order; 65% growth in France. I mean we're still on a very steep curve across a number of major European markets where we see great opportunity as well.

Okay. Switching topics a little bit. The AeriSeal clinical trial, could you give us an update on -- or maybe first describe it and then give us an update on it and what it may mean?

Yes. So I talked about us identifying the patients that are most likely to benefit. The tools that we have are designed to let us know whether a patient has what we refer to as collateral ventilation. A little bit less than half of the people, when they are born, have a communication between lobes in their lungs. So there's this collateral ventilation. There's kind of a backdoor connection between one lobe and the lobe next to it. It doesn't matter to anyone at all ever in their life that they have this or don't have this, unless they get emphysema and you want to put in valves in an effort to try to reduce hyperinflated tissue. Because if that is isolated, which is the case in the majority, slightly more than half of patients, and you put in our valves to allow the evacuation of that air and the reduction of that hyperinflated area, if there is no cross communication, the procedure works. If there is collateral ventilation, there's a back door open, you put our valves in, air is going to continue to flow through but you're not going to drop the target area because for every cc of air that comes through the valves, another cc comes in through the back door and keeps that area open. AeriSeal is an injectable polymer that we are studying in Europe today in a -- under a protocol called Convert. And as the name implies, we're trying to take patients that are collateral ventilation positive and make them collateral ventilation negative, and thereby, increase the addressable market for valves. And we believe, is our current hypothesis, that we will be able to get at about 70% of the patients that are objectively CV-positive, and we're hoping to be able to move a bunch of them to become CV-negative. So if you look at -- we're targeting patients in particular where the defect, the -- probably shouldn't call it a defect, but the incompleteness of the fissure or the division between the lobes is reasonably accessible. So if the -- if it's Swiss cheese, it's hard to treat. But if it's focused in a particular area that's accessible, and we can see that using our software program, then that's a potentially treatable patient. And that group represents 70% of the whole. So this study that we've undertaken, again, a multicenter, multinational trial in Europe, is designed to answer 2 questions. One, can we take an objectively CV-positive patient and make them CV-negative? And two, can we thereafter place valves and get them to a much better place? So that's what's underway. And we're enrolling patients now. We enrolled a bunch of them in 2021, we'll a bunch more this year. And we're planning -- we're hoping that later this year that we'll be in a position to provide an early look into those data since sometime in the back third of the year. And so we'll provide an interim sense of whether that's working or not. If it is, it could be very, very interesting for us.

So when you take this interim look at AeriSeal, is it at a medical meeting? Is it a press release? Is it, hey, things look good, it will help revenue in 2023? How do we think about this?

We have submitted an abstract for presentation at a major medical meeting later this year. I -- based on my prior experience in this space, I would be a little surprised if that doesn't get accepted. It's possible that it won't get accepted, in which case we'll think about plan B. But if it is accepted, then I think it would be in that context, that we would provide an update as to where we're headed and what kind of signal we're seeing. This is a feasibility study. It's important to point that out. And as a consequence, its primary reason for being is to inform us as to the design and the sizing, if you will, of a pivotal trial that will follow that analysis. So that's why sort of the reason for the early look, we don't believe that -- or it is possible that we won't have to enroll every patient that somebody could look at clinicaltrials.gov and see that is set up on that trial, maybe that we'll decide to close that trial up a little bit early and just move on to the pivotal.

Got it. Thank you. Derrick, let's spend a little bit of time talking about the financial side of things. Particularly how you think about gross margins and also how you think about the organization ramping towards profitability.

Sure, sure. Thanks, Joanne. So we're feeling really good about our gross margin, in particular, right? In the fourth quarter, we put up our highest gross margin ever, just under 75%. And what we've been seeing is we've been seeing really the benefits of production efficiencies, primarily driven -- volume-driven and overhead absorption that's been materializing over the last couple of years. And while our margins are going to fluctuate a little bit on a quarter-by-quarter basis, we're feeling really good about where we are at today. And so we think that the 75% or between 74% or 75% is maintainable moving forward. And we do think that we will continue to move up from here, probably somewhere into the high 70% gross margin range as we continue to ramp up our volumes to meet demand and as we continue to drive production efficiencies through it. That high gross margin translates to our confidence in being able to reach a profitability or cash flow breakeven stage over the next few years. And look, we've got about $191 million of cash and equivalents on our books today. We'll probably burn something on the order of $50 million or so in cash this year, which is similar to the burn rate that we exited last year with, I think that burn rate starts to go down starting next year. I do think we're going to see leverage across our P&L. And so I think we've got a nice runway to cash flow breakeven, call it, over the next few years and feel really good about the cash that we have on our books today to get us there.

Excellent. In our last few minutes together, we're talking this time next year, and looking back, and I'm saying instead of, oh, in '21, I was saying, oh, in '22. What do you think we're going to be saying?

You're on mute, Glen.

I did it myself. All right. So in my view, I expect that we're going to have significantly less discussion around COVID, which couldn't make me any happier. And that we will be focusing on the many fundamentals of our business, not the least of which is account -- active accounts and account -- and established account productivity numbers and those moving up. We'll probably also be talking about many of the metrics that I just talked about and how those are translating directly into patients actually having procedures. So those -- the patient engagement-specific metrics and the -- and our efforts this year, which are very much focused on the referring physician and what implications that has on the flow of patients into the relevant treating sites. So I think that's -- I expect and hope that, that will be the centerpiece of what we'll be talking about.

Excellent. Well, Glen and Derrick, thank you so much for joining us today. I know you have a full day ahead of you. So I hope you have some fun with it.

Thank you very much.

Thanks, Joanne.