Pulmonx Corporation (LUNG) Earnings Call Transcript & Summary

Travis Steed, Medical Device Analyst at Bank of America, and we welcome Pulmonx up next. We have Glen French, CEO; and Derrick Sung, CFO. So thanks for being here. We'll hop into a fireside chat.

So I guess, I just wanted to look at Q1, you just reported Q1 results and probably one of the more COVID-impacted smaller Med Tech companies, small cap companies in the space. So I just wanted to make sure, like we kind of level set where things were in Q1, the recovery in March and April into May, and so now that you have a little bit more visibility into the early part of the second quarter.

Right. Yes. So just as by way of background, we're significantly impacted by COVID because -- particularly when COVID consumes ICU beds. And Omicron was -- came on very quick and it hit basically all of our major market. We're in about 25 different countries. And all of our top countries got hit within a 2-week window. And ICU beds got filled up by folks who hadn't yet gotten vaccinated. So we are very sensitive to that. In the first 45 days of the quarter were significantly impacted. And then we saw in the back half of February, things pulling out. And then in March as well, we saw things strengthening. So a lot of cases that were scheduled in the early part of the year that then get rescheduled. And those are the cases that really lead us out. So we saw a really strong March with a lot of sort of January cases baked into it and then also some April, which had some backlog as well that was -- and then we continue to be on a real steep trajectory coming out.

So we pretty much burned through all the backlog through April at this point?

It's a great majority for sure.

Okay. And any numbers you can put around the recovery, like active account numbers or that -- to see how that kind of changed from March into April?

Yes. So we have, in the recent past, in the midst of COVID been providing resolution on active accounts to the monthly basis. It's just -- and we're going to be moving back to quarterly commentary. But as it relates to sort of closing the loop on that, the worst months we've ever seen as it relates to active accounts, is 30% -- low 30%s. So we were 31% active in January in the United States. That strengthened a little bit around mid-30%s in February and then was in the low 50%s in March. So...

Has it gotten better since then? Has it continued to tick up?

We're continuing to get sites up and running. But the monthly numbers, they blend out and our active account number for the first quarter, which is what we normally would report on was 68%, which is on the low end. We would expect high 70%s kind of low 80%s in a sort of a time frame when COVID is not a big factor, which is kind of what we project in the back half of the year.

Right. And then when you look at the full year guidance, what are you assuming on some of those metrics? Are your assuming kind of the COVID pressures that you've seen? I understand like you obviously, it seems like you had the opportunity like teams came in a little stronger than expected, not quite ready to raise guidance at this point given some of the challenges that you've had to face that kind of outside of your rollout, not really directly to you, but all the COVID challenges kind of live through a couple of downturns with COVID. So it feels like it was probably just more conservatism at this point that you didn't want to quite raise guidance and raise Q2 guidance at this point, but I just want to make sure that we're thinking about that correctly.

Yes. I mean I think that we don't want to get in front of our skis coming off of a pretty low trough in February, right? We saw 2 months of really promising recovery. And as Glen mentioned, that seems to be extending in through to April. We're certainly feeling good about where we are. But it just does feel premature to be raising guidance at this point in the year. And we want to be respectful as well of COVID and the unpredictability of COVID, right? Sitting here last year, this time frame, I think we thought that the back half of April of 2021 was going to be largely COVID-free and we were surprised by that, for example. So I do think that we want to just make sure that things kind of roll out as we [indiscernible]. That said, I do think that by the back half of this year, our guidance contemplates that back half of this year from an activity account activity perspective will be up to these sort of normalized levels, that 80%-plus range that Glen mentioned. And so that's kind of built into our guidance and assuming there's no major wave that comes through, I think that's achievable.

The other thing that certainly got my attention as a former sales rep and sales manager and so forth is when you look across the year now obviously, the first quarter was impacted, and it is a low starting point. But the steepness is -- I think it's -- if you looked at the consensus numbers, 26% average growth quarter-over-quarter across the year. So it's a very steep hill. And so we finished up a little bit relative to expectations in the first quarter. We weren't willing to give that away.

Yes. That makes sense. And Q2 guidance you actually gave during Omicron 3 months ago, but you're still keeping the same Q2 guidance despite some of the recovery?

Yes. I mean we didn't specifically give Q2 guidance at the general sort of qualitative nature that we have always been looking at is we knew that Q1 was going to get hit hard by Omicron. We expect that in Q2, we'll get back to where we were at the end of last year, so where we were in Q4. And then from that point on, we'll get -- we'll be back on the growth trajectory that we were previously. And so that's kind of how we're looking at it.

All right. That's helpful color. And then on staffing, that's something that comes up quite a bit. I think you're pretty close in the hospitals. Like what are you seeing on staffing pressures now and expectations we're seeing that easing over the next 3 to 6 months?

Well, we do expect that lease so going sort of backwards. And staffing has been largely invisible to us during some of these COVID waves because obviously the procedures are shut down. We're not terribly concerned about our staffing. But -- so we're happy to now be in a position where we're seeing it. I would say about 25% of our accounts have some measure of staffing implication. It doesn't mean that they're shut down by any means. But it may be that the rate at which folks are able to expand is being governed by the availability of anesthesia or support personnel and so forth.

Okay. And if you kind of -- switching to more market development, obviously, that's what you were trying to do before COVID, so the more important piece here. But if you look back over the kind of the last year since you've launched the product the last couple of years, what do you think you've kind of not been able to accomplish versus what you've still been able to accomplish versus your kind of expectations originally?

Well, revenues aren't what we had originally thought because of the downturns. The sort of from a tactical perspective, I think that one of the areas that's been gratifying is to see our ability to open new accounts in the face of these various COVID waves, and it will happen at different rates depending on whether it's a heavy COVID period or not. And so we have been able to continue to expand. The -- I think one of the most remarkable things about the first quarter was that we obviously got hit by the impact on our ability to execute procedures, but patient interest and the metrics that we'll track as it relates to engagement online, patients opting in, patients making calls in treatment centers and so forth, those continue to rise through the COVID. So it was COVID, COVID shut down the cases, but it couldn't shut down the interests. So that was great to see those numbers relative to the fourth quarter continuing to go up.

When you think about market development activities that over kind of the next 12 months for this year, like what's the things that you're going to be most focused on this year versus like 2023? Are you going to still be focusing the same things you're going to go to go more DTC advertising and kind of pushing in that direction?

Yes, interesting. So we've always said from the start that there was in a very simplistic way, we needed to make sure that we opened up accounts that were extraordinarily well trained and to -- with which we could share best practices from the best-performing centers. And we've recently opened up a new training center, which allows us to train more folks. And we are -- we have an array of different programs that allow the sharing of best practices. And we're about halfway to our target number of opening up accounts, so we're about 230 on a path to opening up about 500 accounts. So we feel good about that we've shifted as a primary focus, our sites really on the referring physicians, which is the second part of our 3-part approach. And it's important to us to make sure that those physicians are all up to speed. About 80% of our patients that we're treating are going through referring physicians. The remaining 20% are seeing something on the Internet or on TV and they're heading to the treating center and they're contacting the physician that they saw. And that's an important area for us because there's a -- although the referring physicians, there's about 5,000 docs in the United States that are controlling most of the patients. So on the order of 100 referring docs per territory, roughly 10 key referring docs per account, and they control the majority of the patients. We know who they are because we can see their high prescribers of the types of drugs that patients with severe emphysema are taking. So we're taking a very, very targeted approach. They know about our technology. So we do market research and we figure out are you aware of this technology, but they don't understand the specifics. They don't -- for example, we'll say, do you know about the technology? They say, yes, if you refer to patients, they'll say no, and we'll ask them why. And they'll say, well, you've got to get your data published. When we got 4 randomized controlled trials published in the best journals. We've got -- they'll say, we got to get reimbursement aligned. It's like reimbursement is done in the United States and in most other countries, those kinds of things. And the other thing that we need to do with these referring docs is to connect them to the treating doc in a very real way. These patients that they're referring docs are managing are among the most severe patients that they're treating and handing them off to somebody who they don't know to do this procedure is a big step. So fortunately, Zoom has provided a way to get folks face-to-face pretty easily. And in some cases, the doctors are literally driving around with our sales reps going and shaking hands and meeting these referring docs. So that's really important. And then the third part of our approach is really this patient engagement and our direct-to-patient activity has evolved from what we originally thought was going to be the classical direct-to-patient kind of stuff to more of a way to get into the referring physicians. So the patients themselves are becoming smarter through the education that they pick up online. And we also have a talk to my doctor program where the patients themselves are giving us authorization to use their name and to go to the recurring doc and there's no better lead that you get then to go walk into a doctor and say, when you this specific patient asked me to come in and talk to you.

So there's -- just to be sure, there's 5,000 referring doctors out there and you're saying, most all of them have as hard of your technology?

Yes. 5,000 doctors represent better than 60% -- or they are managing better than 60% of the patients in the United States. So we're focused on them. These are high-volume folks. And we believe that the other referring physicians will be informed by the activities of these leading.

And are you just mostly going -- having sales reps sit down with these referring doctors, educate them and they?

Yes, in some cases. In some cases, it's the treating doc that's involved. We're taking whatever path is necessary just to bring them up the learning curve. And again, there's 2 elements. 1, what's the magnitude of the benefit that we can deliver. I mean, relative to what they're able to do for these patients. And keep in mind that our surgical predicate is long volume reduction to surgery. We're just scratching the surface on the opportunity. And yet last year, we did 5x as many of our procedures as long line reduction procedures. So that's an approach that's just highly invasive and really not something that's an option for most of these patients that aren't strong enough to withstand the insult to that procedure. So what we need to do is to go into these referring physicians and help them understand the magnitude of benefit that we can deliver. And relative to drugs, we're delivering something that's way more impactful to these patients' lives. It can be life-changing for them. And so they got to come up to speed on that front. And then they have to feel comfortable with the person who's going to end up doing the procedure. So we have to provide that introduction.

And on the treating doctors, you've got 330 centers now you said goal of 500. How should we think about the path from 230 to 500?

Well, we've been clipping along in sort of the light COVID times and we -- as we look ahead, we see COVID is being lighter. It's not going away by any means. But as the human species has now got a lot more antibodies than we did a couple of years ago, basically had none. There is a relationship between the presence of antibodies and the likelihood that you're going to have been an ICU bed. And our sensitivity isn't to the number of COVID patients that exist, but rather the proportion of those that end up in the ICU to clog it up and doing so get in the way of our procedure.

Is the biggest limiting factor here more lack of patients being referred? Or are there other things that you hear when you're out talking to customers like we're doing in some cases, but maybe like we're not quite sure which patients are the best fit? Or is there other limiting factors on this? Or is it just a market awareness?

It's primarily market awareness.

I think we'll continue on the kind of 15 to 20 new accounts per quarter that we've been on in the pre-COVID time frame in terms of the opening accounts.

I think you mentioned the second U.S. training facility that you're opening up. Like is that going to be incremental? Just how does that fit into the business? I think anything to talk about there?

Well, it's already open. So -- and we've had a couple of training programs there. We're having a training class about every 3 weeks at one of -- or the other of the training centers. In the last 2 years, we've been training about 100 doctors per year. We open up about 60 accounts if you get about whatever, 1.5 docs per account on average. And 80% of our training to this -- over the last couple of years is a virtual -- so thank goodness for Zoom. The problem is it's not nearly as good as face-to-face training. So we fly folks in. They spend a solid day. They talk about anesthesia, they talk about reimbursement. They talk about the procedure. They see a few cases, they have back and forth with a global thought leader. So opening up another center allows us to do more face-to-face. And we really have a strong bias to trying to do as much as we possibly can. And I would -- the great majority of training going forward, I anticipate is going to be face-to-face. And so that capacity will be helpful. I think we'll probably be -- we'll certainly be able to run a lot more people through face-to-face training. We also, in the event that somebody is not -- we just can't find a way to get them out. We'll bring training to them, if necessary.

Okay. And then switching gears a little bit to Japan. I just count the opportunity there and how big of an opportunity in Japan is? And it sounds like second half 2022 is the expectation for launch?

Yes. So about 100,000 patients, about 1/5 the size of the U.S. So it's about $1 billion prevalent opportunity in Japan. So we're very excited about that. We've -- we're in frequent and significant conversations with the regulatory authorities of PMDA in Japan. We -- we've already filed. We anticipate we'll have approval by the end of this year. Reimbursement is appended on the back of that. So once we get approval, we start the reimbursement process, depending on who you talk to 6 months, 9 months, 12 months later. So by -- we expect to have our first revenues in Japan before the end of next year.

And expectations for how that launches similar to the U.S. launch slower, faster?

Slower it will be, it's much more deliberate. I mean, we see a great opportunity in Japan, but it's a very hierarchical. You don't go to the first 5 centers or 10 centers that are well selected with the right thought leaders and it can be a problem for you. We're well aware of who we need to speak with. We've got our first employee there. We're in the process of hiring a general manager right now. We're going to build out a very experienced team, and we'll execute it the right way. But I would imagine that the slope of the revenue curve in the first -- certainly, first year, probably first couple of years will be a little bit flatter than what you see in the United States and then I'll look very familiar thereafter.

Okay. And then on AeriSeal, I guess just to start, maybe some data later this year, perhaps how important is that data for the overall market? Anything we're going to see there, just get the kind of levels out?

So a little bit less than half of all patients are born with an incomplete division between their lobes. And so we're targeting -- we're putting in valves into patients that have complete fissures or divisions between their lobes if you put in valves into somebody who doesn't have a complete fissure, then as the Aeri's is exiting that target lobe that you're trying to bring down, it's just refilling from the back channel. So this lateral concept of collateral ventilation is fundamental to the use of valves. We are targeting folks who are collateral ventilation negative. Now less than half, slightly less than half of patients are born with cross communications. So your target lobe that you're looking to bring down might have an incomplete fissure between it. AeriSeal is a technology that we're utilizing in a multicenter, multinational European feasibility trial called CONVERT, where we're using it essentially as a sealant in an effort to try to complete that fissure. And in doing so -- there's basically 2 questions in convert. One, can we take a patient who is objectively. So we have something called Chartis, which is a balloon catheter that measures changes in pressure and flow, and we can see whether there's collateral ventilation. If you're going into a target lobe, which you calculate to have a leader of air in it and 2 leaders comes back through the catheter, you know it's coming from somewhere, so is collateral ventilation. So we objectively determined that the patient's collateral ventilation positive. We go in and treat that a target area of that lung with AeriSeal. And then we go back in with charters to demonstrate that the collateral ventilation negative. So the first level question is, can you take some CV-positive and make them CV-negative? And if the answer is yes, can you take that patient then and give them -- put in some valves and have them behave the same way as the patients did across the 4 trials that we've already done. So convert will have -- we anticipate we've submitted an abstract to the European Respiratory Society Meeting in early September in Barcelona, that if accepted, we expect to provide a window into the answer to the first question. Can we take someone to CV-positive and make them CV-negative. In doing so we would -- we could potentially increase our total addressable market for valves. And so we're anxious to see that. We've talked to global thought leaders as to what the proportion of what -- how much success would we have to see for this to be worthwhile. They've said, if you can do better than 30%, the 30% to 50% would be okay, better than 50% conversion would be a lot better than okay.

You said if accepted. Does it -- if it's not accepted as it come later? Or is it?

We'll find a way to report it later. But you never know, but it would be a little bit surprising. It would be a weird situation didn't accept that.

But I just wanted to make sure I was clear on that. And look, it seems like now there's several ways the patient kind of gets into the funnel and could fall out of the funnel. This could be one less reason for them to fall out. Is that a limiting factor on growth do you think so this could actually change that dynamic to some degree?

You mean AeriSeal?

Yes.

Yes. So we've got -- we have this quantitative CT analysis software, cloud-based tool called StratX. And that gives us a good sense without sticking a tube down anyone's throat. So charters, obviously, you got to go in, you got to deliver a catheter down through a bronchoscope. So the first level test is StratX. And StratX will give us a good sense. It will -- it will take the bits and bites or the pixels and it will reconstruct the fissure so you can have a reasonable sense of how complete the division. As you take CT scan data and you rebuild the fissures sort of on a computer. So you don't have to stick a tube down some. At that point, there's some number of patients where we say, you're not a good candidate for our procedure. It's a little bit less than 50%. Those patients wouldn't get that bad news. They would find out at that point, hey, you're -- you're not going to get valves today. But we can try to seal off that fissure and our hope and expectation is that we would get consent in advance of a procedure. So you do your StratX, you go in, for example, you might test it with charters. And if charters says no, at that level, if it's CV-positive you could then use AeriSeal. So it will open up, I think, not only more patients, but also you get a lot less disappointed people looping back to the referring docs that saying, I wasn't a candidate. So we expect that we'll have something with AeriSeal that will essentially eliminate one of the points of resistance, which is 40% of patients are moving back saying it wasn't a candidate.

Okay. That's helpful. Helpful color. And Derrick, I wanted to talk a little bit on margins before we run out of time here. For this year, gross margin this quarter was a little bit better. How should we think about the margin trend for Q2, Q3, Q4 for the full year 2022?

Sure, sure. So we were at just above 75% of gross margin in Q1, which is the highest we've been at. And really, the production efficiencies that we've been talking about, both due to higher volume throughput as well as just our overall efforts in making the process more efficient have been coming through, and we expect them to continue to come through. So for the remainder of the year, I think we will stay in that 74.5% to 75% range. So I think we've got a good baseline off of which we'll move forward from -- and then slowly, I expect will gradually we can still climb long term to the high 70%s in terms of gross margins over the next few years.

Okay. And then what about operating profits and operating margins or however you want to talk about it in terms of when breakeven is from the P&L perspective to even also kind of longer-term goals, how profitable could the business be?

Yes. I mean, longer term, I would expect that no reason why we can't see 25%, 30%-plus operating margins at scale. It will be a while until when we get there. Right now our focus is on getting to a cash flow breakeven level, right? And I expect that we will get to cash flow breakeven with the current capital that we have on hand. I expect that will happen over the next few years. I don't want to give a specific time frame or date, but I think we feel very good about our pathway there. Just given that our gross margins are high, and we have a really efficient commercial model once it gets moving. So I feel pretty good about getting there over the next few years.

All right. When you say you can get to breakeven in the next few years, is that contemplating some additional spend to help develop the market over the next couple of years like DTC, if you do turn that on?

Yes. I mean we continue to invest in growth, right? And we expect that as our investments will shift over time from a commercial perspective from focusing on the treatment centers and opening up referral and driving physician referrals to kind of the last piece to it is DTC that we can feel like we can get to a number of patients. So you will see a continued increase in our commercial spend. You will also see an increase in our R&D spend. All of that, I would say, is contemplated in our strategic plan to get to cash flow breakeven with the cash that we have on hand.

Is there a particular revenue number you need for breakeven?

I'd say, roughly speaking, north of $150 million, $150 million plus to $100 million, something like that on an annualized basis, again, just very roughly.

Rough numbers, yes. No, that's helpful to kind of have it in the ballpark. And then kind of last question here, supply chain. Anything that -- how are you managing to some of the supply chain issues?

Yes. Yes. We -- the short answer is we haven't had -- we don't see meaningful material impact from supply chain issues. We certainly have seen some increase in material pricing and lead times as one else has -- we feel like we have done a good job in getting in front of that by buying ahead of time and ahead of -- well ahead of schedule. And we don't have any major components that are coming from overseas or anything like that. So it's all manageable, and our production efficiencies will continue to drive our gross margin increases that I think will offset the supply chain pressures from a pricing perspective.

Okay. Great. That's all I had. Was there anything else that you wanted to say? We'll wind there. All right. Thanks a lot for coming.

Thank you very much.

Thank you.