Pulmonx Corporation (LUNG) Earnings Call Transcript & Summary

Good afternoon, and welcome to the second day -- nearly the end of the second day of the Morgan Stanley Healthcare Conference. I am Cecilia Furlong, medical device analyst here at Morgan Stanley. It is my pleasure to have Pulmonx with us; CEO, Glen French; CFO, Derrick Sung. Thank you both for being here today.

Thank you.

And I think we've started a lot of these conversations with macro. I'd love to start with CONVERT given what we've heard recently from a data standpoint. But as you think about just for the field? What's the greatest potential benefit as you contemplate further adoption?

Specific to CONVERT or...

Yes. Just -- as you think about just the ability to further optimize therapy with AeriSeal and just the TAM expansion opportunity that...

Absolutely. So just as a way of background, we -- our valves, which is the sort of bread and butter of our business are useful in patients that have little to no collateral ventilation. So that means a nearly complete or complete division between one lobe and the adjacent lobe. So there's some number of patients that don't get treated as a result of that. And our hypothesis was that we might be able to use AeriSeal, a technology that we had acquired, an injectable polymer as a sealant across that fissure plane to complete the fissure. And so there was some data that -- there was actually a single center -- single patient report a couple of years ago that an individual there was able to use AeriSeal to take a patient who was objectively CV-positive, make them CV-negative and then put in valves and they behaved as you would expect somebody who is CV-negative would behave in a target patient population. About 3 weeks ago, from the same center, about a 28-patient sampling, 1:1 randomization between treatment in a control group. And they showed as well that they could convert patients from CV-positive to CV-negative. And then when they place valves that, that would be a positive. So we had already started a study that we call CONVERT. And the idea is that when we go in to execute our procedure right before the commencement of the procedure, right before the placement of the valves, we do a test with a technology called Chartis. Just a simple balloon catheter to measure changes in pressure and flow, effectively simulates the procedure. And about 20% of the time the patient is CV-positive. So 80% of the time we're placing valves, and 20% of the time we're waking up the patient and they're disappointed. And what AeriSeal is looking at in the CONVERT trial is whether we can take that 20% of patients and complete that fissure gap and perhaps then come back later and place valves. So at the European Respiratory Society meeting in Barcelona, a week ago this past Sunday. We reported data that we were able to convert nearly 80% of patients from CV-positive to CV-negative and that when valves were placed in those patients, the results were quite compelling. So I think that the broader impact on our opportunity is the opportunity to treat roughly 20% more patients because it works about 80% of the time in that 20% group. And maybe even just as importantly, that what we heard back from clinicians is that there's a lot of excitement about optimizing the treatment of existing patients using AeriSeal as well by virtue of being able -- when we go into a valve patient today, we have a primary and a secondary target because of this issue of collateral ventilation. And if Chartis points us to the secondary target, often there's a big trade-off. Primary target might have a lot more trapped gas, a lot more destroyed tissue and a lot be a lot less perfused. And as a consequence, be a clear #1 option. But today, physicians are challenging to have to go to the second option, which may be CV-negative, if the first one is CV-positive. And so this AeriSeal data also opens that up as a possibility. So there's TAM expansion, about 20% on the number of patients that can get valves. And then obviously, the entire spectrum of folks that I just mentioned would also get AeriSeal, which we would expect some revenues to come from.

As you think about to just 80% of patients will go on today to get a procedure, once they're in the [indiscernible] the 20%, being able to give them an option versus optimizing being able to treat the primary low. But what's the bigger kind of benefit you look at those 2 in comparison?

Well, the most obvious one is, I think -- most obvious and quantifiable one is the first group, which is the group that isn't getting treated today that's being woken up and going home. The second group that we talk about in terms of optimizing the treatment is one that's getting the valves, getting the benefit of the valves, but has the opportunity to get even greater benefit by going after the primary rather than a secondary target. And that's a fraction of those patients. But both of these things, in addition to providing the patients with the best possible solution to their challenge, creates a very meaningful improvement in the feedback loop that goes back to the referring physician that when 20% of the time when the patient comes back to them, they're disappointed, very disappointed. I went through all of this workup and they didn't even do anything. Though I had to have the procedure and I didn't get the valve. I thought there was an 80% chance. I thought I was going to be among the 80%. And so even though 80% of the patients are looping back saying, hey, I got the valve, the 20% aren't. So we really think that, that unto itself is going to be helpful and then also getting -- increasing the magnitude of benefit, which is considerable. It's a multiple of what they get from drugs when they get benefit from the valves being able to optimize that and increase by being able to go after the primary target, the magnitude of benefit that these patients' experience, we think, is a -- is also going to be beneficial.

From a -- as you think about just expanding into new physician populations to and having now kind of an option for those 20% or being able to optimize therapy. Are those barriers today, as physicians look at patients that they may or may not treat, and does that kind of more broadly open the market, I guess, is what I'm trying to ask.

Yes. No, I think it's absolutely the case. You've got among the most fragile patients that these referring physicians have in their practice. So the idea of undergoing a bronchoscopy that may or may not result in an action that could make -- take the patient to a better place is meaningful to them. So going from effectively 80% to 100% chance that, that procedure is going to result in an action that may take them to a better place should have a positive impact on that flow.

As you think about to just a stand-alone use of AeriSeal, you've talked about that. Can you speak to just the lack of reversibility, one. And then is that the right technology? Do you think there's another kind of approach that you could ultimately look to take in the CV-positive patient population?

So we acquired AeriSeal some number of years ago. And the clinical research that was done on that technology that we acquired prior to our acquisition was as a stand-alone treatment. And what that means is that we would target a specific or the company, Aeris would target a specific lobe or a region of the lung that it wanted to reduce. And it would provide up to 80 CCs of AeriSeal in that lung. The results were good from an efficacy perspective. There was a sort of a somewhat concerning safety signal. There was a lot of inflammation and so forth. So -- and the impact on the lung was effectively the same as surgery, meaning whatever you -- wherever you are going to treat, and there's a number of other sort of options for CV-positive patients that were in development or are in development where you might as well do surgery. I mean it's irreversible. You can't access the tissue that's still there. The blood supply is still there, so it's not dying, but it's a challenge. And so as far as the future of a stand-alone treatment, what we've discovered using AeriSeal as a sealant as opposed to a regional treatment is that we can get at a lot of those patients. So we're opening that up for -- as -- so the opportunity for the stand-alone is very small. And as it relates to the future application of AeriSeal, there is the potential that it could be used as a future very focal treatment in the segmental or sub-segmental parts of the lung where there's -- oftentimes in a lobe, there is heterogeneity with regard to the disease distribution. And so we can envision clinical research to support the expansion of that application beyond the CONVERT application to include very specific possible treatments, but not like taking down an entire lobe or a big portion of a lobe.

Okay. And looking at the CONVERT application specifically, how should we think about timelines for commercialization outside the U.S. You do have CE mark currently. So just on how you're thinking about that, when we could hear more in terms of your outlook and [ IP ] in the U.S. and then just how you're thinking about the pricing model here, too.

Yes. So with regard to time to market outside the United States, we're going to complete enrollment in that trial. We reported on interim data. We'll complete enrollment in that trial next year follow-up, probably sort of rough estimation, at the European Respiratory Society meeting in the fall of 2024, I would anticipate that we would be reporting those data for the first time. On the back of those data, whether published or simply an abstract form because we have the CE mark. If they continue to be anywhere close to what they were in the first 40 patients, I would expect that we'll commence commercialization roughly at that time, so a couple of years from now. From a U.S. perspective, one of the reasons why we looked at the -- some people might say, well, why did you even look, why did you care to look? We had data from Australia on a single patient. We had data from Australia on a group of patients, but all from a single site. This is a multinational, multicenter CONVERT trial. So we figured we want to bring those data forward in hopes that we could engage in really constructive conversations with FDA with regard to the commencement of an IDE trial that's between us and getting FDA approval. So we expect that we will commence that enrollment probably in the latter part of next year, and it's probably about a 3-year time line to get enrollment follow-up and then through the PMA process probably with a panel meeting with FDA. Again, with the data that we have right now, it's -- our conversations are ongoing with FDA. They're very constructive. So we feel confident that we'll be able to commence that trial before we actually have the final readout on CONVERT 1.

Okay -- yes.

Pricing. We haven't established pricing. We expect to charge for this technology.

Okay. That is an answer. So as we turn back though, just to the core business today, wanted to ask what you're seeing from an account productivity standpoint. And you talked about through COVID, you'd see waves and you'd see kind of mass shutdowns. We don't have that anymore. So I'm just curious, are you, from your standpoint, kind of back at a more normalized level, kind of closer to pre-COVID type of dynamics. I realize you were not in the market for a long-term in the U.S., pre-COVID, but just how that's trending?

Yes. As a result, it's a little bit apples and oranges because the pre-COVID timeframe, and we typically look at productivity as accounts that have been up and running across 4 quarters. Typically, in the first quarter, they'll treat 1 or 2 patients, will see how they do in the second quarter after they commence. They'll step up from there and so forth. And we saw this very encouraging up and to the right productivity curve at individual accounts that were started and underway in the pre-COVID phase for a year. Everything that came after that was interrupted by the on-off switch of COVID. And as a consequence, those 40 accounts that represented that group today is 180-plus accounts. So it's a little bit of a different denominator. But maybe Derrick can talk through the way that productivity has moved across that period and what it looks like today?

Sure. So in that group of established accounts that have been up and running for over a year, as the COVID waves have come through, they've obviously knocked the productivity down. So prior to the COVID impact, we were seeing this group of accounts, on average, doing 6 to 7 cases per quarter. That's an average. So in that small group of 40 accounts or so we saw the highest accounts doing upwards of 15 or 20, right? But on average, they were doing 6 or 7 as we went through the various COVID waves. Every time a wave of COVID came through, we would see everything shut down. You would see that productivity level drop low, down to 3 in some quarters, certainly below 4, and then it would kind of come back up. And most recently, we've seen a similar dynamic earlier this year. So when the COVID wave came through in January, February, in Q1, we saw that productivity metric drop down below 4. In Q2, we saw it come back up to between 4 and 5, about 4.5. And so that's really -- that was encouraging to us because that's kind of the same pattern that we expected to see kind of being hit down and bouncing back up. Now what I would mention is that I do think that the accounts that we started up and initiated during this 2-year period of COVID, are likely not the same as those that were started pre-COVID because, as Glen mentioned, those that were started pre-COVID had just kind of a 4-quarter uninterrupted runway and with an account that stops and starts throughout COVID. We would expect to see some impact to that curve as they move up that, that productivity ramp. So that likely play and will continue to play into some of the numbers as we look forward.

How do you think to -- and it seems talking with all the companies. Staffing is still an issue and maybe an issue we continue to live with. But how do you think about separate procedures, maybe feeling a bit more pressure as you think about especially for the patient progress to ultimately get the valves placed. Do you see outsized pressure on your procedure from some of the staffing limitations versus other potentially deferrable procedures.

That's a good -- I wouldn't characterize it as outsized, maybe a little bit, but staffing was a nonissue for us until recently because COVID was such a big issue for us. It is like until COVID wasn't filling up all the -- overflowing ICU beds. It wasn't until that point in time where ICU capacity, which was shutting our business down periodically. Once that went away, we started to see more of the staffing being an issue. But I think it's -- to the extent that some amount of the current staffing circumstances, sort of a COVID hangover, where certain people have decided to step away. Maybe we're a little bit disproportionately are outsized impacted by it because our physicians were responsible from the frontline management of patients in the ICU and the nurses as well were very much consumed by COVID. But I think in general, the issue is probably more about the steps at the hospital necessary to get a patient ready for a procedure and the more steps there are, probably the more opportunity there is for COVID to sort of get in the way of that, but just the broader capacity. We're not an operating room procedure, but the issues are the same in the operating room as they are in the procedure suites, where essentially what happens is maybe in a standard week, they do 100 procedures and now they might be doing 80 and then everybody gets proportionally impacted, but I don't think we get disproportionately impact.

Okay. Well, that's helpful. And as you think about and contemplated in your guidance and specifically your outlook for the back half of the year. What are you factoring in, in terms of geographic contributions? And can you just speak to China, it's a small portion of your business, but what you've seen in that region recently?

Yes, you want to talk about the modeling.

Sure. Sure. So I mean -- so we did reiterate our guidance in our Q2 call, $55 million to $60 million. And I'd point out that, that was despite incremental increases in headwinds from foreign exchange, which we didn't contemplate when we initially provided that guidance at the beginning of the year. And from a -- specifically from a geographic perspective, maybe starting with Q2. In Q2, we saw the U.S. grow 31% year-over-year, outside the U.S. in our 4 largest markets, which are Germany, France, the U.K. and Australia, we saw 20% constant currency growth on average across all those businesses. So together, the U.S. plus those 4 largest markets make up 90% of our business. So overall, 90% of our business grew just under 30% in constant currency, 27% in constant currency. So we felt pretty good about the recovery out of COVID in our major markets. Looking forward, from a geographic mix perspective, and I think we expect to continue to see kind of a 60-40 mix between the U.S. and OUS. The small 10% of our business that really didn't come back as we had hoped or we expected in Q2 included China, as you mentioned. And we do expect that China will continue to lag in terms of their COVID recovery through the remainder of the year. But overall, we expect to see kind of that -- a continuation of what we saw in Q2.

Okay. I guess, too, just as you think about where you are in terms of TAM penetration in the U.S. and -- or center penetration specifically, how do you think about just the cadence now, you don't have a lot of the macro factors holding you back. But cadence of bringing on new accounts, balancing that with going deeper into accounts. And as you think longer term, too, is this -- ultimately, do you view that for kind of more concentrated in higher volume centers, but academic centers versus kind of a broad-based procedure? Is this a procedure longer term that really is kind of a widespread adopted procedure.

Well, we definitely -- we believe that the right place to focus is on centers of excellence. So we're not -- we don't view this as a broad base. We don't expect this to be done in 5,000 hospitals in the United States. Our target number of hospitals is somewhere 400, 500 hospitals, where 200-plus -- 250-plus hospitals are already set up. The opportunity to grow by opening up new centers of excellence is not nearly as great as the focal area that you talked about before, which is increasing, same-store sales or productivity or whatever you would like to call it. So we've really been focused on that. About 80% of our business today in the United States comes through referring physicians. So 20% of the patients find their way to the treating sites on their own and 80% are going through referring physicians. If we think about the opportunity in the United States, probably only about 10% of the opportunity is within what we call the direct field of view of the treating physician or their sort of preexisting referral network. So 90% of the patients are out on the edges. It's always been our plan. We've always had a sort of a 3-part plan to make sure that we get geographic coverage and get the hospitals up and running and using best practices to be able to efficiently take patients from the front door to the procedure and then to shift our focus while still sort of moving along on opening new accounts, which we intend to continue to do in the same 10 to 20 new accounts per quarter. And then to really shift our focus on the referring physicians because they're the ones who control the bulk of the patients. We needed to have the treating sites up and running so that we had some place for them to refer their patients to. And so we shifted from a commercial perspective, earlier this year, to a great extent, our focus toward these referring physicians, and we've been tracking metrics specific to that. We've identified the patients that control the bulk of patients with emphysema in a specific geography. These patients have a pharmaceutical fingerprint. We're able to buy that data. We know who the doctors are that are controlling the bulk of the patients around our treating centers. And then we're going into them to raise their awareness of the existence of the technology through a multitude of means, including direct access by our sales organization, patients are actually their own advocates, both directly or they can give us authorization to go in on their behalf, using their names to their treating physicians to try to make sure that they have the latest information and -- to their referring physician. And then the treating physicians are also actively involved in outbound communication and meetings and so forth, be it Zoom or in person with the referring physicians as well. So we've been very much focused on that and tracking the point of first contact, the point of first meeting, the introduction, the referral of the first patient, second patient and so on and have been seeing that build nicely since we started this. Essentially, we tried to start it in January, but COVID had other ideas. And so it basically got off the ground in March, and we've been seeing some nice progress. We've seen that progress reflected in recent -- pretty significant increases in StratX as well as calls into our reimbursement services group. So we feel good about this focus. This is a plan that we put in place 4 or 5 years ago. And we felt good about it then, and we feel it's good -- good about it now. So it will be a primary focus for us this year and next. And then we'll begin to bring to execute direct-to-patient activities once we know that any resistance due to a lack of awareness has gone with the referring physicians and that we have these treating hospitals all up and running.

I was going to ask on the direct-to-patient side. And you talked about timelines. And you do have a website that patients can go to specifically today, but how do you think about just kind of the approach there? And once you have everything built out and the infrastructure in place, just high-level thoughts today.

Yes. We've obviously piloted that. We know what it costs to take a patient from first contact to the procedure, we can do that easily within the envelope of spend that we have generated by the gross margin per procedure and so forth. So we're in really good shape. We have an opportunity to deliver some nice improvement. But we are -- I think it's probably the easiest of the 3 legs of the stool, if you will. I think the most impactful leg, if you will, is this referral component that we're focused on right now. But I think once that's developed and any resistance due to a lack of awareness that exists today is minimized or eliminated. I think then we know -- we got 150-plus thousand people who are connected to us through social media and so forth. And then like I said, we've demonstrated the ability to move those patients toward the treating sites. But we want to -- we have -- we set out a deliberate plan. We're executing against that deliberate plan where our indications are, so far, early returns are that we're moving in a positive direction as we look ahead, expect that to reveal itself.

As you think to beyond '22, furthering the initiatives, targeting the prescribing physicians and then as you think about just the expense tied to clinical, how should we think about both R&D, SG&A from those 2 initiatives trending over time? And then across both of those, especially SG&A, do you think about your field force in place today? When do you start to get greater leverage out of them?

Yes. So I think on the commercial front, we'll start to get greater leverage from our commercial team, even next year, right? I think today, we've largely gone through the big build-out of our commercial team. We're at 56 territories in the U.S., 34-odd territories outside the U.S. We expect to continue to add additional territories more opportunistically, right? But I don't think we're going to -- we're not going to substantially increase that at the level that we'll be driving sales. So I expect to get leverage from our commercial team starting next year. The R&D front, we will see our spend increase, particularly starting next year, the AeriSeal program will result in an increase in R&D spend. And so you can expect to see our R&D line go up. We'll obviously give more specific guidance when we provide our 2023 guidance on our Q4 call. But directionally, I think you could expect to see R&D go up and we will get leverage commercially.

Okay. I know we're running out of time, but just kind of last thought. You talked previously around kind of being able to target the COPD spectrum, if you will. How would you think about just the opportunity you have within your current bag, pushing that for now that we don't have a lot of headwinds with CONVERT, with AeriSeal and the opportunity there with the potential to look at something maybe on the chronic bronchitis side longer term. What is your thought process just in terms of balancing those two.

We're watching with great interest, technologies that are moving forward on -- under the COPD umbrella, which is chronic bronchitis and emphysema. There's at least a trio of companies that are in late-stage development. We're quite familiar with the space and keeping a close eye on things.

Okay. I think with that, I know we're almost out of time. Glen, I'll turn it back to you if you have any last words?

Yes. No, thank you. We appreciate this opportunity and now and in the past and looking forward as well. We feel like this is -- we're very encouraged by the backdrop that is ahead of us in terms of an environment where COVID is no longer filling up ICU beds, which is wonderful for our business. And as we move ahead, and we see a lot of indications of strengthening as we -- in the future, so...

And with that, thank you for both being here.

Thanks.

Thanks.