RxSight, Inc. (RXST) Earnings Call Transcript & Summary

Hello, everyone. I'm Robbie Marcus, the med tech analyst at JPMorgan. Happy to introduce our next presentation, company is RxSight, I'm going to bring up CEO, Ron Kurtz, and then we'll do some Q&A. Ron?

Thank you very much, Robbie, and thank you for having us at the conference. These are forward-looking statements. RxSight is focused on growing the premium cataract surgery market, which is the most profitable segment of the highest volume surgical procedure in ophthalmology. Our strategy is based on delivering both better medicine for patients and better business results for doctors and practices, an approach that our team has used previously to build high-margin premium pay businesses in ophthalmology over the past 20 years. As we will discuss, RxSight's first-in-class light adjustable lens or LAL, delivers unparalleled visual results for patients and drives growth of premium pay procedures that are critical to the economic success of doctors and ophthalmic practices. Now as many of you know from -- now as many of you know from personal experience, the conditions that lead to the need for glasses in the first half of life, such as myopia, hyperopia and astigmatism have been primarily linked to the cornea or the front surface of the eye. Since this is the target of the surgical procedures like LASIK, which people can undergo to reduce their dependence on glasses or contact lenses. Around age 50, the conditions that affect the lens start to impact vision. First, the loss of lens flexibility initially leads to presbyopia, reducing a person's ability to see at near without glasses. Later, as the eye -- eyes natural lens loses transparency and becomes cataractous, vision is further impaired and can only be restored by surgical removal and replacement of the lens. Cataract surgery is, in fact, one of the most common global procedures with cataracts affecting most people to various degrees by the age of 60 and usually in both eyes. During cataract surgery, the cloudy or cataractous natural lens is removed and replaced with a plastic intraocular lens or IOL in nearly all cases. It is at this point that patients and doctors have to make a choice that will impact their vision for the rest of their lives. For the past 15 years, that choice has involved 1 of 3 types of nonadjustable IOLs. Most patients, about 80% in the U.S. receive a spherical monofocal lens, which provides good quality of vision but requires most patients to wear glasses for best distance and near vision. This option is primarily paid for by Medicare or insurance, which because of progressive reimbursement cuts means doctors receive only about $500 for performing the surgery and for providing all pre- and postoperative care. The other 2 types of IOLs are turned to premium or private pay because doctors are allowed to charge patients directly an additional fee to potentially reduce that patient's dependence on glasses. About half of the premium IOLs in the U.S. are so-called toric monofocal lenses, which provide patients who have astigmatism with somewhat reduced need for glasses than they otherwise would with a spherical IOL. But patients still require glasses for best distance and near vision. In the U.S., doctors charge approximately $1,000 to $2,000 per eye for placement of toric IOLs, which is in addition to the $500 they receive from Medicare. Multifocal lenses, which make up the other half of premium IOLs provide patients with better near and intermediate vision without glasses but are associated with reduced quality of vision compared to monofocal IOLs. In the U.S., doctors typically receive $2,000 to $4,000 per eye in addition to Medicare reimbursement for placement of a monofocal -- multifocal IOL. A major problem with all 3 types of nonadjustable IOLs is that they force doctors and patients to make critical decisions before surgery when the person's vision is still affected by cataract, and they really don't know what their priorities for vision will be after the cataract is removed. For example, exactly how close do they want to hold their phone or how much will they be bothered by the glare and halos commonly seen with multifocal IOLs. Doctors are therefore forced to predict both the type and power of the IOL that will work best for a patient, which often leads to suboptimal outcomes after surgery when there's limited flexibility to address these issues except by using glasses or undergoing a second surgical procedure like LASIK. For the past 3 years, a growing number of U.S. patients have been able to choose a new premium IOL. The first and only adjustable lens or LAL, that empowers patients and doctors by enabling them to make important decisions after the cataract has been removed. The LAL surgical procedure is nearly identical to that of a spherical monofocal IOL with no special testing or alignments required. Approximately 2 to 3 weeks after surgery, the patient returns to the office to undergo light treatments that customize the focusing power of the LAL to fit the patient's desired refraction. This is accomplished using the light delivery device or LDD, which ArcSight also manufactures and sells to doctors. After the light treatment, patients can test drive their vision at home and then return to undergo additional adjustments or make the prescription permanent with a final light treatment. The flexibility of this process empowers patients who might otherwise not be good premium IOL candidates. It also empowers doctors who might not perform LASIK and therefore, have been less able to offer premium IOLs in the past. The LAL enables superior clinical performance versus spherical monofocal, toric monofocal and multifocal IOLs since the patient and the doctor get more than one chance to deliver the desired visual results. In our most recent reporting of a Phase IV real-world data collection at a large number of our customer sites, over 82% of eyes were 20/20 or better at distance without glasses, which is about twice the rate of any of the alternative nonadjustable IOLs. About 90% of patients choose to customize their vision in both eyes, with more than 90% of these able to see 20/20 at distance using both eyes without glasses and over 90% also able to read 5-point font, which is typically the printsize used for footnotes. Rates that are again much higher than those for nonadjustable lenes. The LAL also does not increase the rates of unwanted side effects such as glare and halo, which are common features of multifocal IOLs. The better medicine features of the LAL technology are obvious to eye doctors who are increasingly choosing the light adjustable lens for their loved ones and themselves. In our most recent customer survey, nearly 90% of doctors believe the LAL offers the highest quality of vision, 3/4 would select the lens for their own eyes and virtually all would recommend the lens to friends and family. Because the LAL delivers high-quality vision with less dependence on glasses, it is possible to offer it to a wide group of patients, including ones who are particularly discerning or have conditions that would make them less ideal candidates for multifocal IOLs. This has important implications for the LAL's better business features. The most recent RxSight customer practice survey found that 40% of LAL eyes would have received a spherical monofocal IOL, thereby expanding the number of patients receiving a premium IOL in the practice. About 1/3 would have received a toric monofocal IOL and about 28% of multifocal IOL. Taking into account these percentages and the relative pricing and cost for each IOL, each LAL implanted delivered nearly $1,700 in net additional revenue to the practice. Based on average utilization of the LAL in our practices, this translates into an average payback period of just 9 months for the light delivery device. Our commercial strategy is focused on building a large and durable infrastructure for LDD treatments at clinical practices that will then drive sustained growth of LAL utilization. This starts with the sale of the light delivery device to the practice, a process led by a dedicated LDD sales team. Our team of clinical field and customer service personnel then install, train and prepare ASCs and practices to offer the LAL to patients and to perform LDD treatments. Working with these groups are our LAL account managers who help build LAL utilization at practices by providing strategic clinical and marketing support. Since our initial introduction in the U.S. in 2020 and despite COVID, we have seen progressive growth in both our LDD installed base and LAL utilization. As we reported earlier this week, we saw record LDD and LAL sales in Q4 with outstanding results year-over-year and versus Q3. 2022 was an important year for ArcSight with a near doubling of our installed base of LDDs and tripling in the number of annual procedures. Combined, this led to triple-digit revenue growth to just -- to just under -- just over $49 million. Our strategy for continued growth includes further penetration of the large U.S. market, where we currently have about a 5% share of premium procedures. The U.S. accounts for about 1/4 of global market -- the global market of premium IOL procedures and is still growing at about 12% CAGR, which is more than twice the rate of growth of the overall cataract market. In addition to our commercial efforts, we know from our experience in previous companies and at ArcSight that continued technology advancements were also key to continued penetration of the market. Since our initial FDA approval, we have successfully prosecuted over 20 [ PMA ] supplements, which, in turn, have enabled important technology advances, including ActiveShield introduced at the end of 2021, the expansion of treatment ranges and IOL powers and multiple other improvements that impact practice and manufacturing efficiencies. We believe these will be -- we believe there will be a strong global interest in the LAL as well and are starting to take steps outside the U.S. with our initial regulatory approval and sale in Canada and evaluation of a number of attractive markets in Asia and Europe. Overall, the RxSight market opportunity is large, presenting a long runway for LAL sales growth. There were an estimated 3.6 million global premium IOL procedures in 2022, with the number expected to double over the next 5 years, driven by higher overall cataract surgery volumes, progressive cuts to reimbursement for non-premium IOLs and improved technology. At RxSight pricing, this translates into a TAM of over $7 billion in 2027. In summary, we believe RxSight is well positioned to address this large market opportunity and to lead further growth of premium IOLs by delivering both better medicine in the form of superior visual outcomes that are customized to the patient and do not compromise quality and better business by expanding the pool of premium patients with a scalable process that grows practice revenue and profits. By building a durable light treatment infrastructure, RxSight will drive sustained long-term high-margin LAL procedural growth and shareholder value. Thank you very much.

Great. Maybe we could start with the fourth quarter preannouncement. You had a nice beat on the top line. How do we think about the LDD placements and the receptivity in the environment right now? And then also maybe talk to utilization of account or doctors or however you can size it for us of the LALs.

Thank you, Robbie. We're very pleased with our fourth quarter. It was a high point number of LDD sales, and as Ron said earlier, we almost doubled our installed base from 206 at the end of 2021 to 400 at the end of 2022. So the fourth quarter capped a very nice increase in our installed base. And importantly, also, we -- there were over 9,000, 9,123 exactly IOLs implanted during the fourth quarter. And one of the ways that the Street and we look at our LAL progression in terms of market penetration is the number of LAL per LDD performed in each quarter and on a monthly basis. In the fourth quarter, it was 6.1, and that was the fourth quarter of 2021. We've seen progression each quarter. Since then, in the fourth quarter, we ended with 8.9 LALs per LDD performed in a monthly period. We look at it monthly. And importantly, what we see is all classes of our customers continue to grow. So we look at it from the class of 2020, who was significantly impacted by COVID. 2021, who was less impacted, but nonetheless, and then more recently, the installs that we have had in 2022. And what we see is all groups are growing and starting to converge on about the same averages. Obviously, the 2022 accounts are a little behind the others. But we have seen consistently in the last few quarters that these customers start with a higher number initially and also they grow faster. And so that has contributed to the growth and the acceleration of the number of LALs per month during the year. And there are a lot of reasons for that. We can have Ron talk about that a little bit or we can go on to your next question.

No. Go ahead.

Yes. I think it's interesting. I think Shelley has given a good quantitative assessment from a qualitative assessment. There are a number of factors that really are driving that growth and utilization and ultimately driving LDD sales as well. The first is the clinical results and the dissemination of the quality of the results to a broader group of doctors and patients. We do that ourselves through large Phase IV clinical studies. But we also just see a word of mouth, both patient to patient and more commonly doctor to doctor and that has -- that obviously makes people more confident when they acquire the technology to start more aggressively, as Shelley mentioned. The other factor is technology advancements. We introduced ActiveShield about a year -- a little bit more than a year ago. That was a -- reduced the concern that doctors could have about noncompliance from patients, really made people more comfortable offering the technology to a broader number of patients, and we continue to see the benefits of that as well as other technology advances that we make. And then there's a -- we talk about an infrastructure of LDD treatment. And by that, we mean not just the LDDs but also just the clinical knowledge and the clinical expertise and the practice expertise in how to deliver that care efficiently. And that's something that we've learned with our initial customers, but we've also then disseminated that knowledge with our -- with every new group of customers so that they can start more efficiently. And we do that with both our clinical trainers, but also a relatively recent add to our commercial group, the LAL account managers. And those are folks who are incentivized to grow utilization specifically. And they do that really by looking at any potential roadblock to growth in utilization and addressing that concern. So those, I think, are good underlying reasons.

So you guys are very early in the launch and the adoption curve of the light adjustable technology. How do we think about the number of target accounts that might be out there? And then of that, how do you think about the average utilization per account? I'm just trying to think about where you are today versus where you might be in the future.

Okay. Thank you, Robbie. That's a really good question. There are about 10,000 ophthalmologists who perform cataract surgery in the U.S. today. Of those, probably 2,000 to 3,000 perform the bulk of the premium cataract surgeries, premium cataract surgeries, which numbered about 600,000 in 2022 and are expected to grow to about 1 million in the next 5 years. Those do the predominant amount of surgeries. And so right now, we have 2 opportunities. Obviously, you start where the procedures are and target those customers. We have about 400 of those. But also there's a great deal of room for expansion, not just among those practices, but among practices that are doing low volumes. Perhaps they're not confident in their ability to use multifocals and deal with the side effects such as glare and halo or also they don't have access to a LASIK suite. And so for the other products, the competing products, which we call fixed IOLs, the solution is if the patient is no longer happy with the results that they got, you can do a little bit of LASIK surgery as well, and they would not want to refer that patient to another doctor as well. And in our case, when a patient comes back in, they have an opportunity to participate in their own clinical care and determine what they want. And do you want to talk about that a little bit, Ron?

Yes, I think that that's a -- it's the idea of appealing to a broader class of patients. So there are patients who right now are not a large fraction, only about 6%, 7%, 8% of the market is getting a presbyopia-correcting IOL. So the vast majority of patients aren't doing that for reasons. Some of them are clinical reasons. The -- those -- all multifocal IOLs reduce quality of vision, they reduce contrast vision. And a large fraction of the patients in this age group have already compromised visual quality due to ocular comorbidities, glaucoma, post -- patients who are post refractive, mild retinal disease. And those are really not candidates for traditional premium IOLs, presbyopia-correcting IOLs. And that represents probably 30%, 40% of the population in this age group. Those patients can be great LAL patients, and they can get the benefits of better vision. They also -- it also appeals to patients who are -- who want to have control. And this is the first lens where it's the patient driving the decision-making literally with their postoperative testing that's done and then their decision. Do I want a little change in one eye versus the other to give me better near or distance? And that is just a very attractive to a group of folks.

The workflow is a little different than with other competitor IOLs that's more one and done. Here, there's a little more workflow difference in the physician office. What have you done to help minimize the changeover for physician practices? And do you think it's going smoothly?

So I would take issue a little bit with the premise and that there's not one and done with the conventional premium IOL. There's a lot -- those IOLs have been around for 15, 18 years now, and the field has figured out how to clinically optimize the issues that those lenses have multiple preoperative testing to try to be able to predict what the IOL power is. The intraoperative steps that people use to try to do that extra intraoperative steps postoperative management, whether that's LASIK, which is a whole another procedure or handholding patients through a rocky postoperative course as they try to adapt to their new vision with multifocal lenses. So if you look at -- if you compare presbyopia-correcting IOLs to standard monofocal IOLs, there's a lot more chair time already with those. And then if you look at the LAL, yes, we do have some built-in additional visits. However, there are a number of things just as those other technologies that we have figured out and our users have figured out to optimize the workflow. An obvious thing was to do both since most patients have cataract in both eyes. And most doctors would typically separate cataract surgery a month or 2 in order to see the results in the first eye and then judge how did that patient react? Do I have to modify my surgical plan? Do I have to put a different IOL type in this other eye? There's no reason to do that within LAL. You're going to adjust both eyes and it's actually clinically superior to do them at the same time because both eyes work normally together. And so typically, people have the implants done sometimes the same day, but usually a day or a week apart. And then they get on a schedule where both eyes are adjusted at the same time, reducing the number of visits by about half. And then just the -- within the clinic, and this is something that our clinical trainers and our LAL account managers do just picking up all the efficiencies of the clinic. How do you -- simple things, how do you do a refraction on a patient with an LAL in an efficient manner? How do you drive them to a decision point? How do you dilate them efficiently? Most of the work, 95% of the work is done by technical staff in the clinic, which is a scalable thing. It's not the doctor. And typically, more and more, it's not the MD that's doing the light treatments, which take about 3 to 5 minutes for both eyes. It's an optometrist that's already in the practice doing that and is already the one that's guiding that patient through their decision-making. So again, it's -- just to summarize, there's there are -- there's not as much of a difference as people think initially when they don't have the technology. And then as they adopt the technology, they see the benefits and they also see the efficiencies that they can actually adopt to make it as efficient or long term more efficient because as Shelley noted, once you have this infrastructure in the clinic, the doctor who was doing the high-volume premium and who was able to leverage their selling skills, their clinical sales to be able to build a large premium practice that now can be translated very easily to other doctors in the practice who may not have done a lot of premium, but now can tap into that infrastructure where they're essentially putting the lens in and then having that infrastructure do the treatments.

Questions in the room? In the premium segment, it's almost all cash pay out-of-pocket for the patient. With the market down a whole lot last year and recession looming potentially in the U.S., how do you think the resiliency of the premium IOL market might hold up versus other cash pay markets?

So one of the unique things about our product is that it has significant advantages even in a recessionary environment. First of all, the patient population that's served by our practices is typically in the range of 60 to 70 years old. So those are folks who have had the opportunity to have a lot of equity in their homes, even though the market is down, they're still ahead, and they're in their peak years of earning or in terms of their net worth. This is compared to something like LASIK. LASIK, a patient can put that surgery off. They can do it at 20, 30, 40 and work around the economics. And so you do see a lot of the production or the number of procedures in LASIK is very highly tied to a recessionary period, and you've already seen them come down. In the case of the cataract surgery, the patient is going to need surgery no matter what. Their vision has become very bad. They can't see very well. Maybe they could put it off for a little bit. But what happens is they're coming into the doctor's office and even if they perceive that their only choice is to have a Medicare-reimbursed procedure. The doctor can talk to them about other alternatives as well. And in our case, you get superior visual outcomes. It is an easier procedure. You have better outcome, not just in terms of your ability to see a distance in near, you participate in your own care, and you can decide what you want. And so the patient has some real advantages. So we think that, that provides us -- nothing is recession proof, but it is a patient population that's coming into the doctor's office, no matter what. And then as far as the capital is concerned, doctors do have to buy our capital. We sell it for about $125,000. The most recent patient -- doctor survey showed that the payback is about 9 months. And with Medicare being cut consistently another about 8.5% last year, expected another 8.5% this year, they're looking -- practices are looking for a way to make money because the doctor only receives around $500 for all the preoperative and postoperative care for 3 months associated with the cataract surgery, but that also includes the actual surgery. And so you really do need a premium procedure and a premium practice to bolster the profitability. And so I think that we have some great economic arguments for both the practice as well as for the patient.

Shelley, if I look at the consensus numbers for 2023, there's a decent range from the high to the low. And I know we'll get the full guidance on the fourth quarter earnings call. But any preliminary thoughts you have heading into next year versus your jumping-off point in the fourth quarter, we could think about?

Yes. Thank you very much. The fourth quarter is a great jumping-off point for our 2023. While we don't, as a policy, talk about the Street guidance. I think that when we look about what we're going to do in 2023 to grow the business, it's very similar to the blocking and tackling that we did in 2022. And Ron, do you want to talk about that a little bit, the specifics of where we're focused at for a business?

Yes, it's very simple. I mean it's -- in the U.S., it's placing LDDs, continuing to have that LDD sales force mature and penetrate that -- the existing market and then to continue to grow utilization just as we've done using all the tools that we have at hand.

Great. Maybe if I move down from the top line down the P&L, you're clearly in investment mode, very fast growth, very big expansion phase. If we look a couple of years out down the road, how do we think about what peak type of margin profile might look like for a company like RxSight?

Yes. That's a really good question because currently, in the first 3 quarters of the year, our gross margin was 42%. But like most razor-razorblade models, your capital equipment has a modest margin. And in fact, we intend to improve that margin with an introduction, hopefully, at the end of this year, with a lower cost to manufacture, light delivery device. But the biggest thing that drives margin is the mix between the LAL, which is the implantable versus the piece of capital. And of course, that margin is much higher on the intraocular lens and continues to go down in terms of its cost over time because most of that cost is fixed overhead for your clean rooms, your chemistry labs, things like that. So the higher volume you build, the lower the cost. And so what you see is, in the fourth quarter, for instance, just extrapolating from the numbers that we did provide in our press release, over 55% of the revenue will come from the LAL versus a mix earlier in the year of about 50-50. And that will continue to grow. One of our key things that we want to do is continue to make each practice more successful. And that translates into the metric that you see, which is the number of LALs per LDD per month. So if we go way out because we would never hold back LDD sales in order to manage margin, as you go back, you want your customers to continue to grow, be more productive. And ultimately -- I'm not saying in the next couple of years, but ultimately, that would likely lead to a gross margin of about 80%.