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

All righty. Thank you, everybody, for joining. It's Patrick Wood. Obviously, I run the U.S. Medtech team. For disclaimers there's the research Morgan Stanley website, which has the disclaimers on them. I'm sure all of you will be visiting there frequently today. It's very exciting. But we're delighted to have Dr. Ron Kurtz here as well as Shelley Thunen, CEO and CFO, respectively, of RxSight, what should be a fun discussion, fireside chat going through all things ophthalmology.

And so firstly, thank you so much for joining us. I think maybe if we could start with sort of a more of a big-picture view of things. Can you give us an update on how you think the overall cataract market is looking in the U.S.? What are you hearing from customers about patient's propensity to trade up, I guess, to more premium lenses like the LAL and to pay for the process overall?

Yes. So thank you, Patrick, for having us. Maybe I'll just start with an overview of cataract surgery. It's the most common surgical procedure overall, obviously, the most common in ophthalmology and about 5 million or so procedures in the U.S. are being driven by aging demographics, which is going on worldwide, so growing kind of in the mid-single digits. And then approximately now 19 years ago, there was the development of what we now call the premium IOL market, which was a way that patients can pay an additional fee at the time of cataract surgery to reduce their dependence on spectacles or glasses after surgery. And that segment of the market has grown from nothing to maybe 19%, 20% overall of the market, but it represents the vast majority of the profit for practices because the reimbursed cataract surgery, the level of reimbursement has dropped over the last 30 years, but especially in the last 20 years to approximately $500, $550 per eye for the surgery, the preoperative and postoperative care associated with that. And that's a level which really doesn't pay for the physician's time or their staff time. So the only way that they -- or a primary way that they've been able to augment their income is to move patients to the premium IOL space where they have, again, this potential to reduce their dependence on spectacles. And that has grown very quick -- not quickly, but it's grown steadily and continues to grow in our view. Sometimes, you have to be careful about how you define the market depending on -- because there are different segments of the premium market with -- but if you look at it holistically, we feel it's continued to grow, and it's growing because, one, patients increasingly want to be free of glasses. Technology has gotten better, we're obviously an example of that. And doctors are and practices are highly incentivized economically to do so.

And so there's obviously been that penetration rate that's sort of ticked up over time, as you said. But U.S. were kind of 19%, 20%, to grow from here and to keep that penetration going. Is that a function of things like the LAL converting more monofocal patients who would have -- into the premium category because the -- not to comment on the competitors, but the other lenses, the traditional trifocals seem to have slowed out a little bit, whereas you guys have kept growing. Is it that added feature set for monofocal conversion that gets you there?

Well, we certainly believe that, and that's been our experience. We do a survey, a customer survey every year. We've done it now for about 3 years. And in that survey, we ask doctors and optometrists and practice managers where the patients are coming from. And what they've told us consistently anywhere from about 40% to 45% of the patients over the 3 years that we've done the survey is that those -- that the LAL patients are coming from monofocal -- about that percentage, 40% to 45% are coming from the monofocal. About 1/3 are coming from toric or astigmatism-correcting IOL and a little bit less than 1/3 are coming from presbyopia-correcting IOLs. So we're drawing obviously, from all segments of the market. And that's what I would anticipate clinically because if you look at the cataract population, these are patients, again, who are generally 60 or above and they're going -- they have a fairly high percentage of eyes that will have some other ocular condition that makes them maybe not the best candidate for a presbyopia-correcting IOL, up to 40% to 50% of patients will have some concurrent ocular condition that would generally -- it may not be a hard stop, but many or most ophthalmologists would tend to not put in a lens that's going to reduce their contrast vision or their visual quality, which the LAL, of course, does not do.

Makes sense. We obviously had a fun time last quarter a bit of a rollercoaster where the market got completely panicked, the LDD placements would be below consensus and low and then came in spectacularly above it. I get that there's a -- sometimes people can myopically overfocus on LDD placements. But how are you feeling about those? How do we think about those going forward and the implication for the business overall?

Yes. I mean as -- and Shelley jump in here, but as of last quarter, I think we had 810, so over 800 LDDs primarily in the U.S. And -- but if you look at the -- where that is in the overall scheme of things, there are about 10,000 ophthalmologists who are doing cataract surgery, they're working out of multiple offices generally. So the number of actual geographic locations where they're seeing cataract patients, we don't really know what that number is. But our view is that wherever cataract patients are being seen, they should have access to the light adjustable lens and therefore, have an LDD. So any way you measure it, whether that 810 versus 10,000 surgeons, however many offices. We've trained about 1,400 surgeons, we're early innings. And we -- it's often difficult to predict exactly the rate of that adoption, but it's where we would generally assume that it's going to continue to rise.

And then we've always talked about this being an awkward metric as well, but utilization as defined by LAL per LDD, which is especially on a given quarter, an awkward metric for many reasons. But that's obviously been picking up quite nicely. Maybe any color you've got on what you're seeing at the individual like doc and account level? Like the newer people who've come onboard and the utilization of the LAL relative to some of the first-generation docs who are adopting it, like at how -- within the practice, like I know that we remember the panel at ASCRS, and you have some docs, it's a very high proportion of that premium lenses. But what are you seeing kind of overall from a utilization standpoint?

Yes, maybe I'll let Shelley comment at it from a quantitative and like best give some quantitative comment.

Yes. I think that probably my answer is going to be macro overall. But we do look at our customers by cohorts of year of install of the LDD. And what's important to us and how we run the business is if you're doing 10 today, we'd like you to do 12 tomorrow, right? And our goal is to get to 50% of the overall premium IOL market, right? But what we have seen in our cohorts is all the cohorts continue to grow. And they generally, except the newer installs, end up about the same number of LALs per LDD. And that's important, and that is really part of what our core business is people in the field increasing utilization. But what we do see is we don't really have enough data on '24 yet. But if we go back to our '23 customers, they get to the same level, the previous customers were faster, right? Of course, they're not at necessarily the same -- from a cohort viewpoint. Cohorts are pretty small, right, from a statistical viewpoint, but that's what we want to see, and that's what we have seen. And it's very consistent with our goals to get to 50% first in our practices and then at the overall premium IOL market. That takes time, but that's how you build it. And so we've been really pleased with that number. And as you said, it could vary quarter by quarter, right, just depending on seasonality, how big your installed base was the previous quarter, et cetera but we've seen an overall upward trend consistently over the last 2.5, 3 years.

The LAL+ as a new sort of item in the toolkit. I get that you guys are agnostic given the pricing is identical to the LAL and it's about a use case for patients. But how did that land in terms of with the customers where you expected it to? Is it being used more or less than you expected or about the same? Like how did that land versus what your original expectations for the lens were?

I'd say we're very pleased with the reception that the LAL+ -- we -- in addition to asking business questions to our customers, we ask clinical and technical questions. And that was one of the most requested items from the technology was we'd like to get a little bit more depth of focus, a little bit more near and intermediate. And that's what the LAL+ does. It slightly extends the depth of focus and doctors are reporting that -- we have a large Phase IV study. One of our doctors just reported their results where it's delivering about a line to a line and a half additional near vision. Now the LAL also delivers excellent vision at a range of distances, but -- with both eyes. But certainly, that's been seen as a benefit. Not all patients are going -- there's always trade-offs when you're dealing with optics, you don't get something for free. And so there's still some patients who are going to be LAL preferred, and it's going to be up to the individual doctor, to the individual patient. And honestly, we don't -- as you said, we don't -- we're completely agnostic. We charge the same. We can make the lenses. They cost us the same to make. We monitor how they're used and it makes no difference just as the same as it doesn't make the difference of what power lens they put into the eye. We're agnostic to that as well.

Makes sense. Obviously, you both went through the cap raise that you guys came to the market with that went well. I mean, what in your eyes prompted the timing of that? And how are you thinking about using that money going forward, particularly because I would argue you're kind of at or approaching breakeven and probably a bit faster than some of us had expected. Like what do you think you want to use that money for primarily?

Yes, that's a good question. We raised net of fees and expenses, about $107 million. In the second quarter, we ended cash and cash equivalents at $233 million for the quarter. And if we look back in terms of timing of that, one, the market was in pretty good shape then. It's been a bit more volatile since. And of course, you can't predict the future. We didn't know what was going to happen, but it was stability in the market. Our stock price was increasing during that period of time and pretty heftily so. And we didn't know what the balance of the year was going to be, particularly with the election coming up, that seems to, so far, have been a little bit less of a factor compared to everything else that's going on as well. So the timing was good. But also the reason for raising the money is that we felt at that point in time, we knew we have 800-plus LDDs installed. We're increasing our number of LALs, we ended the quarter at about 10% market share at the premium IOL market. And there's a point in time where we have enough visibility in the marketplace among ophthalmologists and also hopefully with customers as well. But we saw an opportunity to invest a bit more because you don't want to overinvest too early, right? And you don't want to wait later. So what we did say in our second quarter call as well as the CMPO back to back, we wanted to invest more in sales and marketing and not necessarily feet on the street. We always add to that number every quarter, primarily clinical and training people. But we want to increase our marketing to optometrists as well because they're a referral source, and there's 50,000 of them in the U.S. as well. And important to adoption is somebody introducing the idea of a premium IOL to a patient and more specifically, in our case, the LAL. And so we want to do that. We want to put a little bit more money in R&D. We have a philosophy of continuous improvement on a product. You've seen that with over 40 PMA supplements. And so the timing was right to do that. And the reason for doing it at that moment was it was a good time for investment. Would you add anything about the investments, Ron?

Yes. And I'm sure -- I think you'll probably get to this. But obviously, we're also looking OUS to start that process, and there's some costs associated with that as well.

Yes. I mean, OUS different kind of market, a lot of different dynamics in different countries. It's a bigger world and actually cataracts because of their very nature, a lot of the volumes, or most of the volumes, by definition are OUS, how are you thinking about where even to begin to tackle that opportunity? Because there's so many places you could start and what the pros and cons of the different sort of approaches might look like?

Well, I would start by saying clinically, ophthalmology is more the same globally than different. I can go to an ophthalmic meeting anywhere in the world and feel very comfortable. And so it's important -- and I would also say that the U.S. market, although it represents about -- I think it's the overall, maybe it's about 15% or so, the overall cataract market, maybe 25% of the premium cataract market. It's still a minority but it's an important market because it still sets the pace for -- generally. There are -- historically, there were some regulatory reasons why sometimes Europe would be ahead. But those have now almost reversed. And so being successful in the U.S. is an important step to move internationally and Shelley and I's previous 2 companies, that was our approach as well, have penetrate the U.S. market to some level of success and then leverage that internationally. And I think that's -- that, that will play out here as well. You're right, every market, every country is different. There are -- we do have the benefit that the premium IOL industry now has been around for about 20 years. And so we've seen where premium IOLs have had success. And if you look at the market, about 80% of the OUS premium IOLs are done in about 20 individual markets. Now these are highly -- there are big countries and smaller countries, but they're -- or I shouldn't say small countries, but medium-sized countries. And so they're a very group, but they're primarily located in Europe and Asia in the developed or partially developed world. And those are the countries that can afford, where they have who can afford to pay for this. The systems are a little different. But within each system, people have figured out how to adopt premium IOLs. And for the same clinical advantages that we see here in the U.S., we anticipate that this will be similar OUS. Obviously, there's a regulatory hurdle that we have to get over. And I'm sure that your audience has experienced this across different fields in medicine that there's been a convergence of regulatory levels, requirements across the globe. And so it's -- it takes some effort, maybe not quite as much as an initial one in the U.S., but still significant, and we're working through those in the markets that have the highest potential.

Do we have a sense of potential time line of what that could look like?

We're -- we haven't laid out, we'll start to lay out a time line, I would say, maybe into early part of next year, but it's a -- it's dependent on regulatory. There are a lot of attractive markets to us. And where exactly the regulatory trips fall will obviously influence that. But we see all of those markets as being approachable to our technology.

Maybe shifting gears to something a little shorter term. Q3 and the balance of the year in general, how are you feeling it's shaping up relative to expectations from your end? Any changes in the market, dynamics out of the summer is a little bit slower anyway. But the more sort of recent trends would love to hear anything, any updates you have there?

Yes. I can talk a little bit about numbers, and we can both talk about trends a little bit. We do have very tight annual guidance at this point in time, $139 million to $140 million at the top line, 68% to 70% in gross margin. And we also increased our OpEx guidance just a bit. Some of this relates to the reason we raised money in the CMPO, additional investments in sales and marketing and R&D. And I think if we think about the overall dynamics in the marketplace, typically, the first quarter and the third quarter tend to be seasonally more difficult, they're a little lower, particularly the third quarter, just from both LDD placements, capital equipment overall in the market as well as procedures just because doctors are on vacation, patients are on vacation as well. And so we typically do see that. We did say publicly that we would grow sequentially from second to third quarter on our last call, but it would be very nominal. And that's really based upon, one, the seasonality but also a really great second quarter. We also had a really great first quarter as well. But the market dynamics other than seasonality, and Ron has talked about this before, have remained the same, right? Overall, our patient population, maybe Ron, you want to talk about that, is the wealthiest population. In the U.S., they control about 2/3 of the wealth, about -- they're about 1/3 of the population, they continue to grow, right? So the barriers to entry from an economic viewpoint, from a patient viewpoint, there's nothing that's recession proof, but we're definitely recession-resistant just because of who we're selling to and doctors are selling to. And then, of course, as Ron talked about just a little bit earlier, doctors really need to offer premium IOL to stabilize profits. They're not making it on their biggest procedure, which is cataract. Would you add anything to that, Ron?

There is an internal control, and we've talked about this within ophthalmology, which is LASIC surgery or other refractive procedures that are done on a younger patient population, which are very much affected by financial cycle, the economic cycle. And we certainly hear that from our customers that their LASIC volumes may be down but that puts -- in a somewhat self-serving way, it puts the onus on driving more premium IOLs and more focus of their business because they want to build their business not on a cyclical procedure, but more on something that's going to be steady. And if you look at the cataract population, it's not going away. We're still at the beginning of the baby boomers entering into the cataract age. We're -- the population after that didn't get any smaller so you won't see maybe a huge spike, but it's very steady. People have reduced tolerance. There's -- people are otherwise living longer and healthier lives. Therefore, they want to have vision and vision is incredibly important to not only their longevity, but also their overall successful aging. If you look at there was -- I mentioned this in our Q2 call, but I just attended another lecture on this. Probably the -- besides hearing loss, vision loss is the #1 input to -- the #1 modifiable input for dementia risk. So it's which affects a huge percentage of the population as it gets into it, 70s and 80s. So I just think it prevents falls. There's just a lot of reasons why vision. And now with Zoom and increasingly active lifestyles for people in their 60s, 70s and 80s, they don't want to be burdened with glasses either. And so there's more of a desire. And as Shelley pointed out, these are the people who have worked -- they've worked hard all their lives. They have the ability to pay. There's going to be the largest transfer of wealth in the history of mankind going on over the next 20 years. And a good percentage of that people are going to spend on themselves and on their overall health and well-being over the remaining 20 or 30 years.

With 3 small kids, I feel like it's currently for me, the largest transfer of wealth in the history of mankind I'll tell you that, they're not cheap. I mean there's another trend in the market. It's very small at the moment, but to a point around aging and that side of things is refractive lens exchange and that side of things. Given you guys have a lens that is dramatically, I would argue, lower rates of dysphotopsia and that side of things and can remove some of the surgeon anxiety, I guess, about doing it in younger patients. Is that a category that you'd expect to continue to see grow? Could it really become a more meaningfully sized category or just people are going to wait anyway to clinically intervene until later?

Well, we call that early cataract surgery. And -- because essentially, everybody has a cataract over the age of 40. That's if you look histologically and so when does that become symptomatic? Well, when I first started training, we used to wait until the cataract got ripe. What does that mean? The definition keeps changing, the age that people are having average. The mean age continues to fall. It's lower for us than it is for -- if you look at one of our studies, one of our post-marketing studies, typically, it's around 61, a typical cataract surgery might be 64, 65. So it's already younger. And that's the mean. Obviously, there's the distribution. So -- and then if you look at and I think you very perceptively have identified the problem of doing early cataract surgery for that patient population is they've got high expectations. It's frankly, a lot of people in this room, myself included, are in that age group, and it's -- you've got -- you don't want to give up quality of vision for distance. And you want to have a high degree of certainty that you're not going to require glasses afterwards. And really, your choices are you could do LASIC. You could -- or some other type of procedure. But if you do that, you're not going to be facing cataract surgery over the next 5 to 10 years anyway, and now you've made your cataract surgery a little bit more complicated by doing that. So would it make sense to do earlier cataract surgery. And there are a lot of doctors who feel that it could. And I think that, that's expanding. It tends to be patients who are more well healed and can afford a premium lens. So we see that as continuing to grow, and we think that our technology is well suited to that earlier cataract surgery patient population.

You both mentioned R&D and product development and that side of things over time. I'm curious from an outside-in perspective, it sounds flippant, what is there to do in terms of like the lens is extremely well tolerated. It gets great visual outcomes. There's very few complication rates. Sort of is that -- like what is the further development that could help spur that market? And then I guess, connected to that, but ancillary is the efforts from some people to try and make an accommodating IOL that doesn't require any kind of intervention. I'm thinking of like the Juvene lens some years ago and we remember the disaster was crystal lens. And whether that's ever something that's in your eyes likely to happen or just the physics of it too difficult so?

Yes. So at the outset of your question was you're already pretty good. How are you going to be better? And you can say that about anything. You can say that about cataract, intraocular lens has been around now for 75 years, and there's been continued evolution, including us. And so we see this as just the beginning of -- if you think about how much money we've been able to devote to R&D, right, it's grown over the last 10 years considerably versus what we were able to do before because we're growing and we're able to -- we know more, we can do more, and it's part of our core culture is to continue to move. Shelley mentioned about 40 PMA supplements since we got our first approval, that's a hectic pace. I don't know any other company that's been able to do that. And we're able to do it because the technology allows it. It's a very flexible technology. It has -- when you add in the light delivery device, we have now essentially multiple devices that we can improve upon and improve the procedure for the patient. And there's always room for improvement. And that, in fact, helps to drive adoption because there's always a reason why somebody has not adopted your product. And it's hard to predict exactly what that is. Sometimes the person who's in that position doesn't know what it is. But at some point, they say, "Oh, okay, now I'm going to adopt this product." And for some people, it was when we first got into the market, for some people was when we introduced ActivShield, whereas some people was when we introduced LAL+, for some people was when we just recently got approval for a broader range of diopter powers. There's always a reason for the adoption curve, and we just want to continue to drive that so that we get to that greater than 50% adoption. And it's also a reason why doctors and practices feel comfortable investing not only in the LDD, the capital equipment, but their teams' knowledge, their clinical expertise in light -- postoperative light treatment because they see that, okay, the company is going to continue to upgrade my technology. They're going to continue to invest in this. And what I have today is going to be useful for many years to come. So that's an important feature. With respect to competing -- accommodating IOL just level set, we're an adjustable intraocular lens, meaning that we can adjust the power and then at some point, the power becomes fixed. And so then it does not change in real time. An accommodating lens is able, theoretically, to change shape or location or move in the eye to be able to do what a young lens does, which is to focus at multiple distances and change that focal length in real time, which an artificial lens has not been able to do. That's been a holy grail in ophthalmology for about 75 years and nobody has been able to do it. It's a complex problem because if you look at the structures of the eye, they're incredibly delicate, and you disrupt a lot of them when you do cataract surgery. So is that to say that nobody will be able to do it? No, I'm sure that eventually we'll have accommodating IOLs, but it's going to take time. And at the end of the day, the level of accommodation, so it's not 0 and 1 that you have accommodation or you don't have accommodation. You have -- if you ever check out your 3-year old, they have a -- they can accommodate, they can hold something up here, which you can't do at this point. And so your accommodation changes with age. So by the time you're 50, you might have a diopter when you're 10, you have 20 diopters. So what -- how much accommodation is an artificial lens going to give you, an accommodating IOL. And the likelihood is that it's going to be a limited amount. Maybe if we're lucky -- the FDA requires 1 diopter nobody has been able to meet the FDA standard. So 1 diopter is a pretty small amount. I'm 61. I have probably about -- a diopter. And it's not enough. Maybe somebody can get 2 or 3 diopters. The implicit limitation on that is that you have to hit the distance vision perfectly if you're only going to have a very limited amount of accommodation and so my view has always been that in order to do an accommodating IOL, you have to have an adjustable IOL first.

Makes sense. I think that's the most perfect timing ever. Ron and Shelley, thank you so much. Thanks, everybody, for joining us. I appreciate it.

Well, thank you very much for having us.

Thank you.