Great. Thanks, good morning, everyone. Welcome to the conference. My name is Nathan Rich. I cover the dental space here at Goldman Sachs. We're very pleased to have Sonendo with us today. Bjarne Bergheim, CEO, to my left, Michael Smith, Chief Commercial Officer, with us as well. Bjarne, maybe to start, kind of keeping it high level, just from a macro backdrop, you know, we're kind of halfway through the year. I think utilization's been described by you and a number of your peers as pretty stable. You know, you have kind of unique insight into the endodontic market based on the TDO software that you have.
Can you maybe just talk about what you're seeing from a volume standpoint, kind of as we sit here almost halfway through the year, and what your expectations are over the balance of 2023?
That's a good question. We have the ability to read utilization live off the consoles, and all the consoles are reporting in live data to us. What we're seeing is that, to your point, utilization is stable, and we expect utilization to continue to be stable. I think the beauty with this business is that root canal therapy is a non-elective procedure. We do not expect a macro scenario where patients and, you know, doctors will not do a root canal procedure. We expect that to continue regardless of how the macro continues going forward.
You know, you have a significant market opportunity. I think when we just look at the endo channel, and we'll get into GP later, but just, you know, focusing on the endo market, you know, I think you're in about 20% of practices in the U.S. You know, utilization of GentleWave is still relatively small, probably under 10% of total root canal procedures that endos are doing. Can you maybe just talk about what that kind of ramp up looks like and sort of the distribution curve? Because when we look at your volume per console, you know, the endodontists that are using GentleWave are probably only using it for about a third of their procedures on average. I'd imagine it varies pretty widely by user.
Could you just talk about what that distribution looks like, and for the low volume users, how you see them getting up the utilization curve?
Yes. Roughly every endodontist has about 1.2 consoles. If you run that data and run that analysis, you will see that, and we think that utilization per box is roughly about 40%.
Got it.
Share of procedures. To your point there, you know, there are some, this is an opportunity, right, to continue to drive that utilization. And when we look at the distribution of utilization, we see that there are really two peaks. There are some that are doing substantially all their procedures with the GentleWave, and then there are some that are doing less. They're doing it for the more complex procedures. The ones that are doing all their procedures with GentleWave, they've figured out the, obviously, the clinical benefits, but they've also you know, figured out the efficiency benefits, where they can really see that, "Hey, by using GentleWave, I'm more efficient. I can do more procedures.
There's a significant financial benefit, and there's a significant patient benefit of doing so. The ones that are doing in the second peak, if you will, that are doing less, they're doing it for the most complex cases. There are some root canal procedures that have an outcome in traditional cases of only about 30%, 40%, 50%. By using GentleWave, of course, they can then significantly, you know, improve the outcomes of those procedures. That's, we think, represents an opportunity for us because those are the doctors that don't necessarily understand how this can really be used to drive clinical efficiency in their practice. Such as driving a procedure from 90 minutes to 30 minutes, or doing, instead of multi-visit, doing single visit.
We think there's a significant opportunity there to drive, you know, education. Also, I think we'll talk about, obviously, about the GP opportunity here later on, but I think by educating the GP, if the GP knows about GentleWave, we think they will require their patients to get GentleWave. That's another thing that will help really drive and make these endodontists be more alert to doing a better procedure for their patients.
You transitioned to a tiered pricing model. It sounds like you haven't seen any pushback from endodontists, and I think most charge an add-on fee, or at least half charge an add-on fee to the patients that are passing that cost through. I think, you know, they typically don't see any pushback to that either. I guess, has that kind of been your experience? You know, it doesn't feel like price has been a limiting factor in terms of utilization.
Yes, we've been very, very aggressive on taking price, all right? We've, over the last two years, I think we've done four pricing increases. We've increased price almost 30%. I think, you know, we've got to balance the aggressiveness of actually taking price versus really obviously taking care of our doctors as well. Right now, we haven't. You know, it's early. We did this price increase in February. Q2 here will be our first complete quarter, if you will, with the pricing, with this pricing increase. It'll probably take us, you know, another two or three quarters to really fully understand the extent of how this, you know, pricing increase, you know, how that works in a more. Y ou know, where utilization and sales ops have substantially aligned, if you will. I would say that so far, that actually, this is working out very well. I don't know, Michael, if you have any other comments on that.
Yeah, I think you mentioned it, Nathan, right? Roughly about 50% of our doctors charge an add-on fee. Certainly, there's a belief among some of the endodontic group out there that if I pass on an additional fee to the patient, that they may choose to go elsewhere, and so there's a reluctance to do that. You know, I think that the data that we have from a patient and consumer standpoint is really actually very compelling. We did some research at the end of last year. A feedback that we got was that, on average, once consumers understood what GentleWave was, that they would, they'd actively seek out a GentleWave provider in 2/3 of those cases.
More than 80% would be willing to spend up to $250 more to access the procedure. You know, part of the role that we obviously now take on is how do we go and share that information out? How do we go and educate doctors on that to give them confidence that, hey, you can put an initial charge on, and you have room in there to cover the cost of the consumables, plus, you know, put some margin on top of it. I think we feel good about that, and it's really a timing thing, is how do we educate doctors on that and how do they get comfortable?
Great. Maybe just kind of sticking with that, because I do want to shift over to console placements. I'd imagine one part of the discussion is just kind of economics that the endodontists will see and, you know, kind of payback period. I guess, can you maybe just talk about how you kind of, you know, there's obviously the clinical benefit, you can maybe talk about that, but also how do you frame the kind of economic benefit to the endodontists or, you know, how they should think about that when they're considering purchasing a system?
Do you want to talk economics, Bjarne, and then I'll maybe touch on some of the other barriers?
Sure. I think, you know, our typical value proposition that we always talk about, right, is efficacy, efficiency, economy, and ease of use. Efficacy, we've talked about it, like significantly improved outcomes, significantly less pain. On the economic side is, or the efficiency side, right, is the ability for these doctors to be able to significantly speed up their procedures, attract more patients, and really change the economics of their practice. It doesn't take much. If they can attract one or two extra, call it two extra patients per week, that's roughly 100 patients per year, roughly about $100,000 extra drops to the bottom line. It's a relatively straightforward thing for us to go in and show them that this can really impact their economics of the practice.
Yeah, you know, I came to Sonendo from the clear aligner market, and I think there's some interesting parallels here, right? Which is, maybe I can frame them as firstly, you know, similar to orthodontists, you know, endodontists have been doing treatment the same way for 100 years, basically. I think there's just a belief that, you know, good enough is good enough. They've always done it this way. You know, do they really need to do anything differently? Is there a drive and set of pressures to make them do something differently? I think that's the first part, which there's a parallel in.
I'd say the second piece, again, it's a bit of a similarity, is, you know, we're taking what is more of a digital workflow and trying to put it into an analog workflow. We see a lot of success, as Bjarne mentioned, in those practices where doctors go all in, they fully adopt the technology, and they set themselves up as a GentleWave practice. Staff training, scheduling, get over the learning curve. This idea of integration and team training, those sorts of things, is certainly one part. The last piece, as we mentioned, is, you know, are patients willing to spend more to access the technology? How easy is it to do that?
I see there's some parallels, and those three are certainly areas where we continue to invest in training, education, people, and programs to go and support doctors on that journey. Again, you know, I really look at it and feel that for a lot of these barriers, it's really just a timing thing. You know, we're still fairly early on within the endo market, and now as we transition to general dentists and giving them access to the technology, I think that we see that the value prop is incredibly strong for the general dentist as well.
You know, you guys have talked about the longer conversion cycles. I guess, you know, what's the kind of the feedback you hear around, you know, why dentists are choosing to wait? Is there anything you can kind of do to maybe help incentivize the purchase in the near term, or is this kind of just a function of the macro environment we're in?
Maybe I'll take the first part of that, and then Michael can take the second part. You know, these are business owners, right? They're affected by high interest rates, they're affected by an economic uncertainty in the overall environment, and they're choosing to make a, you know, purchase a GentleWave console versus doing something on their house or home or car and so forth. So that's really what's really, I think, impacting their decision-making process. High level for us, the things that we are all over is really helping drive close rates. That's something that's important to us. Also make sure that we get more doctors into the funnel. We can talk more about that as, obviously, as we talk about the GP side of this.
I think, you know, for us, a key element with actually, you know, the GP strategy is adding more doctors into our funnel, which will help, which just ultimately becomes a leading indicator of what we will be able to close in, down the line.
Yeah, you know, I look at the leading indicators, you know, in terms of doctors in our capital sales funnel, stronger now than it ever has been. I think, you know, the interest that we're seeing in terms of our education events and willingness to travel and attend, again, incredibly strong. From a, you know, if I go to the top of the funnel, our professional marketing efforts to go and attract new doctors, particularly dentists, into the funnel, again, stronger than it ever has been. I look at the conversion cycle and say, "Well, listen, it's really just a timing thing." Long as we continue to add people into the funnel, you know, I feel confident that as time goes by and as the year goes on, that we'll close more of those.
You know, I think to your specific point, you can imagine, you know, we're trying to put in place incentives, programs, in order to ensure that when a doctor's ready to close, that we close them as quickly as possible. You know, I think that the pieces that Bjarne Bergheim alluded to in terms of the macro interest rates, I mean, these are small business owners, right? We're not just competing with the capital equipment, but we're competing with a family holiday or a car or, you know, kids' education, these sorts of things. I think that the team and the programs we have in place, we're trying to close that out as quickly as we can.
Great. Maybe this is a good point to transition to the GP market. I guess, you know, maybe just to frame the market opportunity, I think you talked about 50,000 dentists that don't refer out, 5,000-7,000 are high volume, do a high volume of root canal procedures. I guess, can you maybe just talk about how you kind of identified the market opportunity, and then kind of what the next steps are in terms of going after it as you know, kind of increase this rollout that, so far has been pretty limited to the GP channel?
Yeah. What we've done is we've bought insurance data, so we have a pretty good idea of what the distribution of what, you know, what these different GPs do across the GP space. You're saying 50,000 are the GPs substantially keep the majority of their cases in-house. What we've done is we've searched for the ones that are doing the highest number of root canal cases, and are also interested in technologies that are very complementary to GentleWave, such as same-day crown. We think as we enter the GP space, a very interesting opportunity is actually pairing a GentleWave procedure with the ability to do the same-day crown.
You come in for your root canal procedure, and then 1.5 or two hours later, you have your crown already put in place and you're ready to go home. That really changes the. It's really a paradigm shift in how you can really do great root canal procedures. That's why we've come up with these, call it 5,000-7,000 GPs that are high targets for our current capital sales reps. You know, as we. Why are we going to the GP space? There is an element of, point one, there's an opportunity to sell consoles, obviously, to these GPs. There is also, I think, a very important element here of driving awareness amongst the GPs.
There are not that many GPs that know about GentleWave and the opportunities around GentleWave, and if they do, they don't really truly know how this can impact their patients under practice. By doing this, we believe that GPs will request or demand their patients to get a GentleWave procedure, which will ultimately help drive utilization, you know, amongst our current practitioners. I think ultimately, as that starts happening, we're starting to move patients into GentleWave sites, and ultimately, that will create some disruption, if you will, in, you know, amongst endodontists, which ultimately will, you know, I think, also help drive more education amongst endodontists that, "Hey, this may be an opportunity for me to get in on this wave," if you will, of buying GentleWave.
We think that it's a really great opportunity, and just, you know, so far, it's still early, but so far, we're really excited about the commercial strategies that have been put in place, and it's really helping drive, you know, a lot of prospects into our funnel. To Michael's point, we've never had as strong of a pipeline now. Now a lot of these GPs are in the early stage of the funnel, and as these GPs kind of trend, you know, move through the different stages of our funnel, we think that's a very, very strong leading indicator for a, you know, more activities to come as we go forward here.
Is there a way that you can maybe contextualize, from your point of view, the level of awareness that GPs have? I don't know if you've done survey work or anything like that to just, you know, get a sense of, like, how many know about GentleWave.
Yeah, it's low.
Yeah.
You know, I think we have a lot of, we have a lot of opportunity there, a lot of room to go in the GP space. I think the feedback that we're getting from GPs who've adopted the technology has been incredibly strong. You know, we have examples, one doctor I talked to, in Orlando, you know, he was spending 90 minutes chairside with his patient for every root canal, busy general dental practice, spending 90 minutes chairside with them. Now, as a result of incorporating GentleWave, he's able to bring that down to 15 - 20 minutes, you know, for his personal time.
Yeah
C hairside, and in that time, he's able to go and see five, six other patients in that time. You know, he's seeing productivity gains of 25% in those practices. I think other examples that we see are doctors who, they wanna employ a same-day endo or restorative model. They've invested in chairside milling. GentleWave plays very well into that and enables that workflow. That's why we've looked for these technology indicators, these proxies of willingness to adopt a new technology. I think although awareness is low, the feedback that we're getting from those doctors who have adopted has been incredibly strong.
You know, I think our general dentists that we talk to, you know, they'll say things like, "Now we can treat every tooth in the mouth," whereas previously they weren't necessarily able to or felt comfortable with that. I think whether it's keeping the patient in-house, whether it's building out an endo restorative model or improving their productivity, the value prop's incredibly strong for GPs.
For the 5,000 - 7,000 that are the highest volume ones, should we think of those dentists doing volumes kind of equivalent with what an endodontist might be doing? Just as we think about, like, what the economics might be from their point of view, would they potentially see the same type of return on investment that, you know, we've kind of seen with the endo?
I think there are definitely some of them that are doing equivalent to the number of procedures done by endodontists. You know, typically, as you move further into the GP channel, right, they will typically do a slightly lower number of volumes compared to an endodontist. What we are seeing, again, early days, but what we're seeing so far is very, very encouraging, and that is that GPs that are adopting this technology are substantially moving all their procedures to GentleWave. So they may be doing slightly less volumes, but we're getting, you know, substantially all their procedures. Like Michael was alluding to, I think the value proposition amongst the GPs is, I would characterize it as stronger amongst the GPs than amongst the endodontists.
You know, GPs are typically spending more time for a traditional root canal procedure. You know, the benefit for them now with GentleWave is that they can spend less doctor time, but they can concurrently do other procedures in their practice, something that obviously an endodontist can't typically do.
Yeah. Maybe moving over to CleanFlow. I think we're about halfway through, 53%, conversion to CleanFlow, goal to get to 100% by mid-2024. Can you maybe talk us through kind of what are the remaining kind of buckets to get us from that, you know, midway point to 100% conversion?
Yeah, I mean, we're very confident that we're going to get to 100% conversion by the middle of 2024. The key next big lever or step for us is transitioning our anterior procedures over to CleanFlow. Currently, doctors are typically using our, what's called our Anterior/Premolar Procedure Instrument. Now, middle of this year, and which is consistent with what we've always said, middle of this year, we're going to launch CleanFlow for anterior. We expect a relatively rapid transition from, you know, moving those anterior procedures, roughly about 20% of the procedures, over to CleanFlow. We'll continue to move the doctors over in, you know, in a similar cadence to what we've done so far.
We're also managing the existing inventory levels of these, you know, these procedure instruments that are now going away, Anterior/Premolar and also Molar, because we want to make sure that we're not left with excess inventory of these, procedure instruments.
Got it. Okay.
Yeah.
You know, I think thinking back to the time of the IPO, the transition to CleanFlow was a big part of the gross margin expansion that you expected to see. You know, I think kind of being 50% of the way through, I'd argue we probably haven't seen the majority of the margin expansion that may come with that transition to CleanFlow. Can you maybe just address that dynamic? Maybe it's related to kind of the inventory comments that you just made. Is it really going to take kind of getting to that 100% level before we see the full gross margin benefit?
Already CleanFlow already has significantly better contribution margins than our current molar procedure instruments. Obviously, to your point, by moving more procedures over to CleanFlow, that will most definitely help the margin profile. I think there's another thing, right? Is right now, we're operating with three procedure instruments. In the future, we'll have one. That means significantly simpler operations internally. That means our, you know, we can reduce some of our current overhead, et cetera, et cetera. I think there are many opportunities there to continue to drive that margin story going forward.
I know Mike isn't here, but if I could stick with the numbers questions for a little bit longer. I guess, you know, has your view of the long-term gross margin opportunity changed at all over the past couple of years? I guess, you know, if you think about sort of the buckets to go from where we are today in the low 30s to, you know, significantly higher than here, what are those? You know, we just talked about CleanFlow, but what are the other opportunities in your mind to improve gross margin?
We still, we very much believe that we have a story here that will get us to more normalized and normal med tech gross margin numbers. I think the key elements for us, point one, CleanFlow, like we just talked about. Number two, is on the shorter term horizon, is moving the manufacturing of G4 in-house, which is going to help us on margins. We're also identifying a number of different things internally, on our operations team that we can do to help reduce overhead. Really happy now to have a new head of operations, John McGaugh, that's going to really help us to drive that going forward. There are, you know, the biggest element for us in all of this is also driving scale in the business.
Driving top line, such that we can get better overhead absorption. That's why we're so eager to continue to drive the GP story, such that we can ultimately drive a higher top line growth. I think there are also other things that, such as negotiating with some of our suppliers, et cetera, as our numbers become the number of supplies that we're buying across our portfolio becomes larger. We're still sticking to our story, and we believe that we can make this a drive this margin story to a point that's more in line with a traditional med tech company.
On the G4 rollout, it's higher ASP, I'd imagine it's probably higher margin as well, once you move the assembly in-house than G3?
That's right. I would say that by moving the G4 System in-house, our margins on the G4 is gonna be substantially in line with G3.
Okay. Is the plan going forward to offer both G3 and G4 as sort of two different price points based on what the dentist might want?
What we're seeing now is that, you know, initially, call it a couple of months back, we thought there would be more of a 50/50 split amongst G3 and G4s. Given the benefits of G4, we're now seeing a significantly higher demand of G4 than we previously expected, which is a very good thing.
Yeah.
Roughly right now, I think G3s are trending around 25%-35% of all the consoles that we're selling. As long as there continues to be a demand for a lower cost console option, we will continue to offer that. Right now, there are some doctors that do want to buy a lower cost, lower cost option. I think there are these doctors, right, that have been in our pipeline for some time, that were initially were sold on a G3 console, and they still want to buy that G3 console, and we're gonna continue to offer that opportunity.
Okay. I guess, as we think about the rollout to GPs and the investment that might take, you know, how are you gonna talk about, you know, allocate, you know, to the sales force, kind of talk about allocating their time? I guess for the capital sales team, is there gonna be more of a kind of concerted effort to focus on GPs for the time being? You know, maybe presumably that endos has kind of been educated. There might still be obviously volume there, but maybe Michael, if you could-
Yeah.
You know, talk to that.
The way I look at it is, you know, the vast majority of endodontists out there, they know of us. You know, we're gonna continue to invest in the specialty. We were AAE this year. We run EndoCon every October. We invest in, I think 20+ endo residency programs across the country. That, that area of the market is gonna continue to be our core business for some time, and we will continue to invest in it. I think the way that we look at the GP opportunity is that it's really a chance for us to go into a segment of the market that we think, as we talked about, has this, we have a great value prop for that we hadn't made any inroads in before.
As you can imagine, we started to ask the sales team to spend proportionally more of their time now doing the prospecting and the new business development work with general dentists. If endodontists want to continue to work with those, and to Bjarne's point, to those that are still in our funnel, we'll obviously continue to service, support and offer the technology to them. I think it's trying to get this balance between the two. You know, the other areas of dentistry where, you know, running two channels can obviously create some conflict. I think we're navigating that well. A number of our endodontists that we work with are helping us in terms of GP education and trying to give us the best possible experience to take into that market.
As we talked about earlier on, you know, a lot of our education now, we're curating specifically for general dentists. We have a couple of events coming up at the end of the year, again, that are specifically for general dentists. I think the further we go through the year, the more we get into this and learn, the more our prospecting activity will be with general dentists while continuing to serve endodontists as well.
Maybe you want to spend a minute on innovation. Obviously, you have a lot, you know, still going on with kind of the core root canal treatment, but you've maybe started to talk about, you know, treating cavities might be one way the company could go down the line. I guess, can you maybe talk about, you know, I'd imagine your kind of push into the GP channel would position you well, for that use case. Can you maybe talk about where you feel like the appetite is, maybe from the GP channel and any, you know, opportunities or challenges as you think about going after that opportunity?
Yeah, the key drive and key focus for us right now, right, is, you know, presenting our current customers with a clean, full opportunity for interiors. That's point one. Something that we've also talked about now is that in the second half of this year, we're gonna be introducing an enhanced version of CleanFlow, which the best way to describe it is, it is effectively substantially like a, provides a snap-on feature, where once you've created a buildup, you can kind of snap on substantially the handpiece, which makes it almost like a little bit of a Lego concept where you can keep that procedure instrument, and, you know, fixed, affixed to the tooth in a much simpler way.
To your point, I think there is definitely a cavity opportunity here, and everyone are very obviously excited about the cavity opportunity. We have talked a lot to our, you know, some GPs about what this could mean. You know, GPs are really excited about that opportunity and moving effectively cavities to a preventable procedure. The market opportunity for that is on the order of 10x what the market opportunity for the root canal opportunity is. There are roughly about 175 million cavities in the United States every single year. Excited about that. At the same time, the focus, you know, throughout the entire company is gonna continue to be root canal therapy.
We are all over, you know, driving the top line opportunity here around root canals, driving the margin expansion, like we talked about. So that's gonna be the key focus, but very excited about the future opportunities here.
All right, great. We'll stay tuned. Maybe just in the couple minutes we have left, you know, I think that, you know, when investors look at the story, I think, you know, kind of the focus on the path of profitability is kind of first and foremost. I guess in your mind, can you kind of take us through kind of the milestones you need to hit to get to profitability? You know, obviously, there's a lot of, you know, market potential ahead, probably run into a tougher macro environment than you would have liked. Could you maybe just talk about, you know, from your perspective, how you're thinking about the company's cash runway and ability to operate, just given the kind of path forward that you see?
Absolutely, this is something that we're all over. Point one, the company is well capitalized right now, that's a good thing. We are all over driving top line, because at the end of the day, the way to conserve cash and resources for us, more than anything else, it's about driving top line. In this tougher macro environment, it's really critical for us to, A, drive closing times for these doctors and reduce that. Number two, push more doctors into the pipeline, which is why we're so excited about the GP opportunity, which is, again, a leading indicator for what's to come in terms of top line growth for us. That's, top line growth is important. Margin expansion is gonna be continue to be important, like we talked about, we're all over that.
The other thing is cash, how we use cash. We're gonna be very careful with that. We recognize the environment that we're in, and we're also prepared to do whatever it takes to, point one, preserve top line growth and margin expansion, but at the same time, you know, conserve any other cash use to protect the long-term growth opportunity for the company. All over that.
Great. Why don't we wrap there? Bjarne and Michael, thanks very much for your time. I appreciate it.
Thank you, Nate. Thank you.