Okay, moving on to our excellent next presentation. My name is Rick Wise. I'm here with management of Pulmonx. Steve Williamson, President and Chief Executive Officer, and Mehul Joshi, Chief Financial Officer. Welcome. Thank you both for being here. I think this is the first time you've been at this Stifel conference, so it's great.
It is. Thanks for having us.
Yeah, no, thrilled to do it. As a reminder to folks, Steve and Mehul both joined Pulmonx in the first half, early first half, I think, of 2024. Steve in January, Mehul in April, and since then have been focused on continuing to build and enhance the company's three-pronged commercial strategy for their minimally invasive severe emphysema treatment called Zephyr, the Zephyr Valve. I've been covering Pulmonx since the late 2020 IPO and have had the distinct pleasure of watching this wonderful, special, important technology gain commercial momentum. So I'll be curious to hear where we are today and what's next. Steve, I thought just to start us off, maybe talk about this three-pillar commercial strategy, because I feel like your predecessor sort of put it in place. You've taken the ball and running faster, wider, broader, deeper.
But it seems like, based on recent excellent performance, it's really a durable, solid approach to creating these markets.
Happy to. So when we came in, I actually came in in March. So I was in March and Mehul was in April. There was a three-pronged strategy in place. And what we set out to do was to say, okay, what can we do to add specificity to that strategy? And also, what do we do to accelerate? How can we accelerate our growth over time? As we look at each leg of that, each prong of that three-pronged strategy, the first is building Zephyr Valve centers that can be high-performing centers. We bring on new accounts. We continue to do that. We bring on 10-15 new accounts a quarter. That's been our kind of past history. But it's not the strength of our strategy.
What we're really trying to do is get into these accounts that we have on board and drive more utilization in those accounts. There's a couple of different ways that we're doing that. In the past, what the company was really good at is our sales reps are really good at selling the clinical data of the Zephyr Valves to physicians. We have four randomized controlled trials. There's over 100 publications out there. We're in the GOLD Level 1 standard of evidence. So we are the standard of care. There's limited competition from a valve perspective. It's the standard of care. We've got great data. Physicians typically buy that. It's a great story. What we find is as we try to build these programs and make them larger over time, it's been important to address not just a bottoms-up approach, but a top-down approach to the customer.
Some of these hospital administrators, directors of pulmonology, the C-suite executives, showing them that there's not only a clinical value proposition here, but an economic value proposition as well. That economic value proposition discussion is an interesting one in that we can go in and show there's a large, large untapped market surrounding these hospitals in their catchment areas where they have the opportunity to take these patients and provide a lifesaving treatment to them. The Beth Israel Hospital in Boston just put out a paper at the CHEST conference. I don't know if you saw it, but it was they showed that the economics of a Zephyr valve program are very positive for the hospital. But in addition to that, 69% of the patients that came into their hospital system for valves actually were not part of the hospital system before.
So they brought in this huge catchment of patients that they weren't addressing before. These patients come with comorbidities. They come with a number of different issues. And that just builds up the hospital opportunity over time. So good, strong, powerful economic value proposition, great for the patients, great for patient awareness. One of the things that we've done is we've talked to this C-suite executive or the administrators is really help them address workflow. We believe that workflow is probably the biggest limiting factor for growth right now. So as we address workflow, we've launched a new product, which we just announced. It's not a full launch. It's a beta release of a pilot, if you will, in a handful of centers that's called our LungTraX product. And what that does is it builds not only workflow, but it identifies patients for the hospital system.
So we've got the hospital system. We're building out these larger hospital systems that can be big Zephyr Valve centers. We're addressing workflow and automation and bringing automation to these customers, and then the third prong of our strategy is patient awareness and COPD physician awareness. Our patient awareness efforts have been probably one of the biggest surprises I've seen. Patients seem very interested. They're engaging with us. We've had over 34,000 initial patient engagements through our website in the first three quarters of the year. Those numbers, that's up 150% over where we were last year. In addition to that, peer-to-peer education, our ability to touch these referring physicians out in the community, we've added a little bit of fuel to both of those fires, and we're seeing good results.
That's great. And today there was a press release that just came out that I managed to tuck it away someplace. Anton, did you see the news? I want to mention it here. Give me one quick second. I'm not going to have it. It was a reimbursement.
American Lung Association.
Yeah. I want to bring it up because it's breaking news. Do you want to just tell us what that is and what is this big news, this important news, and just the context? Sorry not to be more ready with the question.
No, it's fine. It's interesting as you look at the pulmonary space overall. There's a lot of attention paid to lung nodules in cancer detection right now. The American Lung Association does a lot of that as well. COPD kind of takes that backseat, and what we're seeing is that's starting to change a little bit. COPD, severe emphysema, we've got a similar overlapping patient population here, and what's happened is the American Lung Association has just entered an agreement with us where they will help educate physicians that are out in the marketplace by doing a number of seminars and trainings, and then those will be put online, and so people can go and learn from them over time.
It's one of a number of things, Rick, where we're moving forward and actually seeing that this push for earlier detection of lung cancer is also starting to line up with a push for earlier detection of severe emphysema. These patients that have severe emphysema, if we can get to them early enough before they're bedridden, before they're stuck in the house, before they can't leave, have much better outcomes, very similar to lung cancer patients. So we're seeing that here. We see that with the Targeted Lung Health Check program in the U.K. And we also talked to a number of the C-suite executives about this as well as they're really familiar with lung cancer screening. It's how do we grab this patient population that's got this huge overlap.
It's unusual. I don't usually see just a headline quickly and sort of react. It sounded really positive and confirmatory. What do you do from a, you're talking about the patient engagement and raising awareness part. What can you do or what new initiatives are you putting in place over the next 12 months that could sustain or accelerate the trajectory of adoption?
Sure. So from a patient perspective, there's a number of things that we've done from an online digital media perspective. We have the ability to geofence areas where we know that we have high-performing centers and we can turn on patients and let them know, hey, there is a treating center near you if you're suffering from this disease. That's really where we've been focused. I think we'll go a little bit broader than that over time. We've been very specific on what we do here. We don't want to, there's no point in pouring too much in the top of the funnel if we don't have the workflow and the hospital systems to take advantage of it or take care of it and take care of these patients.
And so our ability to make sure that we've got those high-performing centers before we go and really fuel that patient information.
No, it makes a ton of sense. It sort of leads into my next question. I try to do this for the first 12 months. A new CEO steps into a role. It's like, what do you know now, whatever, however many months into the job that you didn't know? What are you more excited about and what do you appreciate is maybe just a longer-term challenge that you need to get after that you didn't understand back in March? I'm sorry about the date again.
That's okay. That's okay. Over that time, so you're new. I've been here for, like I said, about seven months, eight months. And I spent a lot of time in the field. So you come in, you meet everybody, you understand the business, you get to know the business, you understand the people that are on your team. You spend time with customers. You try to understand where are the needs, where are the accelerators, what can we get after, where are the pain points. And then you take that information, you bring it back to the team, you develop a plan, you go out, you validate that plan with customers again, and then you go out and you execute. I'd say that we're kind of in that validation/execution stage right now. I think we've identified these pain points. I talked to you about them in the different prongs, right?
We're going after the C-suite executives. We've built out workflow and our ability to identify patients and really educate some of these COPD physicians. Very, very important. So we've done that and now we're out and we're executing on that. What I've noticed in my interactions with the hospital systems, with just up and down with physicians, with C-suite executives, when you get back to this patient, this patient is really underserved right now. They don't have a lot of options. And when you see, I was in a case a couple of weeks back and you see this patient wake up and they take their first deep breath in years. I mean, it is a result like that. And it's not always that way, but you can actually see you made such a difference for that patient.
And now that patient will be going through rehab and they'll talk to more patients and they'll talk to their physicians. And it really can breed this momentum. And just seeing the outcomes from a patient perspective and actually seeing the TAM, being able to recognize this TAM through some of the marketing efforts that we've had are both kind of big positive surprises for me. Maybe not surprises, but it just makes you feel good about what you're doing and makes you want to go through and continue to execute our strategy.
Right. And from a challenge point of view, I feel like the company is actually very well set up. But what do you say? This is going to take us more time or require more work. It's a tough question. If you don't want to answer, don't answer.
No. You know the challenge.
I'll let Mehul answer it.
The challenge is, you know, when we came in, there was a big thought through the investment community that we're going to change the strategy. We're going to change guidance. We're going to have turnover like many new CEOs do and that we're going to have a tough year, and we didn't change the strategy. We actually have just been more specific on what we're going to do to accelerate it over time. We didn't change guidance. We've delivered what we've said we were going to deliver from a guidance perspective, and we haven't seen significant turnover, so I think that was the big challenge that it's been an overhang for us, and we're just out here executing. We're driving the plan. We've got good, strong people across the world.
We've got a strong sales and marketing organizations across globally, but in the U.S., we've got phenomenal quality manufacturing, R&D, and we'll continue to execute on those things.
That sounds great to me. And just looking ahead and just at a high level first, as you said, you just reported your third consecutive quarter of top line outperformance. And just to show you that analyst is never happy, but you left the full year guidance unchanged, but it feels like there is a lot of movement. You are, I think, gaining solid ground. Just help us understand your approach to guidance and maybe factors driving low end and maybe high end as well of the kind of numbers you're talking about.
Let me start on that and then I'll hand it over to Mehul if I can.
That sounds good.
When I came in, I think some people said we really inherited ambitious guidance. And there's always the push, hey, you've got an opportunity. You're the new guy. And we said, no, we're not going to do that. There's a commitment that's been made out there. We're going to go out there and we're going to deliver on the commitments. And that's how I've approached it through the whole year and we'll continue to approach it that way. Mehul, anything you want to?
Yeah, no. I just maybe reiterate a few points. The 2024 guidance was set on the Q4 2023 earnings call. And then Steve joined in Q1. I joined a little bit thereafter. And as Steve indicated, the expectation was we would drop guidance specifically on revenue. But as we went through the operating plan, we believed in the company's conviction and reiterated guidance, specifically revenue and the rest of the P&L items. And we're really driving the business to deliver on that. We saw really strong growth in Q1 and Q2. Q3 was a little bit of an unknown because of the seasonality as you've seen the numbers over the last few years. And we openly communicated that and talked about it. Q3 was the expectations were, well, what was delivered was a little bit worse than our expectations, but in line with what we thought.
We expect Q4 to come back stronger relative to Q3. We feel confident in the revenue guidance. You saw I tweaked the gross margin and OpEx guidance a little bit, but we want to deliver on what was committed to in Q1. That's what we're focused on.
On this last call, you also highlighted the OUS performance. Just for perspective for our listeners, we're saying $26 million out of our $82 million-$83 million projection for this year is OUS. And you highlighted multiple reasons to me on the call why we should be bullish on OUS. You want to take us through that reasoning? And I think people are sort of forgotten about the OUS side of the story for you.
Yeah. So we saw 12% growth OUS in Q3, and there's a number of, I guess, different programs that we've executed in order to start to drive to see growth in those markets again. As you look at Europe, we've implemented a number of the programs that we had in the United States that were actually really driving growth for us. Those are starting to gain some traction. That includes the sharing of best practices. That includes peer-to-peer education, things that we weren't really doing in the past. We've really kind of revamped our rep profile out there as well, so we have sales reps that are not just your hunters. We can also farm into these hospital systems and help drive these programs and drive up productivity, so we're seeing benefit there. In Japan, we've got our Japan post-approval surveillance study right now.
We expect that'll wrap up here in approximately 2026, and then we'll start to see revenue from that. That's 140 patients that we'll treat over the course of, we've started in 2024. We'll go through 2025 and, as I said, look to wrap that up in 2026. Once we have that, we'll be able to expand much more broadly across Japan. It's 100,000 potential patients in Japan. It's just like a Japanese clinical trial. You know, you get everybody up and running. We expect that the majority of our enrollment will be in the back half of the trial there. AeriSeal is another one. It's our next generation. It's a new product launch. We've got a PMA that's underway right now. That clinical trial is taking place in Europe as well as the United States.
The European sites, once we've completed enrollment, we'll roll out the product in our European sites as we already have CE Mark in Europe. So we'd expect that to be in kind of the 2026 timeframe as we roll up enrollment there. And then in 2027, sometime approximately, we expect U.S. approval of that.
So is low double digits the right way to think about sort of a reasonable baseline go forward OUS growth rate or are all these initiatives arguing for a potential for steady acceleration and growth?
So the other thing I would add to Steve's comment, and we talked about it, is we got into an agreement with a distributor in China, which has already helped us pretty significantly on the top line. It's slightly dilutive on gross margins, but already operating margin accretive relative to our direct model. So that's the other item that we're moving forward on. And that'll also help drive growth in probably higher growth in 2026. So we've seen good performance over the last three quarters, and we expect that momentum to continue as some of the items that Steve talked about continue to, you know, we continue to execute on those. So that momentum, we expect it to continue.
Michael told me I should press you on 2025 outlook. He didn't really.
It's been 20 minutes and you haven't asked me about it.
I know.
I'm not sure what's happening.
I was trying to lull you into comfort and, you know. But we're halfway through the fourth quarter. It's hard not to look ahead. The Street and we are looking at nearly $98 million sales. That's 19% growth. Just, and I don't expect you're going to give us specifics, but just at a high level, are you okay with where we are just as a company now? Are you comfortable with that? And maybe talk about just at a high level, some of the puts and takes for next year.
So Rick, as you know, we haven't provided guidance on 2025. We are excited to provide that on the Q4 call in the early part of next year. I think what I'd say specifically is that we're really excited about our strategy. And as we execute on that strategy, we will continue to deliver long-term sustainable growth. I'll probably leave it there from a 2025 perspective. We are so focused on delivering 2024 and the commitments the company and we have made. And so we're just focused on that right now. We'll talk about 2025 in a few months.
I'm not shocked to hear it, but you know, you have to try if you don't try. Let's talk about LungTraX. As you said, Steve, it's in beta release. I mean, this sounds like an exciting product. As you know, we had the good fortune to connect with a number of physicians piloting LungTraX, and I came away appreciating tremendously. We wrote a note about it. Got great feedback about its potential to multiply patient referrals and enhance workflow, but I also came away appreciating that there's more work to do. You're evolving. You're learning from this beta release. Where are we now with that? When do we get, you know, when do you get it to the point where you're, we'll call it Alpha and that kind of release, and where are you aiming, and again, talk about the importance to the story.
Sure. So Rick, first off, I thought your note was very insightful. I thought the research that you had done there was right on. I think you called out a couple of really important things. First off, there is a real need here. The physicians really like the idea to be able to identify patients that, well, first, to make it easy to use the product to build out a workflow and then to identify additional patients, all very important. I think there's also a process that it takes time to get these into the hospital system. So we're super early innings here. But if you look, the LungTraX Platform is really designed to do two things. First off, it's to make it easy from a workflow perspective, easier for those that use it. And secondly, to identify patients that are potential Zephyr Valve candidates.
So that's in a nutshell what the project is designed for. LungTraX Connect integrates into the PACS system and directly gets the CT scan from the PACS system and uploads it into StratX, which is, it doesn't sound like it's all that difficult, but the old way of doing things was significantly more difficult. And so it's much easier. They can go in, get into the PACS, send it over for StratX, get a report back. That report back comes both with the patient information, which it currently, or prior, hadn't. So now you've got the patient information right on the report. So it's easier for the navigator to follow and schedule. At the same time, it's got a workflow for that patient. So you can tell which testing they've gone through, what they need to do, and that actually serves as a daily work chart for that navigator.
When we add Detect to it, and what we found was, you know, there was a lot of excitement around the benefits of Connect, but with Detect, Detect goes in and scans the PACS system for other low-dose CT scans and will scan the PACS system for that and then identify patients that might be potential severe emphysema patients. From that, it'll build out a workflow, consider a separate, I don't know, page, if you will. That page will have a workflow of these patients and then allow that navigator to say, these ones need more follow-up and then move them through the process. So initial response from physicians was, hey, I like the ease of use. I like the workflow.
Why don't we go ahead and can you talk to us more about the ability to grab patients that are under our roof right now that came in for CT scans for lung nodules or for whatever else it might be? Can we identify those patients that are severe emphysema patients because they're here right now? We expedited our release of LungTraX Detect, put it in with LungTraX Connect, and as we said, as you said, we're in the beta right now. I think it's really early innings. We are crossing the line with a couple of accounts right now where we're just getting up and running. But I would expect to have more information in the future on that for you.
It sounds exciting. I mean, it's efficiency, detection, you know, and again, that is integration hard for and learning? Is it hard for hospitals, ITs, physicians, or is it relatively easy to adopt?
The product itself is relatively easy to use. I mean, it's a point-and-click workflow system, basically. It's quite easy to use. The delay or the part that's going to take us some time is getting through the contracting process, cybersecurity, working with the IT teams and getting through that process. In some instances, it can take weeks. In some instances, it can take months. And there might be some even further out there depending on what the hospital system is. But really, I think what drives that is if you're bringing value to that customer and through that hospital system.
So if we've had the ability to not just talk to that interventional pulmonologist and get them to try to drive through a software system, but we've also been able to talk to that C-suite executive or that administrator and show them the value of building out a program with this software, then that's really the benefit. So it ties in, the whole strategy ties together very nicely whereas we're talking to the C-suite, we can bring in the workflow software as well as patient detection. And then we're identifying more patients through localized marketing programs as well as peer-to-peer education.
It's exciting stuff. Touch on a few financial topics. Gross margin has been pretty steady and bobbing somewhere in the 74% kind of area. Is this gross margin going forward or is there room for expansion, and especially as you're launching more and more software and leveraging existing accounts and, you know, how do we think about?
Yep. So 74% is a great benchmark in terms of where we've been and where we are. We do have a number of initiatives that will help expand gross margins, specifically in the factory relative to additional volumes as our revenue grows. Also, geographic mix aids to gross margins. And then there's a number of other initiatives around the software and whatnot. So over time, we expect all these initiatives and volumes and mix to help grow gross margins.
All right. And is there, I mean, again, I just a trial balloon. I mean, are we talking about the potential for 10 or 50 bps a year as all these initiatives take hold? Is this three years away to see that kind of initiative or no, we could see it sooner?
We'll provide 2025 guidance, as I mentioned in the Q4 call, but I don't believe it'll take three years to see the benefits. It may happen at the tail end of next year as we start to see some benefits. But also it's the geographic mix, right? So if distributor revenue increases, then your margins could, you know, the margin expansion could slow down a little bit. So there's a number of different dynamics that are in play there.
Talk about R&D spending. I mean, in the third quarter, the dollar stepped down a little less than I might have thought. But what's the right rate? What are your priorities? Are you spending enough? Are you spending too little? You know.
Yep. So in 2024, you saw a step down of R&D expense on a year-over-year basis. And that was primarily driven by a couple of things. One was completion of R&D projects that were started last year. And as we kick off more R&D projects, that spend will come back. Similarly, on the CONVERT I clinical trial, it was in full force in 2023. And as we've concluded that, the clinical trial expenses have stepped down. So that's where you see the year-over-year contraction on R&D. But as CONVERT II takes off and enrollment increases, we'll see that tick up in R&D expenses, latter part of this year, as well as the time period that Steve talked about in terms of enrollment through 2025 and into 2026. After that, we'll see it normalize again.
I would say at this point, it's a little bit lower than where I expected over the next four to six quarters.. It'll tick up and then it'll tick back down as enrollment is completed.
I gotcha.
I think we'll also see a bit of a shift. So we're a standard kind of med tech device product company right now that's just brought a software product to market. We'll see innovation in that software space over time too. We'll continue to iterate the products that we have and drive more and more value over time there. So I think we will continue to spend in that space.
That's great. You've repeatedly said, you both repeatedly said that you can reach profitability with current cash on hand, which if I'm remembering correctly, like $108 million or something like that. Can you update us on your latest thinking and why are you just so confident? Is it in that prediction, just the fundamentals of the business or anything you can share?
Yep. I'm happy to take a shot at it first, Steve. So we inherited an operating plan, Rick, and then we've updated that operating plan. And it has a set of assumptions around revenue, gross margins, and spend. And as we've seen historically and in the last three quarters, we're continuing to beat those assumptions. And so that gives us a lot of confidence that we can get to cash flow break even with the plan we have today. We haven't really spoken about the timing or the revenue levels of that yet, but that's what really gives us confidence. As we continue to execute, we may talk about some milestones along the way, but probably at this point, we're not ready to do that.
We welcome that moment. Thank you both for being here. It was great.
Thank you.
Thank you.
Appreciate it.
Welcome.