Well, afternoon, everybody. Thanks so much for joining us. I'm Matt O'Brien. I cover devices here at Piper. Really excited and enthusiastic to have the PROCEPT management team here with us. From the company is Reza, who's the CEO of the company, and then Kevin, who is the CFO of the company. Matt from IR is out in the audience. Gents, thanks so much for coming out here. Appreciate it.
Thank you for inviting us. Thank you.
Thanks. Of course. So, you know, maybe let's start with the fourth quarter guide. The system number is around 42. That seems achievable based on recent performance. But, you know, the sequential utilization assumes a pretty meaningful step up from third quarter. Can you just kind of walk us through the drivers of that acceleration and why you're getting that confidence?
Yeah, I'll take the guidance questions, Matt, and thanks for having us again. You know, first, I think we communicated on our call around utilization, that we were off to a really strong start in October. We saw, you know, very strong utilization, which was a continuation of the third quarter. We're now launching multiple programs with multiple physicians, and program launches are going really well, which is a testament really to our utilization team and building practices. So that's point one on the step up in utilization.
But then also, just there is seasonality that comes into play here in the fourth quarter, where we do expect elective procedures to increase in the fourth quarter compared to the third quarter. And if you actually look at the absolute number of disposable units that our guidance implies in the fourth quarter, it's a sequential step up in the low 20s, so call it 21, 22%. And if you go back to last year, that number was in the high 20s, it was 29%. So we're actually... Our guidance would imply a year-over-year decrease, even though the sequential increase, you know, looks meaningful on the surface.
So we, so we feel very good about the number. And then just lastly, you know, we can't quantify this, but we do now have full private payer coverage, where 95% of men have access to Aquablation therapy. We received UnitedHealthcare in June of this year, and we are starting to see some benefit of that early in fourth quarter. All of those factors really give us a lot of conviction and confidence around the fourth quarter utilization number.
Got it. Okay. And as far as the reimbursement side of things goes, I mean, those policies have been getting into place over the last couple of years, but I'm sure there's still some, like, skepticism, like, "Are we going to get paid by Aetna? Are we going to get paid by the Blues?" Now, you've got United, so you don't see an immediate benefit. Where are we at as far as just comfort level and getting reimbursed for every one of the Aquablation cases? And then what kind of tailwind do you think you can get from United next year?
So it takes few months from the time the coverage is announced.
Yeah.
So even United, when they announced June 1, it takes a few months to come on the system. There are definitely some small carriers. We have all the large ones, United, Aetna, Anthem, Cigna, Humana, we have all of those. But six months ago, we would have some accounts that they would if they had United patients, they would just pass. They didn't want to even go through pre-op process. But those hurdles are gone.
It is to become a standard of care, definitely, we need United. We needed United, and now we are hearing less and less, you know, customers complaining whether they get paid or not. They don't need to go through the pre-op. It is just one less hurdle.
Got it.
But United, again, not. There are some states. It's primarily local Blue Crosses covering those, those accounts. So United will help, but it's not at every state.
Okay. Okay. And then, you know, just kind of back to the utilization question, are there certain vintages of customers that are, that are, you know, growing really quickly that, you know, we can't see? Because I think it's 7 per month that you're, you're, you're expecting, or just under that here in fourth quarter. But are there some that are doing 10, 12, 14 cases per month?
So what we see is in cohort of our patients, when we look at, for example, first quarter of 2021, second quarter of 2021 on, cohorts, sequentially, utilization go up. And, as we have said in the past, a high volume center average, they do 17 a month, and, there are maybe 10 doctors or so in a, in a high volume center doing those cases.
So sequentially, they are going up. Of course, there is variability because we are still early and now, we are only like 270 hospitals of 2,700 and maybe 6% utilization. There is a variability, but we are seeing cohorts sequentially going up. Yes, there are accounts that are doing north of that, and it takes three to four quarters to get to those six per month.
Yeah.
As you can see, there is variability, but the average keeps going up.
I think what's exciting about our business now is, while we're still heavily dependent on capital sales, you actually see that the mix now shifting more heavily towards procedures. And on top of that, the predictability of the business on procedures as our installed base gets larger, those new accounts that we have every quarter, if you look at this year, we roughly doubled our installed base, right?
So we're going to end the year somewhere in the 310 to 315 range in the US with systems installed. Which means as we head into 2024, the impact of new accounts is less and less on overall utilization, and then that's going to help predictability. It's going to allow us to continue to have sequential increases in utilization, where historically, the large number of new accounts have always been a natural drag on utilization.
Got it. Are you guys starting to see a narrowing in terms of when they start with you, and then they really start to ramp up utilization?
What we are seeing, I'll say this, is the accounts we're bringing on today are performing more procedures initially than when we were bringing on a new account two years ago. And a lot of that is just due to general market awareness and acceptance of our technology, but some of it is also purposeful. We're launching accounts now with multiple physicians, where historically we maybe only had one. And again, we're really pleased with the new account launches that we're seeing.
Interesting. Okay, appreciate that. And so, you know, the capital side of the business, I know, Kevin, it's getting smaller and smaller. But Reza, I've been doing this. I know I don't look like it, 'cause I look so young, but joking, but I don't know why you guys are laughing, but, but.
You referred to me.
Yeah.
You were talking about me.
I've been doing this a while, you know, about 20 years, and I just get skittish around capital sales. It's not the product's not great, it's just hospitals are like: Whoa, hang on a second, rates are up, or we're nervous about things heading, you know, going forward. So the confidence in that side of the business as we head into 2024, seems like, you know, fourth quarter is in good shape as far as capital systems go, but next year is a jump again, in an environment which I think is getting to be more challenging. So just why that, why that confidence? I know we're still, like, penetrated...
Yeah.
But why that confidence?
Yeah, I mean, as you said, capital in an ordinary environment is difficult. But, I'm very happy to say that despite even the current environment, we have been able to deliver what we had said. What is helping is really testament to the technology that we have. This is a differentiated technology that allows surgeons to treat prostate of all sizes and shapes, allows the hospital to have standardized the procedure, because all the other technologies work in a narrow range of prostate size or shape, or depend on the surgeon skill and also multiple algorithm.
They don't need to go through multiple algorithm. When a patient comes, whether it's a doctor A, B, or C on that day, or whether the prostate is 30 gram or 200 gram, they can treat that patient, and the time they allocate to that surgery is very predictable.
And then on top of that, the reimbursement they received allows them to reimburse the capital, and allows also attracting urologists to their practice. Having said that, we are still very early in the adoption curve. We are in 270, so going to 2024, we would be maybe, like, over 300 cases, the 300 accounts. So we have still a long runway ahead of us. These are the tailwinds that will help us to give us the confidence we have in our...
Yeah, just, to the last point I'd add to this, kind of the 2024 number. So obviously, we're not in a position to give 2024 guidance, but we're highly aware what the expectations are in 2024. It's around 185 system sales, and when I look at the sales force today, and we're going to exit the year with about 40 capital reps, quota-carrying capital reps, the average productivity that we've seen is around five per rep.
It does take some time for those new reps, and we have 10 new reps to ramp to those levels. But at the same time, you know, the 40 reps, given historical productivity, would support what expectations are out in 2024. To Reza's point, with 2,700 hospitals in the US doing BPH and exiting the year at 310, 315, we have a long runway in front of us...
Yeah.
To continue to penetrate. We're not seeing diminishing returns when we bring on a new rep right now.
Got it. Okay, well, that's, that's really interesting and good to hear. Can we drill down a little bit on that, on those numbers, though? Because you talked about these 2,700...
Yeah.
Count of hospitals to go after, but 860 of them are high volume, right? So that's like 270... I don't know how many of those high volume you're already in. If it's 270 out of 860...
So we are about 35% low volume and mid volume...
Okay.
And 65% to 70% high-volume. And that has been a good surprise to us since we went IPO. During the IPO, because we were just starting, we wanted to have an efficient sales force. We were targeting those high-volume hospitals, and we were hiring reps who were close to regions where they had coverage, and we were targeting those high-volume. But what we have seen is this low and mid-volume hospitals who come on board, their adoption curve, very interestingly, is similar...
Hmm
To high volume. As I mentioned, it takes three to four quarters for them to get to above six per month. Low and mid-volume hospitals, they, it also takes them, they come to the same ramp as the high-volume hospitals. So, this is why we are excited, we see this. By the way, low and mid volume are not necessarily small hospitals.
Yeah.
These are hospitals that they have a good urology practice, they're treating cancer. They see these BPH patients, but historically, because of either the size of the prostate or the complexity of the procedure, they would refer those patients. Now they have those patients, they treat them. So this is the mix of the high volume and mid-volume, yes.
Okay, so that's, that's interesting. I'm going to go off script here a little bit because that's, that's, I think, a really big deal. Are you seeing some of these low and medium volume hospitals see their practices grow meaningfully 10%, 15%, 20% because they get the robot?
This is definitely early to make that. Again, if you take 30% of 270, we're talking 60 accounts.
Yeah.
It's a small number, but they were not historically having so many cases doing. One can conclude that we need more...
Yeah, look, this is the billion-dollar question, so to speak, right? Is this market cannibalization or market expansion? And I mean, the honest answer is, in the low and medium volume accounts, we're definitely expanding that market. I don't think what we could definitively say today, though, is, were those patients going to get treated somewhere else, or were those patients not going to get treated at all? And that's still to be determined. But to Reza's point, the great thing about this is the pool we're fishing in, so to speak, is not 860 hospitals...
Yeah.
It's 2,700. And that is why, again, when we look at the penetration, we feel like we have a long runway in front of us to continue to sell capital, even though you start to see the business shift meaningfully to more of a procedure type of model.
Right. And I'm not trying to get at cannibalization. What I'm really trying to get at is, you know, these centers and, hey, you know, they're starting to get people coming. I'm just wondering if your salesforce has asked, has told you people are starting to come in the door at certain places and saying, "I'm here because of PROCEPT.
So they, in fairness, these accounts had those patients.
Yeah.
They had the patients.
Okay.
And they were not treating them...
Okay.
They were referring them to other accounts. So now that they are treating, and they are in the same region as high-volume hospitals, both of them, their cases of Aquablation is increasing. But to answer definitively whether market is expanding, the only data point, again, is anecdote. When I ask or when I visit hospitals, how is the number of BPH procedures they are doing independent of Aquablation? They all tell me it's equal or higher than pre-COVID.
Okay.
But I don't have the formal...
Okay
Survey for that.
Well, if hospitals are going to start, you know, competing for patients, that's going to be awesome...
Right
for you guys, so.
Again, this is we are still early, so there is a lot of room for... So when we ask this question on the cannibalization, when we ask the question: If you didn't perform Aquablation on this patient, what would you have used? Most of the time, the answers we receive is TURP or GreenLight, and of course, for large prostate...
Yeah
Is prostatectomy.
I know it's early again, Reza, but to your point, there's a lot of cases done every year, but there's a lot of people sitting there like, "No.
Yeah.
Hey, I'm a guy. I would not want to do this...
Yeah
Unless I absolutely had to...
Yeah
Because of the complication risk. You guys cut down those complication risks dramatically.
Yeah.
Are you hearing any anecdotal commentary about some of the watchful waiting, just saying, "Okay, I feel more comfortable now because of PROCEPT?
Yeah, I mean, as you mentioned, 40 million American have BPH men, 12 million are seeing a physician, and let's call it 300,000 went to... So there's a massive market there.
Yeah.
Yes, there are examples that we see that patients who were on medication, in fact, some of them came even and talked to our employees, that they were on medication, they heard about that, but these are anecdotes...
Mm-hmm.
That they came for a procedure that they thought was safe and effective and... But at the same time, our near-term growth, we are highly focused on, resective market at the hospitals. We are still early, so we are not doing a traditional direct-to-consumer advertising. So we still have a long ways before we try to actively capture. Those patients come...
Okay
But anecdotally, yes, we, we see those examples.
All right. I'm going to bounce around a little bit. The DTC side of things, I know one of your competitors on the office side was doing some DTC.
Yeah.
It's actually a pretty funny commercial. But, do you need to get 500 systems in the field to feel comfortable to do it, or is there something else to...
So, I mean, definitely, as you said, DTC is expensive. So when we say DTC, we don't in the traditional way, so we provide material to the hospitals who purchase the system. They, they capture those patients themselves. By the way, those patients are already at the hospital, so we don't need to go find those patients. These patients are coming. They want to get TURP or GreenLight or other even non-resective. So they are at the hospital.
But we do not actively go advertise. We provide material to the hospital so that they advertise. And as you mentioned, in order to do DTC, you need to have a very large install base so that if patients go to their close nearby hospital, they have the center, they have the system.
Okay.
We are only, like, 270 right now.
Got it. And then, as we're starting to think about penetration rates, I know you guys say, "Look, we're just 5% of all surgeries in the US at this point," but you're not in the, you know, the office setting. So when you exclude that, you're about 7%. For 2024 numbers, you know, is the thought that you can continue to kind of, you know, deliver 200, 300, 400 basis points of market penetration from a utilization perspective?
Yeah. So as you mentioned, if you look at penetration, we are still very early. This high-volume hospitals, the eight hundred and sixty—I mean, the 300,000 resective procedure, this high-volume hospital does 70% of those 300,000. So we still have a long way to tap. That is the mark that I can say we are targeting. Yes, we have accounts that have converted all their cases to Aquablation, but I would not say that we're going to capture 100% of the market.
I don't say that. Yes, accounts are doing it. But what we know is those 70% of just these—I'm not even talking low volume and mid volume. 70% of resective is done by these high-volume centers, so that is where...
And then we are, for 2024, we are not giving guidance, but I don't think...
Yeah, I think what's one of the nice aspects of our business is small improvements in market share have outsized impacts to revenue growth.
Mm-hmm.
And again, while we're not going to talk about 2024 and 2025, I'll reference consensus.
Yeah.
So in 2025, the street has its business of roughly $300 million plus. It has us at 50,000 procedures in the US, roughly. And that would be meaningful growth over the next two years, and still not even the standard of care in the surgical resective space. In fact, not even close to being in the standard of care.
So we don't need to be the gold standard or the standard of care for us to meet our growth objectives. Now, longer term, we definitely think if you get a resective surgery, you should be getting an Aquablation. I mean, that, those 300,000 resective surgeries, the majority of those, in our view, should be ours. And then you get into kind of market expansion and things like that.
But it's an exciting business from that standpoint, where, again, you could just have small inroads in a very large market and have meaningful revenue growth. Got it. Okay. Yeah, count me in the group that wants that versus...
Yeah, I mean, just to talk about 2025 again, I mean, back to those expectations, the Street, those numbers would suggest that the average utilization needs to be about 7.2 in 2025. Our fourth quarter guidance is 6.8. So you could see two years down the road, very modest improvements in utilization and penetration have very big impacts to the revenue of this company.
Okay, and then you kind of talked a little bit about this before, Kevin, but just the consensus for next year was at about 50% growth. But more of that, first of all, that number, you know, reasonable?
Yeah. Look, again, we, I'm not going to be specific on 2024, but we're keenly aware of what expectations are. We're keenly aware of why we're valued, what we're valued, and expectations around that. And I think we're building an infrastructure and a sales team to make sure that we continue with our historical performance of exceeding expectations.
And heading into the year with 40 capital reps, you know, I think, again, at average productivity, you, you can do the math, and that, that would suggest that, you know, numbers in 2024 would be achievable based on our current sales force. You look at utilization in 2024, and the Street models is roughly flat to the fourth quarter, somewhere in the 6.8 to seven range.
While not being specific on numbers, I think what we do feel comfortable saying is we have multiple proof points of where the Street expects us to be, and now it's up to us to replicate and execute that in different centers.
But with some seasonality, though, too, because...
Yeah, right.
A lot of people are doing literally...
I still think, right, and we're seeing that in our business, particularly on the capital side, and I expect that to continue.
Yeah.
Where first quarter, you know, historically, will be down sequentially to fourth quarter. third quarter is roughly flat to second quarter, to slightly down on capital, and fourth quarter will be up. I think that trend is very normal and is something that folks should expect moving forward.
Got it. Okay. And then on the profitability side of things, gross margin specifically, just talk about the mix benefit you're going to get on the procedure side to the business and the comfort level of getting, you know, your 60% gross margin.
Yeah. So, we've talked about longer term, as we shift to a more disposable model, that we see this as a 70% margin business. Now, that's going to take time, and I think you're going to see margin improvements that are very methodical over the next two to three years to get to that 70%, right? I mean, it's.
We're not going to go from one quarter of 55% and the next quarter of 70%, right? I mean, it's going to be, as you've seen, very modest improvements, and the reason for that is the number one driver for us for margin expansion is revenue growth. We have a high degree of fixed costs. When we spread those over a larger number of units, margins expand.
That is another exciting aspect of this business, that we're not dependent on significant cost reductions. We're not dependent on offshore manufacturing. We're not dependent on a redesign of our capital. It's really, if the revenue growth is there, the margin growth will be there, and then you couple that with our OpEx leverage, which we're already showing. Our revenue growth this year of 78% is being driven by only a 48% increase in operating expenses.
Yeah.
You know, that should be kind of a high watermark for the company, and therefore, as margins expand, as operating and leverage improves, you'll find a business that won't struggle with the profitability at scale. On top of that, the cash that we have on hand, $270 million at the end of the third quarter, is more than sufficient to get us there.
Okay. You kind of took the two of the last three questions I had here, but the EBITDA loss is rising this year versus 2022. So this should be the high-water mark as far as EBITDA loss.
Yeah, we should start to see some EBITDA improvement next year as, as we shift to a more disposable model. So that's fair.
And then, you know, you just did a sizable capital raise, really strong balance sheet now, but you're still burning through a lot. You know, you've got to build these robots. They're not cheap. How do we think about, you know, what the raise did for you in terms of that solidifying your balance sheet?
Yeah. So, we look at the raises. We have more than a sufficient buffer to get to profitability. I think when you look at our model, without being specific on numbers, we're not kind of scratching and clawing our way there. We have, you know, sufficient ability to absorb any unexpected or unusual expenses. You know, we do have debt outstanding on the balance sheet that starts to be paid back here in two to three years.
Yeah.
The cash on the balance sheet would allow for that as well. So again, we have more than sufficient cash with revenue growth, margin expansion, and OpEx leverage.
Got it. Is it a little bit more back-end loaded, though, as far as the buffer goes? Does it burn a little bit more here in the next, next year or so?
Yeah, I mean, I think it's fair. Each year, our cash burn should improve here moving forward.
Okay, got it. And Reza, in the last minute, would love just to hear... I mean, I know it's early, I get it, but just the prostate cancer opportunity for the, for the company, what is it that you guys saw where you're like: You know what? This is a real opportunity. We're going to go ahead and pursue this?
Yeah, it's very exciting. As you said, early, started by removing the contraindication of cancer in our BPH patients because, FDA, when we got approval, that was a contraindication. So we had to do some studies to show that by cutting the tissue, we were not spreading cancer.
Got it.
So we did some patients outside the US, and with that data, we showed to the FDA, and they removed that contraindication. Where we got excited, based on some of the signals, is going to see how does this treat cancer. So we have started two studies. One is continuation of the study that we did outside the US, which is patients who have BPH and cancer, and the second, patients who only have cancer. We are hoping maybe by AUA or EAU, we will have more information to share.
Okay.
Where we are excited about this is, you know, in the US, there are millions of men with cancer. Only a few hundred thousand decide to do a surgery or radiation about it. And number one reason, I mean, today, the side effects of these other procedures, whether it's on incontinence or erectile dysfunction. So what we are hoping, if our data show, is provide a much better safety profile.
Got it.
Last point, I know we're out of time here, is on that cancer initiative from a development standpoint. One of the nice aspects is the current design of the system itself, we believe, would be sufficient to do what we need to do to treat prostate cancer or add another indication. So, this is not a heavy lift from an R&D standpoint and doesn't deter us from that path to profitability that we just talked about.
Got it. Okay. Okay, I mean, I can keep going on and on, but we're out of time, so I'll have to cut it there.
Okay, thank you.
Thanks so much for...
Yeah, thank you very much.
Thanks for having us.