Good afternoon. I'm Josh Jennings from the TD Cowen Medical Devices team. We're going to start off the medical devices afternoon track on day two of the 44th annual TD Cowen Healthcare Conference with the executive members, members of the executive team from PROCEPT BioRobotics. We 're thrilled to have you guys here. We have Reza Zadno, President and CEO; Kevin Waters, Chief Financial Officer; and Matt Bacso, Vice President, Investor Relations. Gentlemen, thanks for spending time with us today on the East Coast.
Thanks for inviting me. Thank you.
Absolutely. It's been a remarkable year in 2023. I think it exhibited that there's significant demand in the urology community and from BPH patients for the AquaBeam system and the Aquablation treatment. The U.S. AquaBeam install base reached about 315, or actually 315 exiting 2023. And you guys are calling out 27 U.S. hospitals, that 2,700 U.S. hospitals that are performing BPH resective surgeries. So long runway for penetration. And I wanted to, we touched a little bit on this last night at dinner, but just to regroup here and talk about that 1,800, what we call low volume, or reference as low volume resective BPH, so there's not necessarily low volume hospitals, a lot of them are big hospitals. I want to just talk about that opportunity and how the penetration has evolved and the demand and sales in that channel evolved over the past 12, 18 months.
Yeah, so we definitely have been very pleasantly surprised since the IPO about the progress in those low- and mid-volume hospitals. It's important to know that the low- and mid-volume hospitals are not small hospitals. They see patients who go there; they do cancer and other urology procedures. The number one is the clinical outcomes. They are happy with the clinical outcomes. What they like about it is they can build a practice with the same technology. They can treat prostates from very small to very large that in the past they would refer these to other hospitals. Now they can keep those patients for themselves and build a good practice. And again, more importantly is the clinical outcomes in this. So today they count for about 30% of our accounts. Started with they would approach us. Some of them were key opinion leaders for cancer.
They wanted to enter BPH treatment and they wanted to use our technology. Now today we started, again, focusing on high volume centers because we wanted to focus our sales team because we were just starting on a clear strategy. As time evolved, as we saw these low and mid volume centers entering, showing interest, we approached them. The other good news about this is the ramp in these low and mid volume hospital is similar to high volume hospitals. What it shows is with this technology they can build a practice and grow it.
Excellent. And one of the things we've been thinking about is just the, I guess, competitive purchasing dynamics because if you have a high volume center that was used to getting referrals from these lower volume or non-BPH resective volume surgeries centers or hospitals, that referral channel gets shut off because these lower volume hospitals are purchasing an Aquabeam system, keeping those cases. Is that sparking any demand on the other side? Is there any of that competitive purchasing dynamic going on in certain regions or markets?
So, I mean, definitely we have not done a, I would say, thorough survey. But in the same territory where we sell to a high volume hospital or a low and mid volume hospital, when I personally ask the surgeons whether their volumes have gone down, they all say no, the volume. So that dynamic, if your question is, is it impacting, is it cannibalizing the, it's not. Because they see these patients. There are 12 million men who see a doctor for their BPH. So the patients are there and it doesn't have that impact. And they want to maintain some of those urologists in their hospitals. So it doesn't impact the utilization of other local hospitals.
Gotcha. And is it—but if there is a, say, high volume center where the referral center is now keeping those patients, they haven't adopted AquaBeam yet, is that sparking demand from them in their obviously recent cases?
Oh, definitely. I mean, in the sense that now some patients come to a hospital, they ask for the technology. And some of the urologists have a hospital. They want to use Aquablation. They go to another hospital. So that is also a driver. But what is important also in this hospital is because the hospital administrators, they see the efficiency of the AquaBeam in the sense that when they schedule a case for 60 minutes, it finishes at 60 minutes. So they can schedule patients. It brings more efficiency to an account.
Interesting. In terms of just geographic dispersion and some of the positives we've seen over the last two years, and if you go on our physician locator, you'll see this, where we go into a geographic area focused on a high volume hospital, very quickly you see within that geographic area the other local area hospitals adopting the technology. And this is analogous to other early medical device companies that you get this halo effect both with patients and then also surgeons. And I've heard from multiple administrators where they weren't considering buying a robot, but they hear from their surgeon that they're going to take their volume to a hospital that does have a robot, and then therefore they purchase. So there's a lot of room within a given geographic market for expansion. And what we can answer today is how much of that is cannibalization versus market expansion.
But there's definitely early anecdotes that the market's expanding. We hear from all our customers that volumes are increasing, even at centers that perhaps are losing some patients to other centers and now the system.
Great. And we'll circle back on that market expansion dynamic. I wanted to ask about the capital sales team. You guys are building that out deliberately. And I think one of the signals that there is significant demand out there is that repeatedly these capital reps are able to sell 5-6 systems a year on average. And so I guess two questions on the capital sales rep, just the pace of build out in 2024. I know you guys are going to continue to add reps. And then two, just the quality of the capital reps team and where you're recruiting these reps from and just has the quality or the veteran status of your capital rep sales team improved over the past couple of months?
Yeah. Let me start with quality because I actually think that's more important than quantity. I'm not going to name companies specifically, but we've been able to attract and retain capital reps from very reputable institutions that have a long history of selling capital. I think our commercial team build out and kind of that spirit within that commercial team, the tenure within the commercial team is longer today than it's ever been. So when I look at the average tenure of a rep today versus a year ago, it's significantly higher. And that leads directly to increases in productivity. So we've seen that. And the quality is fantastic. Reza and I were at our global sales meeting in January. And if you ever need a shot of adrenaline, just go to a capital sales meeting, right?
I mean, kind of the spread of the core of the group is strong and it's a great team. That's the quality. In terms of quantity, we will add capital reps at a very similar cadence in 2024 as we did in 2023, which allows for anywhere from 5-15 additional reps kind of sprinkled throughout the year in 2024. But at the same time, as we're getting more complex in our adoption curve and commercialization, the capital sales force isn't as black and white as it was, excuse me, two years ago. We've added a few layers to help support that team. One of those layers is we started to hire what are known as junior reps. These are folks that are probably earlier in their career than a seasoned capital rep. They're responsible for farming.
So they go out and kind of initiate contact with the surgeon. We've had some success there with adding that group. Those folks are not included in the 40 that we publicly report. And then we've also added, and we mentioned this on our call last week, a key accounts team. Think of that as a handful. And those folks are focused on primarily our IDN relationships and key accounts, working with IDN CEOs, CFOs, and have been doing this their whole career. And throughout my career, I've seen that be a nice tailwind to the business with adding those folks. All of these adds are for us to hopefully shorten the timeframe from 6-9 months that it currently takes to sell capital. Perhaps while our model isn't reliant on increases in productivity, perhaps those folks had even increased productivity to greater numbers than we see today.
With all of that said, we feel very comfortable with kind of the capital number that's out there this year. We feel good about the momentum we're seeing, both in terms of pricing and quantity.
Excellent. Thinking just about that productivity ramp, all those dynamics, thanks for sharing those. But one of the things we've been thinking about is just the awareness in the urology community, BPH patient communities, demand has continued to increase. Has that helped on capital rep productivity at all, or could that, or is it just there is this capital selling cycle that just takes some time to build those relationships, get in the door? I mean, there's going to be a ramp period for productivity for these reps at IN stride when they're added onto the team.
So it's a combination of both. Awareness is increasing both from the surgeon point of view, attending the conferences and seeing their colleagues. That's probably the best when they are talking to their colleagues using the technology. But patients are now becoming more aware of the so we don't do a direct-to-consumer advertising ourselves. Hospitals who purchase our robot, they do. So a combination of awareness from a surgeon and the patient, but also our sales team goes to those hospitals and we know all those hospitals. We know all those surgeons. So it's a combination of these two.
I think that awareness has manifested itself in our results. If I go back to when we first commercialized post-Medicare in 2021, you would typically see within a given account one surgeon adopt the technology. That would be the surgeon champion. That surgeon would adopt. They'd be the primary surgeon. They may do one or two cases their first day, new technology, a little unsure. But what we typically see now is multiple surgeons, two to three, multiple cases on a given day. And I attribute a lot of that to just where we're at in the adoption curve, which has to do with things like awareness and comfort and reproducibility that we see. So selling capital is never easy. But at the same time, if I was characterizing it today versus three years ago, we definitely have a larger right to win than we did.
Another big part of that, which is helpful, is reimbursement. When we first commercialized, we started in 2021 with only Medicare, essentially, which was 50% of the patient population. A lot of hospitals, they wouldn't even open the door until we had the large carriers in the U.S. on board. Now that we have the addition of United, which was kind of the last big domino to fall last year, the door is more open than it was two years ago, which helps that process as well.
Understood. Thanks for that. I wanted to ask just a question about potential enhancements to the AquaBeam system. I'm sure you guys have some R&D programs where you're going to advance that platform. Anything to share or if there's nothing you guys are talking about publicly, but how can the system be enhanced that could drive even stronger adoption from where it sits today?
I mean, we are a surgical robotic company and we are committed to continuously improving our technology. Our vision, we have always said we want to be standard of care. Like all good companies, we are continuously working on whether it's hardware or software. I can generally talk what areas they are. But from a timing point of view, I hope everyone appreciates we cannot provide timing on it until it's ready, both from a competitive point of view and also disrupting our current customers. So the areas that we are focusing definitely is making the system easier to use, continuous improvement on the software, introduction of AI as we see how different surgeons are planning, including those in the future versions. But it's really making the system easier, improve the workflow, software improvements, and AI. These are the improvements we are working on.
The great news about everything Reza just said is what he didn't say is we believe clinical outcomes today are where they need to be for us to become a standard of care. So we can improve on the margins, don't get me wrong, but we don't have to develop a system that improves the clinical outcomes to where we're at today to capture the market we need to capture.
Got it. Got it. I wanted to just ask about utilization. I mean, it was a phenomenal utilization increase year 2023 off of a strong 2022. You had, I think, 45% of the installed base exiting the year were new systems that were replaced within 2023. But yet you still increased utilization. I mean, that dynamic, I think everything we've already talked about is probably just awareness, more surgeons adopting or coming on board at each center and using the AquaBeam system. But I guess, I mean, that I think was a stronger performance than you guys expected internally. Any other details you can share about what's driving that utilization rate and then anything you can talk about for 2024?
Yeah. Thanks. Number one is definitely clinical outcomes. That's the biggest driver of utilization. On top of that, making the account more efficient. When I talk to the CFOs and physicians themselves, they're interested in clinical outcomes. When you talk to the administrators, they see the scheduling and efficiency of the account. Again, even a TURP, when an experienced surgeon may think it's going to happen in 30 minutes, 40 minutes, could go through 90 minutes, and the next patient is delayed. So they can effectively schedule these cases and make the account more productive. They don't need to have multiple algorithms to treat patients. Today, whether it's a large prostate or a complex prostate, whomever that day is operating can use the system. Whereas with other technologies, depending on the prostate size or shape, they have to wait for the right surgeon to do it.
And then the other drivers were the training programs we have put in place, we had the very high new surgeon added and also retention, high retention. These were the main drivers of the utilization.
I want to spend a little time just on that question, surgeons, because I think as everyone's aware, we report externally account-level utilization. We don't get surgeon-level utilization. With that said, we've dropped a few anecdotes over the last few quarters that are important when you're a high-growth medical device company. If you think of a funnel of surgeons, in our experience, you could mask underlying negative trends in the business by just having such a large funnel at the top. There's thousands of urologists in the U.S. that we're going after. Those numbers coming into the funnel continue to come in at record rates, which is important and great. But what's as important or you can argue even more important is once they're in the funnel, do they fall out of the funnel?
That's another metric that we track daily is kind of what are those surgeon retention rates? The surgeon that did a case in Q4, what's the likelihood they're going to do a case in Q1? That number has been north of 90%, which means we don't have what's referred to as a leaky bucket. Our utilization isn't being driven solely by new surgeons. It's existing surgeons doing more over time, which is a good place to be when you start looking at surgeon metrics.
Understood. Thank you. I wanted to talk about just the path to profitability and maybe start with gross margin. You guys gave guidance for 2024, 57%-59% range and probably some sequential improvement as we move through the year. Maybe some of the drivers of gross margin expansion and then how should investors think about the gross margin trajectory, where ultimately can gross margins hit with scale?
Yeah. So just as you asked about profitability. So we have not as a company been specific as to the when. With that said, what we have been specific about is we intend to operate this business with the cash we have on hand to get to profitability. And the $260 million we ended the year with, we think, is more than sufficient. It's the commitment we made to our shareholders. It's the commitment we made when we did the follow-on offering last year that this business with the cash on hand, we believe, has a runway to get to profitability. And if you look at the underlying metrics that will get us there, you didn't ask, but I'll start with it anyways, Josh. If you look at OPEX, I mean, our OPEX leverage today, we're growing revenue about 2x OPEX growth.
I think for initial early commercialization, that's much better than many other companies out there. In fact, I'd argue even in perpetuity, if we were to continue that, you can get to a business that's highly leverageable. I think we actually have room to improve off of where we're at today, which is about 1.9 times in 2024. So I'm saying all this because I think our OpEx model is already leverageable to support profitability. So then it really gets to your question around gross margins. If you believe the revenue ramp and you believe the gross margin ramp, you're going to find a business that's profitable. I think 2024 for us is a year where we're going to prove that out. 2022 and 2023 were foundation-building in our operations team.
We moved facilities to a facility that's 4 times the size that we're in today. It could support operations at much greater scale than we're at today. Our direct labor is starting to slow down in 2024. We're just at that point now at $200 million+ in revenue where we're starting to get some economies of scale out of the operations team. That's going to manifest itself in the gross margins in 2024, starting with the first quarter. We expect Q1 to be back to the 53%-55% range. Almost as important as the absolute number is showing a steady cadence upwards. That's what our plan entails in 2024, where we expect kind of marginal improvements each quarter.
If you start at 53-55 and you're going to end the year at 57-59 on a full-year basis, by just pure math, that means Q4 has to be north of 60%. And I do think exiting this year north of 60%, 55% revenue growth, leverageable OPEX, you carry that forward in a model and you find that this business won't struggle to get to profitability at scale.
That's helpful. Thanks for breaking that down. I wanted to touch on indication expansion opportunity in the prostate cancer. You guys talked about that earlier in the year or unveiled the development program and some of the clinical trials you guys are pursuing. AUA may see you guys may provide an update on the initiative. So may not want to front-run that. That's only a couple of weeks away or next month. Well, actually, it's early May. Sorry.
Almost.
Almost there. But maybe just talk high level. I think one of the questions is just on the efficacy and to start, just the unlocking of the contraindication of the current label for prostate cancer cases. And has that driven a boost in utilization at all, or you may not have the data to support that? And then what sparked this program and the initiation of the PRCT001 and PRCT002?
So when we received FDA approval, we could not treat patients who had cancer. So in order to remove that contraindication, we had to show by resecting prostate, we were not spreading cancer. So we conducted some studies outside the United States on patients who had BPH and cancer and showed that we were not spreading cancer. We submitted that to the FDA and the contraindication was removed. So today, if a patient has BPH and cancer, you can treat BPH. No claim on cancer. During that study, we saw good signals on cancer results. We decided to start two studies, PRCT 001, 100 patients who have BPH and cancer, Grade Group one, two, and three, and then PRCT 002, patients who only have cancer. That's 20 patients. So at AUA, we're going to give an update.
We're going to have some KOLs who will talk about the use of our technology. We're excited about this, again, we have to show that this is still early. We don't have the data to support. It starts with the safety profile because in the United States, there are many men with cancer who are sitting on the sidelines. And the reason they are not doing anything about their cancer in prostate is concerns about the sexual side effects of current treatment, sexual dysfunction, erectile dysfunction, and others. So what we had seen in our BPH, whether FDA trial or the real-world data, is the strong safety profile of our product that we have to show in the cancer. And then we have to show the efficacy on that.
So again, it's early, but the few patients we did gave us enough, how do you say it, encourage enough to start these studies.
Can we talk about the encouragement a little bit? Because I think it's important, right? The last thing as a company we ever intend to do is to lose focus kind of on the large BPH market opportunity in front of us. So this cancer initiative was customer-driven. We had customers come to us saying how well this technology, they think, could be suitable for cancer. And that's what really caused us to start exploring. And if you look at selling a robot, the majority of department chairs of urology, they're not BPH doctors. They're cancer doctors. And therefore, by introducing Aquabeam through BPH, we formed some pretty good relationships with the prominent cancer surgeons. And in fact, even just by announcing cancer has helped accelerate robot sales for BPH. It really has.
And again, I just wanted to point out, this isn't the company dreaming about what we could do next because we think the BPH opportunity is any smaller than we originally thought. This is an indication that there's a significant unmet need, customer-driven. And then the beauty of this for us is very minimal R&D investment to get what we need to get on our system to treat cancer. There'll be a few modifications, primarily around imaging, that would be required that today we could utilize a third party to do. But at the same time, the mechanism of action essentially requires no development. So this would all be incremental, and it's a clinical effort, not an R&D effort, and a clinical effort with a modality where we already have some good early evidence.
Thanks for that. Just the patient opportunity that we should be thinking about, I mean, it's all buckets, localized prostate cancer, potentially, depending on what you find with these investigations, but localized prostate cancer, patients with BPH and prostate cancer, and then also localized prostate cancer that would move on to a procedure or prostatectomy, but also these watchful waiting patients that are just sitting on the sidelines. That's a massive patient opportunity. You guys will slice and dice it as you figure out how you're going to attack it. Is that how investors are thinking about it right now?
Exactly. First of all, it's the same patient, same anatomy, same surgeon, same procedure. So the effort, as Kevin mentioned, is a clinical effort. And this is not like focal therapy because the current focal therapy, they just focus on the image that they see through MRI. It's not the whole gland removal. Where we believe will stand out is the strong safety profile. And if it has a strong safety profile, that is, we are hoping that's what attracts these patients who are sitting on the sideline, million of men in the U.S. sitting on the sideline to opt for treatment.
I mean, timing's important, right? This second indication is all about leveraging the existing installed base. Exiting 2024, our guidance would imply a number of around 500 systems in the U.S. If you just think of adding one, just one, incremental cancer treatment at assume the same ASP as BPH. I mean, you're talking about an incremental $20 million within an existing installed base. Whereas if we had embarked on this 3-4 years ago without kind of that critical mass and installed base, it wouldn't have been as meaningful. So I think that it just has all come together in a nice package, so to speak, over the last 12 months, this initiative.
I wanted to circle back on the strategic accounts team you mentioned. You guys have recently announced that you're built out to focus on these IDNs and secure. I know you guys have had success in IDN hospitals within IDNs. You're not expecting any bulk purchase orders from IDNs this year. But how does the strategic accounts team kind of help you penetrate those IDN networks and potentially populate more and more hospitals within those networks?
Take that one. So within the IDN network, when we talk about strategic IDNs, there's 17 large strategic IDNs that essentially represent about 25%-30% of all high-volume BPH hospitals. We've been fortunate, even prior to having a strategic account team, to have contracts with the majority of those IDNs. So that farming work has already been done. So when we think of the strategic account team, it's really now about execution. It's going into these IDNs, having the ability to navigate, which is typically a very complex environment in terms of getting things done, perhaps shortening the sales cycle. And we feel really good about kind of where we're at with IDNs. We are not reliant on bulk buys.
Just so everyone is clear, a bulk buy would mean that the corporate IDN is purchasing a certain number of systems, whereas in the past, the hospitals we've used our local funds. So we do expect at some point in the future to participate in bulk buys, but we haven't factored kind of that tailwind into our guidance for 2024.
Appreciate that. Well, I think that's a good place to stop here. Gentlemen, thank you guys so much.