Awesome. Yeah, well, I think we can get started. Thanks, everyone, for joining. My name is Mike Kratky. I'm our senior med tech analyst over here at Leerink, and I'm thrilled to be joined today by Procept CFO , Kevin Waters. Kevin, thanks very much for joining.
Great, thanks for having us. Appreciate it.
Yeah, sure thing. So, you know, it might be helpful just to kick us off with an overview of the company and some of the key upcoming milestones and maybe the setup for the rest of 2024.
Yeah, so I'll be brief, but Procept, in general, we sell a surgical robot to urologists. Our initial focus is treating men with BPH. I'm sure we'll talk a bit later. We're now also exploring opportunities in prostate cancer, but an initial surgical robot to treat BPH. Just a bit about the market, which I think is quite attractive. We're operating in a very large market, so we have a TAM of around $20 billion. The fact is the majority of men, if over 50 years, have a prevalence for BPH. With that said, our immediate opportunity is to cannibalize existing resective surgical techniques. We've pegged that opportunity at around $1 billion. Really exciting. We're focused on that. A little bit just about our history of the company.
We are a company that is rooted deep in clinical data. When we first commercialized, actually, pre-commercialization, we ran two FDA studies, one being our WATER study, the second being our WATER II study for larger prostates. In those studies, we were able to show superior safety and efficacy versus the current gold standard, which is a TURP. We're the only technology out there in BPH that has done a head-to-head randomized controlled study against TURP. That clinical data has really been well-received by the urology community and our customers, been very, very crucial to driving our success. Our company is rooted in clinical data. Just from a business standpoint, our 2024 guidance assumes we sell about 33,000 handpieces in the U.S.
That equates to about 10% market share in the surgical resective space, excuse me. So we have, we have a long, long runway in, in front of us in BPH. With that said, as I just mentioned earlier, we are starting to explore opportunities in prostate cancer. We're doing some early clinical work there, and we do think that that could be a nice kind of next application for the, for the business.
Understood. Yeah, I mean, a lot to be excited about. You know, maybe before we get into some of the company-specific developments happening this year, you know, would love to maybe just get your high-level thoughts on the overall commercial opportunity for BPH. You know, as you mentioned, when you look at the numbers, this is a massive market, huge addressable patient population. But, you know, how would you kinda characterize the unmet need that there is out there for patients? And do you get the sense that this is a market there are more and more patients that are now actively seeking treatment?
Yeah, so, we are, again, very fortunate to sell in a large and established market. So BPH in the U.S., there's 12 million men that are currently actively managed for BPH. However, there's only 400,000 surgical interventions, both resective and non-resective. And the reason we believe that is the case is because the current safety profile of most surgical alternatives have some very undesirable side effects, whether that's ED, ejaculatory dysfunction, even incontinence, for some of the treatment modalities out there. And then when you look on the other end of the spectrum with non-resective techniques, they do have a high degree of safety, a good safety profile, but efficacy and durability is a question mark with some of those other modalities.
We feel that we are able to kind of treat all sizes and shapes of prostates across the full spectrum. And again, our initial focus is to cannibalize those surgeries, but at the same time, we are well aware of the 12 million men that are being managed for BPH. There's roughly 7 million men on pharmaceuticals, with 1 million of those men falling out each year, that we think are great candidates for Aquablation. And we are hearing anecdotes from surgeons that they're treating patients today that wouldn't have been treated if Aquablation wasn't available. But at the same time, it's probably too early in the game to tell if we're expanding the market. But we are starting to see some early indicators there as well.
Yeah. Yeah, no, and that seems like it could be a huge white space at the end of the day. I mean, you know, you kinda highlighted a few of the advantages, but would love to dig in a little bit. You know, in terms of the demand that you've seen from Aquablation therapy, what have really been the key selling points and the key advantages, whether it's, you know, the clinical data or otherwise, that have allowed you to deliver such meaningful growth?
Yeah, so I do think it starts with the clinical data and being the only company out there that has head-to-head data against the gold standard, which has been around for 100 years. So nobody's been able to do that, and nobody will say that a TURP doesn't have high efficacy. And therefore, I think many companies have been very hesitant to go head-to-head against TURP due to their superior efficacy. But at the same time, we were able to show in that study superior efficacy and superior safety. So that, again, that's the backbone of this company, and I think the number one reason folks look at Aquablation is the clinical data. But then you get into other nuances with the procedure, where I also think there are significant advantages. You think of the learning curve.
The learning curve is extremely flat to learn Aquablation. All urologists are familiar with transrectal ultrasound, they're familiar with cystoscopy, so they're really just learning how to plan and treat for Aquablation. Then the results themselves are predictable, they're reproducible. You get the same results in the hands of an experienced surgeon, a new surgeon, and I think that, that resonates kinda very well with the physician community. Then just lastly, in the BPH surgical space, currently, there's no technology that can treat all sizes and shapes of prostates. Our ability to go into a hospital, standardize a treatment algorithm, have that hospital be able to treat all patients come through their door, I think is something very unique at a nice economic return to the hospital, and all, all of those factors are leading to pretty great adoption.
Got it. You know, just maybe to follow up on that point, you've kinda talked about this is something that can be used across the board in terms of the different prostate sizes, but how would you characterize the distribution of prostate sizes among the patients that are treated today with Aquablation?... You know, it seems like the sweet spot may be somewhere in that 40 milliliter -100 milliliter range based on some of the slides you presented. But, you know, is this a procedure that docs really do consider to be useful across all patients?
Yeah, it's, it's a good question. We, we have a slide in our investor deck that has a histogram of all the prostates we've treated since January of 2021, which is about 50,000 procedures. And what this distribution shows is that 70% of all prostates that we're treating are below 100 grams. And if you look at the market itself, the current resective market would suggest that roughly 70% of all resective procedures are below 100 grams. So we're capturing the majority of where the market is with the patients that we're treating, which would support our thesis that we have a technology that treats all sizes and, and shapes of prostates. We do think that's an accurate representation of the market. To answer your question, we, we are seeing surgeons standardizing their treatment algorithm across all sizes and shapes.
If I, if I look at our best-performing surgeons, they typically, if they're going to do a resective procedure, they're going to do Aquablation. If they're going to do a non-resective procedure, they may bring that patient to the ASC or to their office, and the non-resective option may be suitable in that physician's mind for smaller, less complex prostates. But when it gets to resective, we are seeing standardization across our surgeon group.
Understood. Yeah, no, that's something we'll keep an eye on as well. And then maybe just last one on this side. You know, are there certain patients where Aquablation either isn't typically considered the right approach or where surgeons believe it may just be less effective?
No, we haven't heard that. I mean, I think over time, what we're seeing is surgeons standardizing their treatment algorithms, particularly for all resective techniques. To be fair, you do have surgeons that perhaps may start treating certain patients with Aquablation. Maybe they're more comfortable treating smaller prostates. Maybe they don't have an enucleation or prostatectomy arm or their hospital for prostates greater than 100 grams, so Aquablation is the obvious choice there. But over time, we can say confidently that we are seeing utilization increase as that surgeon becomes more comfortable treating all different sizes and shapes.
Got it. Understood. You know, turning to the most recent quarterly results, you know, you just posted another beat and raise quarter, great commercial execution across the board. So would love to have you revisit some of the key drivers of this quarter's performance.
Yeah. So our business of the day is pretty simple. It's utilization, capital, and then to a lesser extent, international. So I could touch on all three of those dynamics in the first quarter that went well. Definitely pleased to see how we started the year. We're seeing durable and strong growth in the business. I'll start with utilization. As we've communicated in recent quarters, our success really is dependent on training new surgeons and retaining existing surgeons. And when we look at those two dynamics in the first quarter, they performed better than expectations. We still have surgeon retention rates greater than 90%. Surgeon retention means a surgeon that did a procedure in the fourth quarter also does a procedure in the first quarter.
When you have those rates over 90%, that leads to a very healthful, healthy and viable business. And those metrics were on point in the first quarter, in a quarter that is typically weak for elective procedures, we saw strength there. So utilization continues to trend in the right direction. It gives us confidence that we could continue to expand utilization sequentially throughout 2024, even though we're adding significant numbers to our installed base throughout the year, we expect utilization to expand. So things are going well on the utilization front. On the capital side, we are pleased with the first quarter. We made some commentary on our first quarter call that we do believe that the overall capital environment is improving compared to 6 months -12 months ago.
We have strengthened our relationships with our IDN partners. We're able to see some sales to our IDN partners that were funded at the corporate level. That's a proof point that the market seems to be stabilizing and improving, that we didn't see in prior years, where these large IDNs were not using corporate funds to buy capital equipment. So we started to see that in the first quarter. Also, I'd suggest that the tenure of our sales force on the capital side has been a nice tailwind for us. We have our most tenured capital team in the company's history.
It does take anywhere from 6 months -12 months to build out a territory, and I think we're starting to benefit from that in the first quarter, which again is typically for capital a seasonally weak quarter, that we're able to show some pretty significant growth. And then lastly, I did mention international. So international, while it's a small part of our business, roughly 10%, is overperforming, and it's overperforming, particularly in the United Kingdom. We've had some nice wins there. On the reimbursement side, we started to build a more robust direct presence, and we're starting to see some momentum in the U.K.. That was one of the catalysts for us raising our revenue guidance as well on the last call.
Got it. Yeah, I mean, all very encouraging. In terms of where the growth is really coming from today, is this something where Aquablation is really capturing disproportionate market share from certain alternative surgical approaches, or, you know, is this really just expanding the market?
Yeah, so, so today, I think we're comfortable saying we are taking share from TURP and laser procedures, which combined, as I mentioned before, account for 60%-70% of all of the resective procedures out there. Regarding market growth, it, it is difficult for us to determine what's cannibalization versus market growth. With all the success we've had, we're still only expected to be 10% of the surgical resective market in, in 2024. So a long runway in front of us to prove out that we're expanding the market. With that said, we are hearing anecdotally from surgeons that they're treating patients that they otherwise wouldn't have treated if Aquablation wasn't available.
Yeah, understood. You know, one point I'd love to maybe just circle back on is just on the IDNs. I mean, where do you stand on that today, and how meaningful of a contribution do you expect that to be in the next, you know, near term and beyond?
Yeah, so we have great relationships with IDNs, and I'd suggest we're much further along in those relationships in essentially year 4 of commercialization compared to other medical technologies that have come before us. So we account for IDNs into different buckets. The ones we're focused on are the 17 large strategic IDNs, which account for roughly 25% of all high-volume BPH surgery hospitals in the U.S. And we have contracts with corporate, with the majority, if not most, of those 17 large strategic IDNs. So those relationships are progressing. We hired a strategic accounts team in Q3 and Q4 of 2023 to capitalize on that opportunity, and the Q1 of 2024 was really the first quarter where we saw corporate funding being provided to Aquablation from these large IDNs. So I think it's an opportunity that we're going to be able to capitalize on.
We're not dependent on these relationships to achieve our 2024 numbers, but at the same time, it will help, right? You know, we feel good about where we're at in those relationships.
Yeah, understood. You know, you had another huge year of placements in 2023, you know, placed nearly 150 AquaBeam systems in the U.S.. You know, how have those early utilization metrics kind of tracked among the newer centers relative to some of your existing centers, where, you know, I'd imagine those were kind of largely focused in the high-volume centers?
Yeah. So a few things there. I mean, if you look at our installed base ending 2022, it was roughly 170 systems. Those collective accounts that are older, more aged, they do perform better than the corporate average. And that is kind of what we see, and it's why we have a high degree of conviction that we can grow utilization sequentially, even with this underlying dynamic of adding a significant number of new accounts. You referenced kind of the lower and medium-volume hospitals, and let me provide a little context there. So there's 2,700 hospitals in the U.S. that perform BPH surgery. Roughly 860 of those 2,700, we call high volume. They account for roughly 70% of all resective surgeries, and those are our initial targets.
However, at the same time, roughly 30% of our installed base are outside of those 860 hospitals, more in the low and medium-volume centers, that may be large hospitals, but prior to Aquablation, they weren't doing a lot of BPH. And so we've been very successful in starting to penetrate that segment as well. And what's interesting is that the utilization, those low and medium-volume centers, tends to not be any different than what we're seeing in our high-volume centers. And we attribute that to just how large the market is. I mean, the fact is, these low and medium-volume hospitals, it's not as if they weren't seeing patients; they just didn't have the ability to treat these patients. Perhaps they didn't have a specialist for large prostates. Perhaps they didn't have a laser procedure they wanted to offer.
So by bringing Aquablation to this practice, they can expand their practice, they could retain patients, they could retain surgeons. And I, I'd say that's been, I don't want to say a surprise, but just a nice tailwind to the business since going public, is our success in these low and medium-volume hospitals. And I also think it's a proof point that the market opportunity in the U.S., from a pure penetration standpoint, is probably larger than we initially thought when we started commercialization in 2021.
Yeah. Yeah, no, that's, that's a great kind of growth opportunity, it seems. And then, you know, maybe just to that point, it seems like another growth opportunity that you kind of alluded to earlier is just the pharma fallout patients. That these are ones where, you know, they haven't been adequately treated. There are, I think, over 1 million of them in the U.S., so, you know, you've kind of anecdotally talked about, you know, seeing a little bit of traction there, but, how accessible do you think that that patient population can ultimately be?
Yeah, and the short answer is very accessible. I mean, the fact is most patients that are on pharmaceuticals for BPH are already seeing a urologist. And so if this urologist can now have that conversation with the patient by offering them something that's safer than the legacy options that have currently been available, you know, we think these patients, that they are accessible. I mean, the fact is, even for resective legacy techniques, these are patients that more likely than not, have already tried and failed pharmaceuticals. So the urologist is familiar with that treatment paradigm, the patient's familiar with that journey.
But now what we're able to do is to give that patient an alternative once they come off drugs, to get a procedure that is safe, and that, we believe, has been the hold up with why there are so many men sitting on the sidelines.
Now, do you have any specific kind of commercial strategies or initiatives to be able to, you know, help drive penetration in those patients specifically?
We do very targeted advertising within markets that we're in, so we are not in a position where we think we need to do a broad-scale DTC campaign. With that said, we work very closely with our customers when we launch accounts in new markets to make sure that the community is aware of Aquablation. A lot of that is digital or through social media, but at the same time, we're not dependent on pulling in the drug dropout population to meet our near-term growth objectives. All we're dependent on is cannibalizing existing surgery that's been around for over a hundred years. With that said, the main factor we do believe is awareness and education.
As awareness spreads, the likelihood of somebody, you know, wanting to get Aquablation, obviously, that, that goes up, and, you know, we're doing what we can to influence that, but we're not dependent on that in the near term.
Got it. Understood. So, you know, another thing that's come up really since the 1Q call for us has been messaging on kind of the pilot ASC program, y ou know, you've talked about the idea that many of your reps aren't even incentivized to look at ASCs yet. So in that backdrop, what makes you think that this is another opportunity that can ultimately drive upside or just could be an opportunity for you?
Yeah, so we did mention on our Q1 call that we placed our first system in the U.S. to an ASC. And what gives us confidence is that this is surgeon-driven. So many surgeons are now asking us to go to the ASC, and we are being kind of pulled in that direction. And we do feel now, with our current protocol and with physician testimonials, that we are seeing many surgeons now send home their patients the same day, given the standardization of our postoperative hemostasis technique. And I think in that backdrop, we feel that it was the appropriate time to start to see what an ASC strategy could look like, but we're early. What I will say is going to the ASC, in no way it lessens our view of how large the hospital market is.
That's still our focus. The ASC, for us, would be a market expansion strategy. It would be getting the men who perhaps do not want to go to a hospital, perhaps the physician feels more comfortable operating in, in their own surgery center, and it'd be to get patients that otherwise wouldn't be treated. We do not think those 300,000 resective procedures are going away anytime soon, but we are aware of the 1 million men that drop out from pharmaceuticals every year that don't have a safe or effective treatment, and we think the ASC side of service perhaps could bring men in and expand the market.
Yeah, I mean, that's an exciting element of the story then. I guess, you know, the one question that I would have would be, you know, realize it's early days, but is your expectation that ASCs are going to be adequately incentivized to adopt an AquaBeam system when it, you know, hasn't necessarily been something that they've focused on historically?
Yeah. So I'll say that urologists are comfortable in an ASC environment. They... I mean, they currently perform non-resective procedures.
Yeah
... in an ASC environment, and historically, I think elective procedures in general, I would suggest urologists are familiar with bringing it to an ASC. So I don't think there's any type of mindset we need to change if we are going to go into an ASC. And then when you think about just the economics of an ASC, we do have established reimbursement today of approximately $6,600 in ASC. The surgeon payment in ASC is roughly equivalent to what they're paid in a hospital. So we don't think there's any type of economic barrier as well to move into an ASC. To be fair, capital tends to be tougher to sell in an ASC.
We're obviously aware of that, and, you know, as we get further along in our pilot program, perhaps we consider other type of placement alternatives for an ASC, but we're not in a position today to really have to worry about that or even talk about it.
Yeah, understood. You know, maybe just lastly, in terms of the 2024 guidance, you know, you've kind of outlined so many different growth drivers that are supporting the underlying, you know, strength of the business. You know, you've had pretty consistent beat and raise quarters recently, but as you look out to 2024, what would be the reason that you think you could kind of deliver upside beyond your current guidance range?
Yeah, I mean, I won't get into specific kind of upsides. I mean, I think our guidance stands on its own, but just as a matter of philosophy, since going public two years ago, I think we've been very disciplined in how we communicate and issue guidance to our shareholders, and... You know, I would suggest that's a big reason we've been rewarded over the last two years. And that philosophy hasn't changed, right? You know, our goal is to provide a guidance range we feel good about that allows and offers upside for consistent beats. Our business, again, at the end of the day, fairly simple. It's utilization, it's capital placements, and it's international. And, you know, we feel good about each of those metrics as we are in the middle of second quarter here.
Understood.
I appreciate I didn't answer your question.
Yeah. No, I get it. Had to try.
Good try.
Yeah. I mean, in terms of, maybe just kind of moving to the profitability side of it, I mean, this is something you, you've alluded to exiting this year with gross margins above 60%. You know, that would represent about 10 points on a year-over-year basis of a step-up for Q 2023. Is your expectation that 2024 is somewhat unique in your ability to drive such a pronounced increase in gross margin? Or, you know, as you scale the business, is it kind of feasible to think that you could be able to scale up to 70% relatively quickly from here?
Yeah. So I don't think 2024 is unique. I mean, we've been consistent in saying that our single biggest lever to grow and expand gross margins is our ability to absorb overhead expenses on higher revenues. We're not dependent on any type of outsourcing. We're not dependent on significant cost reductions, but what we are dependent on is revenue growth. And as long as our revenue growth continues to deliver at rates comparable to 2024, I think you should expect margin expansion to be very similar as we move forward as well. Now, at some point, there's going to be a natural ceiling here, right? I mean, I think we've alluded to that 70% as something that we think is tangible, but then to get s tart —really expanding above that, then I think you do have to start thinking about more creative strategies around our product to achieve those.
But again, we feel good about our margin profile. We're now in our new facility. It has the capacity to manufacture units for the foreseeable future, and we've built an infrastructure to support a business that could become the standard of care in urology, and that costs money initially. I think you're starting to see, as early as just the most recently completed quarter, our ability to start leveraging those investments moving forward, and we're really excited about that opportunity. I really think 2024 for us is gonna be a proof point for investors, particularly on gross margins, to show that this is a business that could get to sustainable profitability.
Yeah. No, that's really exciting, and certainly in that backdrop of becoming standard of care, that's, you know, an exciting concept. You know, maybe sticking with just the operating leverage, you know, how should investors be thinking about operating expense growth from here, you know, beyond 2024, or even just kind of through the year, in terms of how you think about the R&D and SG&A expenses?
Yeah, so our guidance this year does assume that revenue growth is approximately 60%. Operating expense growth is approximately 30%. So we're already, I would suggest, getting nice leverage on the OpEx line, and I'd also suggest that if that were not to improve in the future, with the margin expansion and revenue growth, you still have a business that gets to profitability. With that said, we do expect to leverage both R&D and sales and marketing in the near term here. R&D, for example, is roughly 30% of sales, right? We're a robotic company, we're innovative, and therefore, we think these investments are prudent. They're 99%+ focused on BPH, but at scale, that number is gonna come down, and that's gonna come down to a more reasonable level, somewhere in the 10%-15% range.
I don't think our business is ever a mid-to-high single-digit R&D company, but it's not 30, right? And so again, it'll probably settle somewhere in the 10%-15% range. On the SG&A side, there are a number of things we can do there as well. Remember, we have a rep in every U.S. case today. That most likely will not be the dynamic in perpetuity, so we'll start to see some leverage there. We're also gonna see some leverage out of our current utilization team, as we grow utilization, we don't need to add that same number of headcount.
Yeah, understood. And then, you know, I guess just strategically, how do you think about how much of a strategic priority getting to profitability is in the coming years?
Yeah, so we haven't given a timeline, but I can tell you this: internally, it's a very high priority. I mean, given our recurring revenue model, we do have a high degree of confidence this business will be profitable, and just the mentality of the company in 2024 is operating at a much more mature level than previously. And what I mean by that is, in 2021, 2022, and even in 2023, we needed to prove out the revenue model. We needed to show folks that we have a very clear path to become the standard of care, and I would say profitability was secondary. And at this point, I think revenue growth is still paramount, but now we need to start to show investors that we can create and grow a viable and sustainable standalone business. So it's top of mind for everybody.
Got it. Yeah, no, that's helpful. You know, maybe in the last couple minutes, you know, one element of the story that I think is pretty exciting, it's maybe early days, is just gonna be the prostate cancer angle. You know, you had an exciting presentation at AUA a couple of weeks ago. What were some of the key takeaways that you'd highlight for investors coming out of that event?
Yeah, so AUA, first, I'll say I want to start with BPH. I mean, I've been here now over five years, and just the general market acceptance and awareness of BPH, it was phenomenal to see at AUA. We had an evening of poster presentations that were not influenced by PROCEPT, where the majority were focused on Aquablation. So there was definitely a buzz around BPH. But as you have alluded to, I think our expansion into prostate cancer was also something that was, you know, very exciting to see at AUA from the physician community. And I mean, the fact is, everybody realizes with prostate cancer, the current alternatives out there, they're either not effective or they're very unsafe, and therefore, this leads to millions of men, millions of men diagnosed with cancer that sit on the sidelines not doing anything.
I mean, active surveillance is the current protocol for low-grade group patients in prostate cancer, and we do think with Aquablation, with further data, we're gonna have a unique opportunity to take millions of men that currently aren't doing anything and living with cancer and give them a safe and effective treatment for their cancer to where they don't have to live with the fear of having cancer inside of their body. So it's exciting. If I think of the urology community in general, most chairs of urology departments tend to focus on cancer. So believe it or not, this has actually given us a leg up in BPH and our ability, the receptivity around our BPH procedure now, I'd say, is higher, given that we're looking at another application, and we're excited, but it's early.
Understood. You know, you maybe alluded to the data, what we could see next. I guess with our last 30 seconds, I'd love to just hear about, you know, next key data readouts or potential label expansion, how you're thinking about the timing there.
Yeah, so we, we've talked that no later than AUA next year, which would be early May of 2025, we think we'll be in a position to provide the market with an update as to kind of how both studies are going. And we plan to do that next year. At the same time, we wouldn't have embarked on these studies if we didn't have confidence and conviction in some of our earlier work that we've done that show we do have a viable technology to treat prostate cancer.
Understood. Well, I think we're up on time, but Kevin, thanks again for joining us. Really appreciate it.
Yeah, I appreciate you having us, and thank you very much.
Thank you.
Take care.