We're going to get started. Next fireside here, we have PROCEPT BioRobotics. Really fortunate to have Kevin Waters, the CFO, and Matt Bacso, also joining us from Investor Relations. Welcome to both of you. Thanks for attending conferences here.
Thanks. Thanks for having us. Appreciate it.
So I've been starting with most of the firesides here, kind of maybe a little bigger picture. I guess, Kevin, compared to the last two years, I just feel like you guys have more visibility into the business as you headed into 2024. It's only one quarter in, but so far the first quarter, you've beat and raised already. And the way you're talking about the business, you gave sequentially improved utilization each quarter. You sound very confident in the split of first half, second half placements. I guess, what—and tell me if I'm misreading it—but what's giving you the improved predictability in the business as we kind of head into 2024 versus, say, what existed heading into 2023? And help us think of where, as you constructed your guidance, where you have the most confidence, where is there potentially some conservatism, and what could drive upside?
Yeah, it's a fair question, right? I think it is accurate to state, compared to two years ago, I think we do have a greater degree of visibility into the business. I really just think it's a reflection of where we're at from a commercial standpoint. Two years ago, I think we were still proving that we had a viable technology that could become the standard of care in the BPH space. We were heavily dependent on capital sales two years ago to a much greater extent than we are today. I'd suggest that's a more difficult part of the business to predict than utilization. As we've shifted to a more consumable model in the US, I think that visibility has improved on the utilization side.
While at the same time, we also have much more experience now with the capital part of the business, managing the funnel, understanding how long it takes a deal to move through the funnel. And we're more aware of kind of the pitfalls as to why deals don't get closed in a timely manner. And we've been able to address that. An example there is we've hired a Strategic Accounts Team to manage the IDN and relationships that brings a certain level of predictability and visibility into the business. But I agree, I do think our visibility is much improved compared to two years ago with where we're at today. Regarding our guidance for 2024, I think we have shown a very consistent history of being able to beat and raise on a quarterly basis. That philosophy really hasn't changed as we moved into this year.
Our guidance does imply almost 60% growth on the top line. But then importantly, we've also started to provide, I would say, greater visibility and metrics around things like gross margin and things like operating expense leverage ratios. And we feel really good about the gross margin expansion we saw not only in the first quarter, but our ability to continue to do that throughout the year and to continue to demonstrate, I would suggest, is really good operating expense leverage ratio for a company that's growing almost 60%.
Yeah. So just maybe going back to the strategic accounts team and the capital piece of the business, what exactly does this strategic accounts team do for you? Why is it in place now? How long had you been putting it into place? And I guess, can you be a little bit more granular on how that provides you visibility? Is it the conversion of the funnel? Is it the multi-system orders, and you just know when they're coming now and timing?
Yeah. So I think why now is important. So we exited 2023 with contracts with almost all of the large strategic IDNs that are in the US. And we put these strategic IDNs into 17 different accounts is how we quantify these folks. So we felt, given that we now have contracts with the majority of these, we felt putting a strategic accounts team in place to capitalize on this opportunity was the right time. I think also the macro environment is improved from six to nine months ago where we did not see large strategic IDNs dedicating capital at the corporate level for funds. And therefore, it didn't make a lot of sense to make big investments there in 2023. So the timing was definitely part of our thinking. In prior quarters, we did see IDN purchases, but these were done more at the local level.
So the Strategic Accounts Team's primary focus is more focused on the penetration side of the business. So it's really shepherding that deal through the funnel in a more timely and predictable manner. While our reps do a great job working bottoms up, starting with the physician, the Strategic Accounts Team is not only working bottoms up, but they're also working tops down. So these are folks that have great experience in working with IDN CEOs and CFOs. They can demonstrate and verbalize the value proposition in a much more succinct manner than I would say most folks. And it's just a specialty that's been helpful to add to our commercial team.
I guess, is it the timeline to convert the funnel that improves with that group in place? And again, having all of those, having the corporate level kind of red tape kind of taken care of in advance, is it that there are multi-system orders that occur that provides that level of visibility? So you know the number, you just don't know the timing. I'm trying to just understand.
Yeah. It's all of the above, right? I mean, it definitely helps timelines and predictability and, again, move things through the funnel. But longer term, the goal of this team is more of the latter, what you described, which is facilitating multi-system orders with large strategic IDNs known as bulk buys, where we can head into a year knowing that this IDN is going to buy X robotic systems. We don't have that, and we haven't had that to date. And I do think that is where we see this team adding the most value longer term, is getting these large IDNs to commit to bulk buys, showing those administrators how our robotic system is operating within their other facilities, and ultimately showing that it can drive volume and surgeon retention within their hospital network.
We saw utilization accelerate. I think what it grew just under 15% the first quarter. Is that right?
Mid-single digits.
Sorry. Mid-single digit rate. What are you seeing now in your ability to kind of guide to sequential improvement every quarter?
Yeah, it's a good question. So the dynamic I think you're alluding to is we do have significant additions to our installed base on a quarterly basis. And those significant additions are definitely a natural drag on utilization. It takes an account anywhere from 3-4 quarters to move up the utilization curve to be performing at the corporate average. So therefore, you have this phenomenon where you have new accounts dragging down the corporate average. But what we're seeing today with new accounts is they're actually moving up the curve faster than accounts we commercialized 2-3 years ago. And I think that's really, 1, it's a factor of just where we're at with general awareness and acceptance of our technology. I think we're moving kind of past the early innovator phase into more mainstream type of physicians that feel more comfortable doing more procedures initially.
We're also seeing accounts now typically start with more than one surgeon. So when we started commercialization back in 2020, in most accounts, we would have one surgeon. And that surgeon would be the surgeon champion. He or she would have to get their partners to be aware of the technology. Whereas today, it's very rare for us to launch an account with one surgeon. And by doing that, we're obviously influencing overall account utilization such that they're not this natural headwind. So that's point one. Point two is we are still seeing, even in our oldest cohorts, sequential increases in utilization. So we haven't hit a natural ceiling, so to speak, in our initial accounts. And that's really just a testament to how large the market is, how many patients there are to treat, and just what an unmet need there is in the BPH resective space.
They're not all coming up the curve relatively equally, are they? The different buckets, is it pretty even with the growth coming from each one of the classes of 2018?
In general, it does take 3-4 quarters to get to that corporate average, which today is around 7 procedures per month per account. Within those different cohorts, there is a high degree of variability, which is as expected. In general, the curve is up and to the right, and there's not a natural flattening of utilization, even in the oldest cohorts.
Got it. Even for your high volume centers, is there a point at which it starts to plateau or that you hit a friction level?
It varies from account to account. I mean, I think we still feel good about our ability to expand utilization. I mean, the fact is our corporate average is 7. Our average high volume account does around 17 resective procedures per month. So while we're.
Total.
Total resective. Correct. So while we're happy and pleased with where we're at, I still think there's plenty of room to continue to move, both in adding capacity to existing surgeons and then also adding new surgeons at existing accounts. And we're still seeing that. We have cohorts now that are 3, 4 years old where we're still picking up new surgeons at those accounts. And that's not surprising. It's not different than any other new technologies where you typically start with an early innovator within an account. It takes their partner just more time to get comfortable with the technology.
Just going back to the capital side and the IDN talk track for a minute, you had mentioned that the goal is to get these bulk orders or bulk buying, if you will. You haven't seen that yet. So your guidance presumably embeds zero contribution from any kind of bulk.
Correct. So bulk buys, I'm going to break it down a little bit for you. So in the first quarter, we did see corporate funding from large IDNs by AquaBeam Robotic Systems. Now, those deals were already in our funnel. So we were working those deals already at the local level, but we did see corporate step in and fund those deals. And we do expect that to continue throughout 2024. What's not in our guidance for 2024 are bulk buys where the corporate would allocate resources to give a fixed number of robots on a predetermined timeline. And that's ultimately where we would like the business to go.
Like a quota.
Like a quota, right? So we would know at the beginning of 2025, for example, how many robots large IDN X would buy. And ultimately, that's the goal. It's the goal, but it's not necessary to meet our growth objectives. I would even suggest in the next two to three years.
Maybe the way to think about it is that just makes you more confident with the corporate dollars behind it and what the funnel conversion looked like. On the other side, when you do get those orders upfront, if you will, that also will maybe give you line of sight to a minimum number of placements.
Correct. I think that's right. I think it's also just a testament to how our technology has been performing in these hospitals up to this point, right? I mean, the reality is we have been in all of these large IDN facilities, and corporate has definitely been keeping an eye on how are those programs doing? Are they expanding patient volumes? Are they retaining surgeons? I think we're at the point now where we've proved that out in many instances, and now corporate's starting to get involved.
Got it. Would you press release or would an IDN press release a bulk order?
I don't know if they necessarily press release a bulk order. I do think, though, there's multiple press releases out there from these local IDNs where they've implemented our technology. I don't want to name any IDNs specifically, but I mean, you could go out there and find them where they're definitely promoting getting our robot within their hospital. We see that quite frequently.
Got it. And then back to the utilization discussion. So 7 on average per month per account. 17 is what a high volume account maybe is doing on a monthly basis. I guess, bridging that gap, 7-17, is there a percentage of those that are kind of unattainable, whether it's because site of care, procedures being done in the ASC, or is that all fully available to you?
Those 17, to be clear, are resective procedures being performed at that hospital, not at an ASC. We can talk about ASC separately, but we believe we have a very clear pathway to become the standard of care in that surgical resective space. The reality is our utilization isn't going to be 17 at every hospital, but we do think we have the opportunity, given our ability to treat all sizes and shapes of prostates, to become the lion's share of market share within a given hospital.
Got it. Well, since I brought it up, you did your first, I think, ASC install, right?
Correct.
Talk a little bit about the strategy there. How important is that? And where does and how does the ASC either help you get penetration faster and deeper into the resective TAM, or does it expand?
Yeah. So I want to be really clear. Our primary commercial strategy remains focused on penetrating high volume BPH hospitals and partnering with the thousands of urologists who perform these resective procedures in a hospital. And we are not dependent on market expansion to meet our growth objectives in the next 2-3 years. And that really is what the ASC is. It is a market expansion strategy. It is giving the physicians and patients a different site of service to expand their practice and treat patients that perhaps otherwise wouldn't be treated. And we do hear that. We hear from physicians that treat patients that would not want to get treated in the hospital setting, and therefore, they're asking us to move to the ASC. And what we're monitoring in this pilot program is to make sure that is what's actually occurring, right?
So it's important for us that in this one ASC center that's affiliated with a hospital, that we don't see hospital volumes go down such that we know that the ASC volumes are incremental, both to the physician and PROCEPT. So this is about market expansion. It's about taking 1 million men off the sidelines who are forgoing treatment and giving them a site of service that perhaps will be a catalyst for them to get a procedure.
I guess what I'm trying to understand is there's, what, 15% roughly of resective procedures are done in the ASC?
10%.
Or 10?
10%. So about 30,000 procedures a year resective are done in an ASC.
Okay. So it sounds like that's kind of off-limits to you now. Or if you're not doing it consistently in the ASC, that is not the part of the market that you're going after specifically. I guess why wouldn't that be the initial kind of ASC target, and then you go and become TAM expansion?
Yeah, I think it could be, right, in reality. But 30,000, it's not a lot of procedures at the end of the day, right? And I don't think we would be embarking on this strategy if we felt only 30,000 procedures were available to us. I mean, the reality is we will cannibalize some of those resective procedures that are being done today in an ASC by us going into the ASC. And to me, that's a given, but that's not why we're doing this. We're doing this to expand the market way beyond the 30,000 procedures that are done today because just how large the patient population is out there that needs to be treated.
You're confident that the access to the Aquablation and the ASC is probably the main missing link or one of them to accelerating your ability to tap into the watchful waiting?
Yeah, I think that's right. But it's also why we're running the pilot, right? I mean, I can't say definitively today what the outcome's going to be. And it's why we're piloting the program. We're very fortunate that our growth isn't dependent on this market expansion strategy. So this could be another leg of the stool, so to speak, to continue to have outsized growth for the foreseeable future. But it's a pilot. It's early. We kind of have one quarter behind us, and it's promising, I'll say that. I mean, the volumes look fantastic, but at the same time, it's early.
It's early. Since we're on kind of TAM expansion areas, cancer is an area where you're starting to run some clinical work for indication expansion. It sounds like you already are going to be able to tap into some of the cancer overlap with BPH. So talk a little bit about your cancer strategy and when you think we can see that actually draw more channel expansion.
Yeah. So we're very excited, both internally and externally. I think the enthusiasm we heard at AUA from our physician partners, from some of the leading cancer doctors in the world that are supporting our study are an indicator of how excited everybody is. Because for as bad as the safety profile is for current resective procedures in BPH, they're even worse with cancer, right? You start to introduce higher rates of incontinence and erectile dysfunction. And we do think with our current design, we're going to compete very well on the safety profile for prostate cancer. So we've designed two studies. We've called them PRCT001 and PRCT002. These are designed to analyze the safety and effectiveness of Aquablation therapy for men with prostate cancer. These two studies, we have said we think we'll be able to report back to the market no later than AUA of 2025.
But again, we do think this could be another indication where folks can make our robot more highly utilized. It's very complementary. There's not a lot of R&D work that needs to be performed, if at all, in terms of the design of our robot system. The early indicators are positive. We presented data at AUA where we showed the first five patients we treated with cancer looked very good post-operatively with a very nice safety profile that looked very similar to the safety profile of a BPH patient. That's point one. I think the other thing we are hearing in the market is this is actually benefiting our BPH business to a certain extent, right? When you talk to hospital administrators, they typically chair cancer departments. The chair of urology is typically a cancer doctor.
By us kind of getting into this space, it really validates kind of the staying power of our robot and the fact that we are working on other things to benefit kind of the urology department as a whole. We're excited about it. Again, it's early, but the early clinical results look really good.
At your AUA event for analysts, I think you had mentioned the unmet need is kind of this near total surgery kind of area.
Correct.
We estimated that the initial incidence on an annual market on an incidence basis is somewhere in the $500 million+. Obviously, you start getting into prevalence, it can get much larger. But just as we tried to quantify where this could go if you had some success in the initial indications, is that ballpark?
Yeah. I mean, we're looking to almost create a new category in prostate cancer where we're not a HIFU treatment. We're not a robotic prostatectomy. But we do think for Grade Group 1, 2, and 3 patients, to your point, there's millions of men that are sitting on the sideline living with cancer that are not doing anything because of the inferior safety outcomes that are available with current alternatives. And when we think about commercialization, it's too early to develop a commercial strategy until we get on the other side of the clinical data. But we do think this could be additive and true market expansion where you take men that are living with the disease inside their body that aren't doing anything that can now have a safe and effective treatment.
Regarding market numbers, I mean, there's 3 million men that sit on the sidelines for prostate cancer each year, and there's only 100,000 interventions. We believe the biggest reason for that is because the current safety profile of surgical alternatives, they're not good.
Yeah. I guess we got to the 500 million more, even whittling that down to the overlap, the Venn diagram of those with BPH and low to intermediate.
Right. And that's about a third of patients, right, are in that Venn diagram that we presented at AUA. And what's exciting for us is at the time you get on the other side of 2024, we'll have 500+ systems in the U.S. And this is leveraging our installed base that we already have out there to do additional procedures that we think could contribute materially to the top line of the company.
Yeah. Maybe switching gears to the profitability side, because I think that's probably one of the other areas where the visibility has really gotten way stronger than it had been over the last two years. Can you talk about, I mean, you did, I think your revenue growth to OpEx growth ratio, which is what we've been tracking. I think it was 2x, right?
Correct.
In Q1, how should we think of, I mean, that seems like it was running a little hot relative to even what you had said you would be on track to do. But I guess how should we think of that ratio as we move through the rest of the year or what it could look like as a jump-off point for 2024?
I think right now, with where we're at, the fact that we are already demonstrating revenue growth, that essentially 2x operating expense growth is a great place to be, right? And we're not prepared today to kind of give anything past 2024. But what I will say is R&D spend as a percent of sales today is 30%. That settles somewhere in the 10%-15% range in the future. On the SG&A side, there's a number of things we can do as well. We have a rep in every U.S. case today. This probably doesn't need to be the dynamic in perpetuity. So we'll start to get some leverage there. And as we grow utilization, that also inherently provides a lot of leverage to the sales and marketing line as we don't need to hire more reps to cover that one account.
So we feel good about kind of that OpEx leverage ratio. But you also have to look at gross margin expansion for our business. And today, the biggest variable to expanding gross margins, excuse me, is absorbing overhead expenses and growing our revenue. And I think you're starting to see that in Q1 where we were able to expand margins significantly. Our guidance does imply a Q4 margin in the low 60% range. And I think we're going to have multiple proof points throughout the year with high revenue growth, significant margin expansion. Even if we were to not improve that OpEx leverage ratio at all from 2 to 1, you find a business that won't struggle to get to profitability.
With just the gross margin improvement alone?
Correct.
Yeah. And just pathway to 70% over time. How do we think about that? Is there a revenue level, a mix of disposables?
Yeah. Again, we're not so dependent on mix. We're just more dependent on overall revenue growth. I think margin expansion going forward is going to look very similar to what we're experiencing in 2024.
On a year-over-year basis?
Correct.
Okay. Well, that's considerable. I mean, you're on track to do at least almost 60 basis, 600 basis points of gross margin improvement.
Again, the biggest variable to gross margins is just top line growth.
Great. Well, congrats on all the progress and keep it up.
Great. Appreciate it. Thanks for having us. Thank you.