All right, we can kick things off.
Awesome. All right, thank you all for joining. My name's Mike Kratky, and I'm the Senior MedTech Analyst here at Leerink. Today, I'm really pleased to be joined by PROCEPT CFO Kevin Waters. Kevin, thanks for joining.
Good, thanks for having us. Appreciate it, Mike.
Awesome. I mean, we can just jump right into questions, but probably a good place to start is on the fourth quarter. You reported a Q4 a few weeks back, some largely expected pressure from the impact of saline shortages. Would love if you could just revisit that and some of the other key drivers for the quarter's performance in more detail and how Q1 performance has progressed versus your initial expectations so far.
Yeah, we did spend quite a bit of time on our call going through the saline impact in the fourth quarter. We did estimate up to a 2,000 procedure shortfall due to the saline shortage. We provide a range, 1,000-2,000 procedures. We did a very thorough analysis at the end of the quarter, both qualitatively. We surveyed accounts. We surveyed our reps. Remember, we're in every case. We do have a high degree of visibility in the lost procedures just through that metric. We also did want to look at it quantitatively. We did an analysis as to what our Q4 normal ordering patterns would be. We understand seasonality has a certain impact. That is where we saw up to 2,000 procedures.
The third part of that equation, this is important, is we lost growth from not launching as many accounts in the fourth quarter as we typically would. For example, the sales we made in the third quarter of our robotic systems, the majority of those were not even installed in the fourth quarter due to the saline shortage. We lost some growth there as well. Regarding Q1, and this is where the news turns a little bit, we did see the impact linger into January. January was impacted. However, we had a very strong February. Not only did we have a strong February, but it feels like we're back to normal sitting here now in mid-March. We have a high degree of visibility into our procedures. Procedures look strong on a per-account basis. We're also launching a record number of accounts in the first quarter.
This is really going to be the first quarter that I think we're going to get to see the momentum from launching our new robotic system in the first quarter here.
Fantastic. After another solid year of 30% placement growth with 190 systems, can you provide a sense of where the growth is coming from in terms of is aquablation capturing disproportionate market share from certain alternative surgical procedures, or is the underlying market growing enough to support growth across multiple surgical procedure types?
Yeah, so we're really generating growth from both aspects of our business in 2025. I mean, first is capital. And we're ending 2024 with an install base of 500 systems. We plan to sell another 210, 200-plus systems here in 2025. And that growth is being driven by both existing high-volume receptive BPH hospitals, which is fantastic to see, but we're also seeing low and medium-volume hospitals that previously were not doing a lot of receptive surgery, adopting our technology, contributing to growth. The nice aspect with those low and medium-volume hospitals is we're not seeing really any differences in utilization on those systems. In fact, they're very similar to the profile of a high-volume account. So we're definitely seeing growth there on capital. Regarding procedural market shifts, that's been very consistent. I mean, we continue to see 70% of our procedures being performed on prostates, 100 grams or less.
The other 30% are procedures where there's just not great alternatives. You get over 100 grams, the treatment modalities available in BPH have some very serious adverse safety profile consequences. Therefore, we're the obvious choice there. Regarding future market dynamics, we do believe we are positioned to become the standard of care in the receptive space and ultimately expand the market.
Great. Yeah, super helpful. Maybe just sticking with the competitive landscape on that side, it sounds like one of your competitors recently announced their intention to separate their urology business alongside a challenging fourth quarter print. Any thoughts on how this could impact the market dynamics and provide incremental opportunities for you to take share?
Yeah, I mean, I'm not going to comment specifically on kind of any competitive companies and what they're doing internally. Our focus remains on cannibalizing existing resective surgeries. Those are dominated by TURP and the GreenLight Laser. For the next 12 to 24 months, our strategy is to make significant inroads there on a competitive standpoint.
Understood. Going back to utilization, one thing that I know we and others have tried to parse out a little bit is just the evolution of the low versus what you've characterized as the high-volume centers historically. How do you think about growth from here in terms of driving adoption and utilization among those different types of accounts?
Yeah, I mean, we believe with what we're seeing that the 2,700 hospitals in the U.S. that do resective BPH surgery are great targets to launch an aquablation program. Back to my earlier comment, we're really not seeing any differences in procedures or procedure growth in these low and medium-volume hospitals. The reality is these low and medium-volume resective hospitals, you shouldn't think of them as small hospitals. The reality is they just didn't have a great option to treat their BPH patients. Therefore, they were referring out their BPH patients. With aquablation, this is a great way to retain those patients and to retain surgeons that perhaps would have went and practiced somewhere else.
Understood. Maybe turning to the 2025 guidance, you're guiding to 210 systems in the U.S. with 40% revenue growth year over year in 2025. How should we be thinking about the building blocks of growth within that, particularly around the price of the HYDROS system and the handpiece revenue as that flows through to the premium versus the legacy AQUABEAM?
Yeah, so regarding growth drivers, our business is pretty simple. We sell capital. We launch accounts. We train surgeons. We drive utilization. Each one of those has different levers that we think we can help influence the outcome. When you think of capital, our guide does imply 10% unit growth in 2025. This would suggest us exiting the U.S. market north of 700 systems installed. That is a 42% increase in our installed base year over year. It's that growth in our installed base that really gives us a lot of conviction in our ability to drive procedures. New accounts have an outsized impact to procedure growth. That's going to continue for the foreseeable future, which is why it's so important to continue to focus on greenfield opportunities, given how underpenetrated we still are in the U.S.
To your question regarding capital pricing, definitely, it's up modestly since we launched HYDROS. We have two quarters now where ASP has been in the $440-$460 range. Our guidance does imply something in the $430-$440 range for 2025. That is not reflective of any shift we see in customer ordering patterns. It's really just sticking with our philosophy of being conservative on price, making sure that we don't limit ourselves in our ability to sell systems because of ASPs. At the end of the day, it's much more important to get the system placed in a timely manner than to get another $10,000-$20,000 on ASP. Directionally, we still feel very good about HYDROS' average selling prices.
Understood. Why don't we jump in on HYDROS then? 2025, full first year of launch, important year as you continue your rollout. For those new to the story, can you just provide a high-level overview or what you've heard so far in terms of your account feedback on the differentiation that HYDROS brings to the table versus AQUABEAM?
Yeah, so it's early. It's important to remember the majority of procedures performed to date commercially are still on our AQUABEAM legacy system. That will start to shift as we launch more HYDROS accounts in the first and second quarter. With that said, the initial feedback on HYDROS from customers has been very encouraging. I'd say particularly around the First Assist AI feature. Previously, the treatment algorithm did not have any ability to help the surgeon interpret ultrasound and help plan a procedure. We now see over 95% of our HYDROS procedures commercially using the First Assist AI feature, which is great. I think that would be the number one positive point of feedback that we're getting from surgeons there. We're also getting other feedback from folks within the hospital system, both hospital staff.
When you think of nursing staff and setting up our system and the workflow around HYDROS, that is much more intuitive than the current AQUABEAM system. You're seeing now hospitals that perhaps had to have dedicated Aquablation nursing staff being able to parse that out to other folks within the hospital, which ultimately should drive more procedures. We will have to wait and see. We do not have any evidence of that yet. Instinctively, you would think that would drive more procedures. That is great feedback from the staff. When you talk to a hospital CFO, I think the ROI on HYDROS, even though it is at a higher price, it now comes with a single-use scope that saves reprocessing costs. It is anywhere from $100-$200 per procedure.
I think HYDROS also has the ability to attract multiple surgeons within a hospital where AQUABEAM, given it was a first-generation device, was never meant to be the robotic platform for mass adoption. I think the hospital administration is now viewing HYDROS as that product.
Got it. Maybe to jump back to that quickly. I mean, you mentioned the price range that your guidance implies. In terms of what that means for purchasing patterns or as you have optionality in some of the larger IDN customers, how are you thinking about how that could play into your longer-term pricing strategy or even just your ASP for this year?
Yeah, so just to remind everyone, our primary goal is to maintain flexibility to sell capital to ultimately do procedures. We want to get a fair price for HYDROS, but we just want to maintain that flexibility, which is one of the reasons we guided to $430,000-$440,000 on the system. That's going to continue to be variable quarter to quarter. I don't think the large IDN dynamic has material downward pricing pressure. I think there's definitely more room over time to go up than down on the HYDROS robotic system, particularly as we think about adding new features and continuing to innovate on that platform. Regarding HYDROS handpiece average selling prices, to get to the second point of your question, they are higher than the current AquaBeam price. But remember, we're launching the majority of HYDROS accounts in 2025.
While 100% or 95-plus % of our account sales in 2025 will be HYDROS, 80% of our procedures will still be on the legacy system. Even though we are getting an uplift with pricing, we're not really going to see that manifest itself to higher average selling prices on the consumable really until 2026. Think of that increase in the low single digits.
Is that low single-digit increase, is that for 2026 on kind of the apples-to-apples basis, or is that for this year maybe a low single digit?
No, I would suggest that that's more of a 2026. We guided a relatively flat ASPs on our handpiece pricing in 2025.
Understood. Super helpful. Maybe just from a manufacturing and CapEx standpoint, are there any gating factors to fulfilling Hydros' demand fully, or are you pretty well set up in terms of scale and manufacturing availability?
Yeah, just in terms of capacity, we have no constraints. We have plenty of capacity to build robots and handpieces. Remember, we moved into a new facility in the fourth quarter of 2023. That facility is roughly four times the size of our previous facility. No capacity constraints there and really no capacity constraints to help expand margins as well. I think longer term, we'll start thinking of alternatives, whether that's offshoring, manufacturing, or things of that nature. Our near-term ability to achieve profitability to expand margins is not reliant on any capacity changes or any changes in how we produce the product today.
Got it. A few more on the commercial strategy. You mentioned some of the areas of differentiation for HYDROS. In terms of having a sales rep in every case today, how do you think about the evolution of that strategy going forward and your ability to wean reps out of those cases?
Yeah, I want to start by saying our reps being in every case is not a gating item to profitability. If in perpetuity we were to choose to be in every case, that still would not impact our pathway to profitability. If you look at our operating expense leverage today, while we're in every case, it's actually pretty good. We're growing revenue at about two times the rate of operating expense growth. As of right now, we're committed to being in every case. We're seeing nice productivity from our utilization team. I personally think it'd be a mistake to remove ourselves at this stage in the growth curve. However, if you think about HYDROS and with that launch, I definitely think that system architecture lends itself to surgeon independence in a much more meaningful manner than AQUABEAM.
There are accounts, I think the latter half of 2025, where we'll start to test this to a certain extent. We have a great European business where we're currently not in every case there. We have great key opinion leaders that we know are very comfortable doing this procedure independent. Long term, to be the standard of care, to be the market share leader, it's impractical for us to be in every case. We understand that. We also don't think doing that sudden or doing it right away would be the right decision. We're going to continue to evaluate it. Our guidance in 2025 assumes we're in every case. Again, we're going to start to look at this towards the back half of the year.
Understood. When you're thinking about the placements for 2025 and beyond, how are you identifying the centers where you think there's the highest value, whether it be centers of interest or accounts where they could be particularly well set up to need one of your systems? How do you identify those accounts?
Yeah, I mean, so of the 2,700 hospitals that do surgery in the U.S., we have bifurcated that market into higher volume hospitals. We spent the beginning part of this call talking about our success in low and medium volume hospitals. At the same time, we're still not fully penetrated in the 860 high volume hospitals in the U.S. I think we have a long way to go there. That is still the low-hanging fruit. The low-hanging fruit is the hospital that's currently doing over 200 resective procedures a year. They're doing a lot of cases. They probably have multiple surgeons offering multiple modalities. That is still our target and our focus in 2025. At the same time, we are picking up these low and medium volume hospitals. I think another great target for us are our IDN relationships.
IDNs represent a significant portion of those high volume hospitals. Over the last three to four years, we've done a great job of working with IDNs at the local level. Where we have surgeon support, they're using local funds. What we're seeing now is we're getting the attention of corporate. Corporate is seeing those hospitals perform. They're seeing what aquablation is bringing to their program. We have now implemented a strategic accounts team to really start working both from the bottoms up, but also now more from the tops down with our IDN strategy.
Got it. Maybe beyond that, I'd love to hear your latest thoughts on understanding the ASC pilot program, any learnings from that, and how do you think about that opportunity moving forward?
It's early. I'll start by saying that the pilot program consists of one ASC in the U.S. and one in Canada. It is not a vast trial that we're doing here. I will say both are performing very well from both a volume and a clinical outcome standpoint. Obviously, in an ASC environment, the patient needs to go home the same day. We felt comfortable enough with some of the data we're seeing from our hospital physicians sending patients home the same day to start to pilot that in the ASC. Again, back to our strategy in 2025, it remains on penetrating the hospital side of service. We're very pleased with the growth that we've demonstrated over the last three years. We also realize this is early innings in terms of kind of where we're at with penetration and our ability to continue to grow.
The focus is going to remain on the near-term hospital opportunity. I can see us placing another handful of ASCs sprinkled out here and there throughout 2025 to continue to evaluate this program.
I think on a longer-term basis, based on your initial learnings, is that something that you still have confidence in, or is it early innings and a little bit tough to say?
It's early innings, but I think we have confidence, right? I mean, definitely back to same-day surgery. We are seeing a larger percentage of our hospital customers now sending their patients home the same day. I think as HYDROS gets rolled out and with the First Assist AI feature, you start to have even greater reproducible and predictable outcomes that could lend itself more meaningfully than an ASC environment. Just over time, we do think this could be a procedure that could shift to an ASC to expand the market. There is always going to be receptive procedures done in the hospital. There are 300,000 receptive procedures done. Our thought about going into the ASC is not to cannibalize those procedures and move them to an ASC. It's to get the patients that perhaps would feel more comfortable in an ASC environment to go to an ASC environment.
Perhaps it's surgeons that would be more incentivized to do a procedure, take men off drugs in a sooner manner if they had a different operating environment. That's how we're thinking about the ASC as a market expansion strategy versus cannibalizing the hospital receptive market.
Got it. Another part of the story, again, probably early innings, but has been your OUS business. How should investors be thinking about that as a potential growth driver moving forward? What are some of the inflection opportunities that you have moving forward there?
Yeah, so the near-term opportunity for us internationally continues to be the U.K. The U.K. represented over 50% of our international business in 2024. I think that holds again in 2025. We're seeing great momentum there with both selling robots at great average selling prices, and we're seeing good procedure growth as well. We're also directing the U.K. with a direct sales force. Near-term driver for us internationally would be primarily the U.K. We're also, though, in 2025, going to start to make some inroads in Japan. We've placed our first few systems in Japan in the back half of 2024. We've invested in both a clinical and direct sales team there. That's a market that, like the U.K., I think we could get great average selling prices.
I think Japan is a market, in my experience, always relies on great clinical data, which we have, and high quality, which we have. I think Japan is going to be a market that we're going to do very well in. In the near term, I continue to think about international as about 10% of our business, which on an absolute dollar basis is great given how fast we're growing in the U.S.
Understood. Maybe beyond that, it seems like the next opportunity on the horizon that more of our investor discussions have started to call out have been on the prostate cancer side of the world. We'd love to hear how you're thinking about that broadly and any expectations ahead of the upcoming AUA conference.
Yeah, let me talk a little bit about what we plan to do here at AUA. That's going to be an exciting event for PROCEPT, as this will be the first year we actually present cancer data results from aquablation. We have two trials that we have currently been running, which are PRCT 001 and PRCT 002. We are going to present data at AUA showing our 70 patients in both of those cohorts. We're going to present safety data, so data around incontinence and sexual dysfunction, particularly erectile dysfunction. We're also going to show efficacy data and what that looks like. On top of that, I still think there's healthy skepticism out in the market, given how new we are, given what a new entrant we are into the prostate cancer market, about our ability to treat.
Whether that's in the transitional zone or the peripheral zone, we constantly hear from investors who get feedback from clinicians that they don't think aquablation could be a viable option to treat prostate cancer. I think that's normal and healthy, and it's just early. We're going to spend some time at AUA walking investors through why we think we are going to be a great option for prostate cancer. At the end of the day, PROCEPT would not have embarked on this journey if we didn't have a high degree of confidence that we had a viable alternative to treat prostate cancer.
I appreciate that and looking forward to that conference. In terms of the timeline for your next key data readouts or potential label expansion in prostate cancer from your pivotal study, can you help us understand that a little bit more?
Yeah, I would suggest under normal circumstances, and let me clarify what I'm going to speak to here. This is our WATER IV trial, which is a randomized trial against radical prostatectomy, Aquablation versus radical prostatectomy, 280 patients. In a kind of a normal operating environment, to enroll one of these trials would take around 24 months. If you use that timeline and think about what that means for approval, given we started enrolling patients in Q1, that would suggest enrollment should be complete at the end of 2026. We have a six-month safety endpoint with the FDA, which would assume we could be talking to the FDA in a very collaborative fashion throughout 2027. Perhaps that could lead to some type of indication in the back half of 2027 or early 2028.
To be clear, the indication that PROCEPT would be seeking would be a specific indication to treat prostate cancer, which no other modality has today. The modalities that companies have today are what are known as a tool claim, which is a claim to resect prostate tissue, not to treat prostate cancer. We think given our relationship with the FDA, given their support of WATER IV, given the FDA giving us breakthrough device designation, we think there is definitely a recognition of the unmet clinical need out there for prostate cancer. That would be the timeline under a normal environment. At PROCEPT, what we're trying to do is influence that to the best of our ability. We do think with some additional investments, we could perhaps pull that timeline forward 6-12 months, somewhere in that range. You could just work backwards from there.
Okay. Yeah, that's super helpful. Maybe just to clarify quickly there, did the agency give you the green light on that as a pivotal design? They're supportive of that study design being enough or sufficient for an FDA label?
Correct. To be clear, there are trials out there today that are randomized trials, but I believe we are currently the only FDA-approved trial right now in prostate cancer, comparing us to radical prostatectomy.
Got it. Okay. Looking forward to stay tuned on that. Maybe moving to the profitability side. Historically, I think you've alluded to 65% gross margins being kind of a relevant threshold that you could think about for turning the corner on profitability. Maybe just kind of highlight where you left the year this year, what you're thinking about the exit rate for 2025, and maybe how you're thinking about how gross margins could evolve from here.
Yeah, 2024 for us was transformative. We ended Q4 at 64%. Really, 2024 for us was the proof point to show that we can expand gross margins in such a manner that with increased revenues, with continued operating expense leverage, this could become a profitable business. With that said, we're not happy with 64%. Our guidance in 2025 suggests we're going to exit the year somewhere in the 65%-66% range. I would view kind of the margin improvements over the next 12 to 24 months as more of the 100 to 200 basis points annually as opposed to kind of the significant shift we saw in 2024. To be fair, we've talked about getting to margins this business today, margins to 70%.
I think if you run any type of longer-term model, you'll find that this business could be highly profitable at 65% plus margins. When we think longer-term, there are things we think we can do, and whether that's handpiece design, whether that's offshore manufacturing, to continue to improve on margins. At the same time, I'd suggest margin expansion is no longer the gating item to profitability. It's just continued revenue growth.
Got it. Super helpful. You mentioned the higher prices. Is there anything else beyond that in terms of specific initiatives to lower the cost of manufacturing that you think are going to come into play in a more meaningful way moving forward?
Nothing we're willing to share at this time. We're definitely always looking at improvements, particularly on the disposable side. The capital margins, they are what they are at this point. There's not a lot of, I would say, R&D work that can go into our system to lower the cost there. On the handpiece itself, it's a very complex disposable. We're definitely looking at how we can simplify that over time. Again, these aren't things that are necessary to get us to profitability at all.
Got it. You mentioned R&D. Can you talk a little bit about how investors should be thinking about the trajectory of both R&D and SG&A from here and your degree of being able to get more operating leverage?
Yeah, I'll speak first just in totality. Again, our operating expense growth moving forward here, the right way to look at it is about half the rate of growth in revenues. I think that's something that's very achievable at this point in our commercial trajectory and something that we could hold ourselves accountable to here in the near term, the next two to three years. Look, some years it may be 2.2, another year maybe 1.8. In general, think about our business as having a 2-1 operating expense leverage ratio. What that would mean for R&D would mean that R&D as a percent of sales would need to come down over time. I mean, our 2025 guidance implies R&D at about 25% of sales.
That does include an incremental $10-$15 million for the prostate cancer initiative and getting folks enrolled and staffing that up. Over time, for a business that continues to be innovative, that continues to want to be at the forefront, being a robotic technology, we should settle somewhere in the mid-teens, three, four years down the road, R&D as a % of sales.
Got it. Yeah, no, really helpful. Maybe just in terms of the adjusted EBITDA margin expansion part of the story, I mean, all those things taken together, how do you think about where this business could land moving forward?
Yeah, it's probably too early to promise an EBITDA margin. What I will say around EBITDA is when you look at current consensus estimates, the expectations for this business to be right around EBITDA break-even in the fourth quarter. We haven't guided any quarter in particular, but I think those models would be consistent with our remarks of cadence of profitability throughout the year. This is not a business that at scale is going to struggle to be profitable. It's not a business that once we turn the corner, we're going to hover around EBITDA break-even or bounce back and forth from year to year. That is just due to we have a great margin profile, we have great average selling prices, and we're already demonstrating significant operating expense leverage.
When you put that together in a revenue growth business north of 40%, you could generate, I would say, some outsized EBITDA comparables. I think our challenge is going to be where do we want to continue to invest that EBITDA growth in the business to continue to drive revenue growth. That is a balancing act, and we'll be cognizant and thoughtful as we move forward.
Understood. I know we're down to under two minutes. Maybe just penultimate question here. Any other catalysts that you think investors should be particularly cognizant of beyond AUA this year? What's going to be the most something to keep an eye on for investors?
Again, back to our business and the simplicity. It's selling capital and it's doing procedures. I think those are the two things that are critical. We don't lose sight of that. We've had a ton of success, but you're only as good as your last quarter, and we know that. We're highly focused on making sure that we capitalize on the large opportunity in front of us. The management team, we talk about it every day, making sure we continue to sell capital, making sure we continue to expand utilization in our existing accounts. There's just so much room for growth still here that we're not happy. We're not here to become the standard of care in the resective surgical space. To me, that should be a given with the technology we have.
We're really here to expand the market, pull men off the sidelines, expand into other indications, and really become a global player in urology. I mean, that's the end goal here.
Perfect. Kevin, this has been incredibly helpful. I really appreciate the time today. Thanks so much for joining us, and thanks everyone for tuning in.
Great. Thanks, Mike. Appreciate you.