Kick it off. Welcome to day two of the Jefferies New York City Healthcare Conference. I'm Mike Sarcone. I'm an analyst on the U.S. Medical Supplies and Devices team, and this is a fireside chat with PROCEPT BioRobotics. From the company, we've got Kevin Waters, CFO, and Matt Bacso, VP IR and Business Operations. Gentlemen, thanks for joining us today.
Yeah, thanks for having us. Appreciate it.
Maybe just high level, Kevin, you know, for those in the audience or those listening who may be less familiar with the story, maybe you can just briefly highlight, you know, PROCEPT's mission, value proposition, and kind of, you know, where we stand in the growth story.
Yeah, no, appreciate it. At PROCEPT, we're a BPH company today, and our mission really is to revolutionize the treatment of BPH, and that's to offer men a safe and durable procedure that will essentially improve their quality of life. That's our initial focus. Longer term, we are doing some work in prostate cancer, which I'm sure we'll talk about a little bit later today. Our goal would be to become a global leader in urology. That's really our mission. If you look at kind of the market prior to Aquablation therapy, men had to sacrifice trade-offs, whether that's safety for efficacy, durability, meaning that if you're going to have a legacy resective procedure, there's a decent chance you would have some type of safety side effect, whether that be incontinence or erectile dysfunction or ejaculatory dysfunction.
We think, you know, we've really cracked the code here where we can offer men an efficacious, safe, and durable procedure. If you look at our real-world and clinical evidence, our safety events are right around 0% at this time. Just in terms of our growth and where we're at, we've had a ton of success since we've commercialized, which is, we really view that as 2021. Based on our 2025 guidance, we'll complete about 52,000 procedures. We'll be about 20% of the U.S. resective surgical market. We have a long way to go in terms of growth here.
Awesome. Very helpful. Appreciate the overview. I guess just to dig in, I wanted to start on utilization. In 1Q, you had about 5% year-over-year growth as you worked through some utilization headwinds. 1Q procedures came in better than expected. You did maintain your guidance for handpieces for 2025. Seems kind of conservative to us, but maybe you can just talk to us about your confidence in the outlook for procedures. Are we fully past the saline shortage headwinds? Lastly, any changes in how we should be thinking about procedure backlog?
Yeah, so I think you kind of hit the nail on the head there. Our guidance is relatively conservative on procedures. I wouldn't confuse our reiterated handpiece guide to our confidence level. We're very confident in the underlying trends in the business. We've been out talking about the strength that we saw in April, you know, in the second quarter. We feel the trends that we saw exiting Q1 have really persisted here into the second quarter. Those trends do include kind of the saline disruption that we saw in the fourth quarter now being fully behind us. As we enter Q2, I think we could say with full confidence that this is 100% behind us. We're not hearing this from accounts anymore.
Just to the guide itself, I think you have to appreciate the market dynamics that were in place at the end of Q1. I mean, there was a lot of macro concerns. I think as a management team, we felt it'd be better to set some conservative expectations and give us the ability to outperform throughout the year where, frankly, shareholders could be rewarded. We felt at the end of the first quarter was probably not a great time to be overly aggressive with guidance because it probably wouldn't have mattered, to be quite frank. Our guidance as well does not assume any benefit from the saline shortage and that recovery that could happen throughout 2025 as well.
Okay, very helpful. Then just a follow-up there. Based on your commentary and messaging, as we look through the quarterly cadence for the year, I think the street has some sequential growth in handpiece sales, but year-over-year growth decels in 2Q, then reaccelerates in 3Q to around mid-single- digit, followed by a meaningful step up in 4Q. I guess, can you walk us through some of the moving pieces behind the quarterly cadence?
Yeah, there's a lot of nuance when you kind of look at year-over-year utilization growth and what it means from a quarterly basis. We had a very strong Q2 2024, which makes the Q2 2025 comparable a bit tougher than some of the other quarters. In general, we haven't guided a quarterly number. What I will say is, if you look at street models, I think everybody's modeled it appropriately, and we feel good about where expectations are on a quarterly basis. Now, if you look at where we're going to exit the year, this would assume year-over-year growth and utilization north of 20%, which, you know, we think is a good run rate. Obviously, we have a very easy comparable in Q4 2025 based on the saline shortage in Q4 2024.
The underlying trends in the business and our ability to continue to produce year-over-year utilization in the mid to high single digits is what our guidance would suggest.
Okay, great. And then, you know, wanted to ask about physician reimbursement. Your Category I code becomes effective in January of 2026. There is some investor concern around the potential for a doc fee cut there. I guess, can you speak to potential outcomes with the CMS professional fee setting process? And then maybe level set us on where the Aquablation professional fee sits today versus other BPH procedures.
Yeah, so this is an important event for PROCEPT, and I'd agree with you in our investor interactions. You know, I do believe there's fairly large overhang with this event. What I'll say is, one, I can't go into much detail, unfortunately. We are under NDA with CMS and AMA. With that said, we view the risk to our business as quite low, given we are a hospital-based procedure. I'll go into some of those dynamics. If you look at kind of reimbursement today, and this is the physician fee, I'm going to talk about the facility fee second. We're only talking about the physician fee where they get paid to go do our procedure in the hospital, remembering that about 50% of our surgeons are salaried employees to begin with. This isn't as impactful as someone might otherwise think.
With that said, currently, Aquablation, TURP, GreenLight, enucleation, the other resective modalities, today, they're all very similar. A surgeon is reimbursed about $700-$800 per procedure. That does vary based on, you know, what Medicare region that surgeon resides in. Some could be as high as $900, some could be as low as $600. Our expectation is that the resective category as a whole will be reviewed. And what's important to PROCEPT is that the relative value that a surgeon is paid to do an Aquablation remains consistent to the relative values of the other procedures that I've just mentioned. So it's not so important to us if the payment were to go up 20% or down 20%. What is important to us is the relative value. This is not a technology where the physician fee is driving adoption.
Surgeons just want to get paid a fair wage to do a procedure in the hospital and make sure it's fair relative to the other resective procedures that are out there. That is our expectation. We think that that is what's going to happen. Frankly, we think it's going to have zero impact on the business as we move forward. I can say with complete transparency, the business doesn't have two models we're sitting on where if reimbursement went up 20% or reimbursement went down 20%, our 2026 guidance is going to be X or Y. This is, it's not that type of event for us. What is important, though, however, is the facility payment. The facility payment is reviewed every year. We feel highly confident that there's minimal to zero risk of us kind of going down to a different APC level.
That's based on hospital charges, which is primarily based on the price of our disposable. And if you look at the price of our disposable, if anything, it's been increasing over time. So we feel there's very little risk there. As a reminder, Aquablation is at APC Level 6. It's about a $9,300 payment to the hospital where TURP, GreenLight, HoLEP is APC Level 5, which is around $5,000. We feel good about the economics. I would just remind everybody, PROCEPT has never been a company that leads with economics. We lead with clinical data. We lead with benefits to the patient. We lead with the ROI to the hospital to retain their surgeons and to bring in more patients. I know there's plenty of investors out there, myself included, that have been through a Cat III to Cat I process where it's hindered adoption.
We're just not in that category, and we're not worried.
Okay, great. Very helpful. I did want to touch on the competitive landscape for BPH. Maybe can you just talk about what you're seeing on the competitive front? Maybe what's the latest and greatest? We've been hearing more and more about prostate artery embolization. You know, they do have some pretty strong facility reimbursement on that end. Maybe you can just comment on what you're seeing there.
Yeah, yeah. We're having a laugh. I'll elaborate on that in a second here. Just in terms of competition, like we're highly aware of everything that's out there. I'd suggest what we see from kind of new and novel technologies all tend to be more focused on the non-resective side of the business, stent-like devices, where they're looking to treat men perhaps that are on drugs maybe earlier in the paradigm here in the treatment algorithm. We don't see anything as kind of a near-term competitive threat to resective procedures, although we're keeping our eye out there, obviously, for everything. You did mention PAE, which is an interesting technology, prostate artery embolization. This is a technology that's been around for 25 years. The first thing I want to put forth here is this isn't a new technology. It's been around for a long time.
I'll say the efficacy is similar to non-resective procedures. Clinical data out there would suggest about a 20% retreatment rate at 12 months. You compare that to kind of our retreatment rates, which is about 1% at 12 months. You're talking about a 20-fold difference in durability. For a procedure that's not new or novel, it's not performed by a urologist. It's actually performed by an interventional radiologist with poor efficacy. I would suggest that the driver of PAE procedures has been more economically driven as opposed to patient-driven. We've now seen a lot of private carriers here in the U.S. stop covering PAE. I would suggest that the PAE noise internally that we see has significantly decreased from 12- 18 months ago. We just don't believe that would ever be a viable technology to become the standard of care in BPH.
It was a little bit of a thorn in the side of us in early 2024, but it's now built into the run rate of the business. It's fully contemplated in our guidance, and we're not concerned.
Okay, great. I did want to move on to capital on the system side. You sold about 43 systems in 1Q, and that was at a $435,000 ASP. You did maintain your outlook for system placements of around 210. You highlighted a healthy capital equipment environment on the 1Q call. Maybe can you give us an update on what you're seeing in the capital equipment environment? As we make our way through Q2, have you seen any signs of hesitation on the capital spend front?
Yeah, great question. So we obviously have daily conversations with the customers that are in our pipeline. We do not sense any shift in overall sentiment. You know, again, coming out of Q1, I think there were a lot of questions around kind of the macro environment with spending and hospital budgets and how is that going to play out throughout the year. It feels fairly stable to us where we are sitting here today. I think we are in a very unique position as a capital equipment company compared to some others. First, our price point is significantly lower than a lot of other robotic technologies, which is a bit more digestible for hospitals in economic times that perhaps even if they were worsening, right?
If you look at what we're offering, we are offering a new and novel technology, which helps hospitals bring in patients, retain surgeons. When I think of a challenging economic environment for capital, I think that's much more impactful to the replacement cycle where hospitals that perhaps have five- to ten-year-old technology are willing to hold on to that system for one to two more years, where they're willing to move forward with new technology that, frankly, is going to bring their hospital a higher return on investment than they're otherwise earning before. That really is our value proposition when we go talk to hospital CEOs and CFOs. It's the ability now to treat a broader range of patients and to retain or recruit new surgeons.
You know, I think if you look at other successful robotic companies early on in their commercialization, they experience that phenomenon as well.
Okay, great. And just a follow-up on the assumptions underlying that 210 system target. You know, maybe can you talk about how you're thinking about new rep productivity around there? And then maybe also speak to the ASP assumptions for the year. You've got it to $430,000-$440,000. And in 4Q, you had an ASP of $460,000. So, you know, is it fair to view that $430,000-$440,000 as conservative for this year?
Yeah, let me, let me, I'll start with pricing, right? I mean, $430,000-$440,000 I think is our realistic expectation. At the same time, I think it allows more room for upside than downside here, right? I mean, I guess we can characterize that as conservative to use your words. Regarding price, you know, we are fairly flexible on our system pricing, and we're very inflexible on our consumable pricing. That is why you see some differentiated pricing with capital. Our goal is to place a system. If we have to give the customer a $20,000 discount to get the system installed a month earlier, the reality is we're going to make that up in procedure volume in one month, right? Therefore, we're very flexible there in negotiating with our customers. We're very happy with our pricing.
We were selling robots for $325,000 just two years ago. The fact that we're now talking about price ranges in the $430,000-$440,000 range with the new system, you know, I think is fantastic with, I believe, again, more room to go up than to go down longer term. I just want to keep everybody grounded that our number one goal is to place capital, get a reasonable price, right? We're not going to give it away. We want to get a fair price, expand margins. The end game here is to grow procedures. You can't grow procedures if the hospital doesn't have a robot. We're going to continue to be flexible on pricing and make sure the company gets a fair return. You're going to see variability quarter to quarter.
I will say the first quarter in any capital equipment company is always the most difficult in terms of getting things across the goal line. It tends to be the most difficult, at least in our view, on pricing as well. If you look historically, Q1 does typically tend to be the lowest ASP quarter. Again, we are going to be flexible there, Michael.
Okay, very helpful. I did want to pivot to tariffs. Prior to de-escalation, you talked about a $5 million impact this year, around 150 basis points on the gross margin. More recently, we've had some de-escalation. I think you mentioned that impact goes down to $1 million or $2 million. That's largely related to kind of the sole source China-based ultrasound probe provider that you have. We'd just love to hear how you're thinking about mitigation strategies for the business and, you know, to the extent we do have some of these elevated tariffs in place for a longer period of time. You know, how are you thinking about the impact?
Yeah, so what Michael's referring to is on our last call, the expected tariff rates at that time, I think were around 140% for import duties on products made in China and brought into the U.S. Our primary exposure there is our integrated ultrasound into both our HYDROS and AquaBeam system. At 140%, we had dollarized that impact at about $5 million for PROCEPT. There's been a lot of news over the last month. I think the current expectation now is right around 40%. That'll probably change tomorrow, by the way, Michael. You know, I think we feel good that the maximum exposure at $5 million is appropriate. You could just do simple math. Every percent that it goes down from 140% should be a savings on the $5 million here as we move forward. We'll just have to see where this shakes out.
Regarding mitigation strategies, I think that's what we're focused on as a company. I put mitigation strategies into both short-term and long-term buckets. Things that we can influence today and things that are going to take more time. On short-term, we've done a good job as a company of building inventory in anticipation of elevated tariffs and taking advantage of some of the lower rates and exemptions that we've had. We're going to continue to do that. It's why you see our inventory balances probably being a little higher than desirable. At the same time, I think longer-term, we're saving money there by not paying elevated tariffs. That's short-term. Longer-term, there are things we think we can do in working with our ultrasound supplier to mitigate any impact of import duties. We've talked about consignment inventory.
We've talked about moving certain manufacturing components that are currently done in China with the ultrasound to the United States. We'll have to work through those. Again, those are more long-term in play. I'll say, even in this elevated tariff environment, we don't view this as a headwind to profitability. We don't view this as a headwind to expanding gross margins. It's incumbent on us as a management team to mitigate these increased costs with other savings throughout the business. I mean, I mentioned the $5 million impact on our last call. At the same time, you heard us reiterate our EBITDA guidance for the year, right? We do think as a business and as a management team, there's puts and takes.
You know, we need to go find things to offset this that do not impact our growth trajectory or impact our ability to continue to sell robots and treat patients with procedures.
Okay, great. Very helpful. I did want to pivot to prostate cancer. You talked about, you know, getting into prostate cancer. Can you speak to how you think about the opportunity there and where you see Aquablation's value proposition?
Yeah, the first thing we need to do is execute on our WATER IV Study, which I'll talk about in a bit, which is a randomized trial versus prostatectomy where we expect to enroll the majority of patients here in 2024. I'll get to that. Starting with our value proposition, it's fairly straightforward in prostate cancer. Currently, men who are diagnosed with early-stage prostate cancer are told to do nothing. They're told to see how it goes. You watch the disease progress, and perhaps someday a more radical treatment will be recommended. These men are told to wait because the current alternatives out there from a safety profile are pretty bad. You have high rates of incontinence, high rates of erectile dysfunction. Men with early-stage prostate cancer tend to be younger, and they don't want to live with those side effects for the rest of their life.
They rather live with the cancer in their body because it's a slow-growing disease. It typically isn't fatal early on. We think with WATER IV, this can be game-changing in terms of getting these men off the sidelines. Where our value proposition initially in BPH is to cannibalize an existing market, our value proposition in prostate cancer is really to grow the market and to get men off the sidelines that otherwise wouldn't get treated. That's really our value proposition there.
Okay, great. You recently held a pretty good event at AUA where you showed some more clinical data from PRCT 001 and 002. I guess, can you maybe just refresh us and highlight some of the key takes there around the safety profile, oncologic control, and the ability to treat various regions of the prostate?
Yeah, it's a good question. We had some pretty defined goals we wanted to accomplish based on investor feedback and customer feedback at AUA. You know, I think the company did a pretty good job of walking folks through those. I'll do that here for the audience today. First off, we wanted to prove to folks we do not spread cancer. When you perform an Aquablation procedure on a patient with prostate cancer, there's zero risk of spreading that cancer throughout the body. I think in med device, there's been some legacy technologies, more later technologies treating other parts of the body where cancer was spread. There was a concern primarily with the investor community, by the way, not the physician community, about us spreading cancer.
We showed our work with the FDA where the FDA removed our contraindication to treat patients that have known prostate cancer for BPH, which would support the FDA's belief that we're not spreading prostate cancer. I'd also say in that regard, if you talk to an oncologist, it's never been a concern of theirs. In fact, there are BPH technologies today, like enucleation, that morcellate prostatic tissue and do not spread prostate cancer. We've never viewed that as a risk, but that was a risk we wanted to address because, Michael, when you do doctor calls, you probably hear that, right? We wanted to make sure we address that. That was goal one. Goal two is we wanted to demonstrate that our ability to treat with our water-injected technology, it works. The treatment algorithm for prostate cancer is different than BPH.
We have demonstrated that we can get to the peripheral zone, which is where the majority of cancer lies, and we can treat BPH, and, sorry, treat prostate cancer. Why that's relevant is with BPH, you're just creating a tunnel, and you're treating a very small portion of the prostate. That means the water-jet cavitation technology needs to operate in a certain way, where with prostate cancer, you're treating almost 90%+ of the prostate, and you have to do some things different to treat. You can definitely reach the peripheral zone where the cancer lesions are, and we could essentially almost do a whole gland removal with our water jet. We demonstrated that.
Lastly, we wanted to show that at six months, 0% of men that were in our earlier cancer trials, which were PRCT 001 and 002, were cancer-free and had a safety profile that was superior to the existing technologies out there. We were able to do that. I'll say this, physician interest has been very encouraging. We were pushed to do this by the physician community. This was not a PROCEPT push initially. This was really surgeons encouraging us to do this. We are early. We are going to work through WATER IV, get the randomized data, and ultimately, it is incumbent on us to prove to the world that this is going to work.
I appreciate that overview. I actually came away incrementally positive, you know, post the AUA event. I guess I'm wondering, do you think there's some misperception among the urology community that maybe what you're trying to do is more focal therapy in nature rather than kind of like the near entirety of the gland? That's why there's this misperception you couldn't treat the peripheral zone?
Yeah, I think so. I mean, I used the analogy when I looked at PROCEPT in 2016 or 2017 when I met the founder, and he showed me water jet technology to do BPH. You know, I think there was a lot of skepticism around our ability to do this for BPH. I think there's still the same healthy skepticism around our ability to do that for cancer. I definitely think, you know, there is kind of this perception that we wouldn't be able to treat for prostate cancer, but we feel really good about the research we're doing and the feedback we're getting. I'd also point out that the folks who are supporting us in this cancer trial, they are, I would say, the upper echelon of folks that are dealing with this. We're essentially going to create a new category, right?
I mean, we're not going to be HIFU. We're not going to be prostatectomy. Our goal is to carve out our own niche, which is going to be unique and differentiated.
Yeah, that makes sense. I guess the other thing that kind of struck me from your event, you had, like you said, these cancer experts, urologic oncologists there who were pretty adamant. Like we've seen a lot of the data around circulating tumor cells. It doesn't spread the cancer. You know, maybe that doesn't resonate as much in the general urology community, right? There is this disconnect. How do you think about that? What are the best ways to address that?
Yeah, I think we're going to be fortunate if we launch this product to leverage an existing installed base that I don't think is fully appreciated yet by everybody in terms of adoption. We're not going to be starting from scratch. If we were to get an indication, and let's say that indication is as early as 2028, you're looking at a company that's going to have over 1,000 systems installed. You probably have over 3,000 surgeons that have been trained in Aquablation by that time. We're already going to have a supportive installed base and supportive surgeons that I think are going to be much easier to convert than if we were just a new prostate cancer company launching a technology. We're very fortunate that we can take our time to build that business.
There's going to be some skepticism early, just like there was with Aquablation for BPH. We feel that at the end of the day, we plan to present robust clinical data. We plan to be the only company to pursue a claim to treat prostate cancer and have a specific indication. We think at the end of the day, the clinical data is going to carry the day here.
That's fair. And understanding you said, you know, maybe 2028 for that indication. In the near term, can you just talk about timelines and milestones we should look out for when it relates to the prostate cancer opportunity?
Yeah, so our goal is to enroll WATER IV within an 18-24 month period. That would put the timeline for full enrollment somewhere in mid-2026 to the end of 2026. If we achieve this milestone, you're looking at a commercial launch with a treatment indication sometime in the first half of 2028. There's a lot of things we could do in the interim working with the FDA. I'd remind everybody we have breakthrough device designation with the FDA. They've blessed our trial. We have a great relationship. We are on the fast track with good clinical data to get an indication here. To answer your question directly, if we met all those milestones, you're looking at sometime in the first half of 2028 for commercialization.
Okay, very helpful. You know, one of the things that stands out to me is there's a growing number of modalities and vendors that are looking to address this prostate cancer application. When you think about the market for tissue ablation and prostate cancer, you know, where do you think PROCEPT's share could ultimately shake out?
It's probably way too early for me to kind of theorize on that. I think that's going to be highly dependent on what our clinical data looks like. But if the clinical data is what we expect, the market today is 3 million men living with prostate cancer under active surveillance, 160,000 men diagnosed with low to intermediate risk disease every year. It's a large market. I mean, there's no shortage of patients. And we're attempting to position ourselves to be the only technology to complete an FDA IDE study with a claim. So I think we could be highly differentiated. And, you know, I fit into the category of age profile of men we were treating. And I just can't imagine living with a disease that if there was a technology available that was safe and effective, that I wouldn't be treated.
I mean, I don't see why anybody would live with prostate cancer unnecessarily. I think the opportunity is huge without dollarizing.
I'll add, I think, you know, one of the benefits of our WATER IV study being a 10-year follow-up study is to ultimately be included into the guidelines for prostate cancer, which ultimately will drive, I would say, market share and market adoption over time. That is the long-term goal, to be put into guidelines to drive broad adoption.
Okay, great. We're at time. Kevin, Matt, thanks for joining us, and thanks for your time. Everybody else, thanks for your interest.
Thank you. Appreciate it.