Yeah.
Okay. I think we're ready to get started. Thanks, everyone. I'm Dave Rescott, Senior Med Tech Analyst here at Baird. Happy to have the PROCEPT team here with us. We've got Kevin, the CFO, and Larry Wood, CEO, is, I believe, going to walk through a brief presentation. From there, we can hop into the Q&A. Thanks for joining us.
Oh, thanks. We're super glad to be here. Here's our safe harbor statement, and I'll just say I think as industry safe harbor statements go, I think ours is best in class. Feel free to copy it and all of our financial things. I'll just talk a little bit about what the opportunity is around BPH. There's about 400,000 people that get surgical therapy right now for BPH. When you look at our penetration of that, a year ago, we were about 10% penetrated. We're a little better than that now, but still a huge opportunity just to penetrate into the existing market of the existing patients that are getting therapy today. It's a significantly undertreated disease, and I think the things that happen to patients while they remain untreated are underappreciated. It can damage long-term bladder health.
It can lead to retention, incontinence, if it's not treated. I think part of the problem is the treatments that exist today are just not that attractive to many of the men with BPH, and so they tend to delay therapy for as long as they can. If you look at the funnel above the 400,000, there's about 8 million men a year who have BPH and are treated with medication. It's a large number of people that know that they have BPH. They're unhappy with how things are going, and so they're taking medication to try to manage it. Importantly, 1.1 million men each year stop taking their medication.
They either stop taking their medication because they're no longer effective, or they don't like the complications, or maybe they've read some of the latest data that's come out that suggests there's an association between the dual medication therapy and dementia. There's a lot of reasons why people don't want to be on their medication. That's the next group of patients. If you go up funnel about that, there's about 40 million people who are living with BPH, and they're probably the people that are less symptomatic. It's a progressive disease. The prostate continues to enlarge over time. These 40 million people will continually move down and continue to fill that funnel. We have a big near-term opportunity, which is converting existing surgery, but then there's even a larger opportunity with getting patients off the sideline. Our technology itself is unique.
It represents a best-in-class therapy for this. When I talk about best-in-class therapy, what I really mean is the things that matter most to patients. There's about four things that when we do patient-centric research, always rise to the top. The first thing is men want complete relief of their symptoms. They want maximum symptom relief. The number two thing is they want to maintain their urinary function. Number three is they want to maintain their sexual function. Number four is they do not want to have a second procedure. When you put all those four things together, you have to look at what the other therapies are that are available. There's a radical prostatectomy, which is a very successful one-and-done procedure. The problem with it is it does not preserve sexual function. It does not preserve urinary function.
If you look at incontinence rates after a radical prostatectomy, it's about 25%-30% of men have incontinence. If you look at the ED rates, the overwhelming majority of men have severe ED following a radical prostatectomy. So it's a one and done, but it doesn't take care of the rest of it. If you look at some of the other non-resective therapies, they do not provide complete relief, even though they might preserve urinary and sexual function. But they are procedures that oftentimes require retreatment within one to three years. So it's another procedure. It's another transurethral approach. This is something that I think is really important to patients. When we say men only want to have a one-and-done procedure, it is a large French device going through the urethra.
I think when you're talking about devices that are in that 20- 24 French range, the number of times a man would like a 24 French device through his urethra is probably 0 to one time. This is why getting one procedure that is totally curative of your problem is so important to men. When we look at the PROCEPT technology for Aquablation, we have very low incontinence rates, about as close to 0 as you can get with a medical procedure. We are able to preserve sexual function, and our durability is right in line with TURP, which is the gold standard procedure. So we can offer all of these things, and we do that by utilizing a water jet. We don't do cutting with traditional knives that create scar tissue. We don't use heat. We don't use radiation. We don't use steam.
We just use water jet technology that's able to cut the tissue using the high-intensity water jet. We use AI to map the prostate so that we know exactly where the prostate is. The physician can alter the lines, alter the cutting lines where he wants the water jet to go. But once he designs the procedure or augments the procedure after our AI, it is simply a matter of standing on a foot pedal and watching the water jet do its work. They typically will do two passes with the water jet. They come in at the end with a loop and do a bladder neck cauterization just to make sure that there's no bleeding complications, and the procedure's over. So it's fast, it's reliable, it's repeatable, and it delivers best-in-class outcomes, and this is what we need to establish as the standard of care for BPH.
From a business side, we've seen a significant increase in our top-line growth. Revenues continue to grow over time. Our range this year is $390 million- $410 million. If you look at gross margins, we've continually seen improvement in our gross margins. We've put a lot of effort in the past year to reducing discounting, reducing discounts, reducing anything that would adversely affect our ASP. We've seen significant growth of our average selling prices for both our system placements and our consumables as well. And that's been a big thing. Our EBITDA loss continues to fall, and we expect to be EBITDA positive by the end of this year in Q4. That's what we've been focused on and what we're driving, and that's how we got to where we are.
Yeah. Thank you for that. I wanted to start maybe from a high level. Larry, you've been in the role for about a year now, and the expectations, I'll say, for growth a year ago, six months ago, I think have come down. You've put in some pieces into play to try to revert that growth and get things on a better track. When you think about the work that's happened over the past year, the understandings that you've seen over the past year, I guess, how would you characterize where we are today relative to some of those initial comments last year and earlier this year, and the visibility you have into being able to navigate this environment going forward?
Yeah. I would say nine months ago, I was on a call, and there were so many questions that people had about the company. There were questions about. We did sort of an inventory reset. We decided there was too much inventory in the field, and we had eliminated some discounting practices, and people were very focused on that. Is the inventory issues behind you? At Q4 of last year, our system sale price was about $425,000. People were like, "That would seem like it was coming down. Does that indicate a weakness in capital demand? Is this just sort of a weakness in the whole company thesis?" Handpiece pricing, I think for the first three quarters of last year, we were about $3,200. There were a lot of questions about that sustainability. There's certainly procedure growth. There were questions about why do people not upgrade their legacy systems.
People have their legacy AquaBeam systems. You're selling greenfield HYDROS, but we're not seeing a lot of upgrades. Is that just kind of an indication that people buy the system, and then they're not that excited about it? All those things. If you look at where we are today, we eliminated all those discounting practices, both on the capital and on the consumable side. Our pricing went from $3,200 for handpieces. I think we've been over $3,500 for the first half of the year, which is a significant improvement in ASP. It wasn't done through a price increase. We didn't jam all of our customers with a big price increase. We just eliminated end of quarter discounting and bulk purchasing and all those things. I think there were people that worried there was. We had a reset in Q4 of last year on field inventory.
But if you look at this year, we expect to be at the 1:1 ratio for the full year with procedures matching handpiece sales. I think that that's behind us. Our system pricing, we've delivered on our robot placements. We've been above consensus for the first half of the year. In Q2, our system pricing was $495,000. So a significant increase in that. We wanted to be purposeful about starting a replacement program, and we wanted to work with our customers and be good partners. So we developed a trade-in allowance where if people wanted to upgrade their system, they could trade in their legacy system and get an upgrade. The response to that has been really positive. We thought we would do between 8- 10 of those this year.
We did two in Q1, which was very fast, and we did 14 of them in Q2. I think that bodes well for a replacement strategy. About half of our installed base now is our legacy AquaBeam, and about half is our HYDROS. So getting those legacy systems out of the field at a higher utilization level, I think will be important. We also invested in launch teams. We now have a methodology for launching sites in a much more advanced way. When we look at the metrics from launch team activity, we see our time from PO to first cases has been reduced by about half, and we see the highest utilization of any cohort in our launch team model. I think that bodes well for the future as well. So we're focused on that. The procedure growth still isn't what we want it to be.
We have more work to do there. We've completed the reorganization of our sales force. We have our sales reps out of routine case coverage now, which is an important part to get them freed up to sell in the office while still covering the cases. So that's been a plus. We just started our first direct-to-patient campaigns. We're active in 18 markets with television. We're active nationally with radio. We have social media campaigns. This is the first time the company's actually done any of that new sustained marketing efforts or taking our story directly to patients. So a lot of things to, I think, be proud of, but we still have a lot of work ahead of us.
Yeah. At the Analyst Day earlier this year, you also outlined a growth guidance for 2027 as well. Two-part question, I guess you know. What at the time gave you the confidence that you had the visibility into a 2027 type number? I think 25%-30% was the ballpark growth. As you see what has happened with the business so far this year, so far through Q3, what's implied in the back half of 2026, I guess, why or why not do you still feel as though that 25%- 30% is the right way to think about growth next year?
Well, I do not think we have enough information to reset it. I think we are going to continue to grow at a differentiated number than a lot of other companies in our space. While we are not growing as fast as we wanted to necessarily, our growth rate is still pretty significant. I think we feel good about our thesis. I think all the growth in the company, all that has been built largely to date has been off just physician adoption and physicians doing the therapy. They have never really had the backing of the marketing programs and the other things. I think as those things take hold, that is going to help. As the cohort of systems that have been done under the launch team, as that group gets larger in size, I think that will be a bigger contributor to our performance.
You also have, as we replace systems, it is an opportunity to relaunch those. As that cohort gets bigger, I think that helps us as well. When we get to the end of the year, we will figure out, we will have our formal guidance for 2027, and we will take a look at that. I think, you just look at the opportunity and the number of patients who are getting surgery today, the number of untreated patients. I think we have a long runway to continue to grow at a differentiated growth rate.
It is a tough question to answer, but if what you are seeing in the back half of the year, not sort of underwhelms relative to what the 2026 commentary is, but gets you to a place where it feels as though 2027 expectations might be a little high. Would that be coming from utilization, from systems, from the upgrades, from ASPs? What would be the metrics that either get you to in that range, below that range, maybe even above that range?
Yeah. I think right now, if you look at where expectations are, they are significantly below where our long-range plan was set at 25%- 30%. I think consensus right now is somewhere around 19%- 20% growth. As Larry mentioned, I think we still can grow at a differentiated rate to the overall market. Look, we are not focused right now on how we are going to miss 2027. What we are focused on are what are the upside drivers and opportunities we have. I would frame the question more that way. I think there is a lot of room with greenfield system placements to go still. There is an underappreciated opportunity with the replacement cycle that are in expectations next year. I think how the setup is for next year is there is not a large increase in utilization within our existing accounts to get to consensus numbers.
But as Larry highlighted, we'll be prepared to talk about 2027 at a later date. I would also suggest that the current 2027 estimates and environment does not assume a lot of the initiatives that we're working on today really do come to fruition.
Last one on this topic. I believe, last quarter you had talked about, in the context of 2027, some of the levers you have around gross margins. The EBITDA guide that you put out there for 2027 as well. Do you feel as though, from an operating perspective, from a gross margin perspective, that there is more cushion on that angle or on that side of the business than there is on the top line? Or if the top line is slightly less than we assume today, that you would see some more margin compression as well on that front?
Well, I think we've taken a lot of action to. If you look at, procedures are off where people had modeled us. At the same time, we gave a new guidance on procedures. We reiterated our revenue for the year at the $390 million- $410 million. So we still feel that we can achieve the revenue because of the work we've done on pricing, on replacements, and on our other strategic initiatives. So we feel good about that. I think when we think about spending, we're going to prioritize top-line growth. If there's an investment we can make that we think can accelerate the top line, we're going to make those investments. So that's going to be our priority always. At the same time, we want to be fiscally responsible.
One of the reasons we're running pilots on our direct-to-patient campaigns is we want to see the metrics out of them. We want to see what gives us the biggest bang for the buck and what gives us the most leverage out of that. So we'll continue to do that. I think the other thing is, if you look at the company spending over the last several years, there's been a lot of investment in infrastructure and just in the corporate functions to make sure that they can sustain the growth. I think we've reached critical mass there. So, people get their merit increases, but I don't see us adding a lot of headcount at the corporate level. So things like R&D, things like our G&A spending, those things I think are going to be largely flat-ish with only minimal increases.
As a percent of sales, they will come down. We will get leverage out of those functions. At the same time, it gives us the room to invest in things that we think drive growth. That is pretty much the conversation Kevin and I have all the time whenever there is a request for some headcount or funding or whatever. Is this going to drive growth or not? If it is, tell me more about it. If it is not, then it is probably not something that is going to get funded.
Yeah. I would view 2026, this really was a build year for the company. We had to get through the field sales force reorganization. We had to fully staff the launch team. We became fully enrolled in our WATER IV [Cancer] study. If you look at what that produced, it produced an operating expense increase of around 20% on 30% revenue growth. If you look historically, we have been able to manage the company where revenue growth has been about 2x OpEx and I would expect 2027 gets more back into that operating cadence as opposed to where we are at in 2026.
Okay. On the system placement greenfield opportunity side, I think part of the commentary in Q2 was that more accounts wanted to upgrade to HYDROS. You have got lower utilization on the AquaBeam system. I think, what, 50/50 split in the field at this point. So I believe you are also potentially piloting some of these upgrade programs, some of the leasing, operating lease business, I guess, setups, right? When you think about where the install base is today, the growth that you have versus the upgrade opportunity that you have, can you talk a little bit about the demand that you think that is out there that should continue to drive, in addition to system upgrades, growth in the installed base?
Well, we have been very pleased with the demand in greenfields. There are still a lot of sites. Obviously, we have been able to hit our system placement numbers for the first half of the year, again, at our highest-ever ASPs. We get to layer on top of that a replacement program that is going better than we would have expected at this point in time.
So I think we feel good about what those opportunities are, and we have a pretty long window into our capital cycle, and we continue to remain confident about that. There are certain hospital systems that, for whatever reason, they just will not pay for capital. They just will not. So we do not want to miss out on volume or an opportunity there. So in those cases, we can do lease structures. We can do other things. I think that is a small minority part of our things.
I think we pilot those in a couple of places, but I think for the most part, we've been able to deliver on capital. I think, yeah, we continue to do that. I do not know if you have anything to add, Kevin.
I think we feel really good that the capital pipeline continues to be strong, and we have a long runway in front of us. We are not hitting a penetration ceiling or a threshold, and we are seeing now a lot more interest from large IDN and hospital networks. That coincides with the replacement cycle as well.
Is there a view on the company's favorability in selling a system outright versus doing some type of operating lease? We know now that Intuitive Surgical, 70% of their sales are coming from some type of operating lease sale, and they have got this pretty significant recurring revenue stream of operating lease revenue. Is that a consideration at all when you think about the initial sale versus generating more recurring revenue from some of these operating lease payments? Or is the metrics a little bit different internally?
I think our biggest opportunity is to place robots and do it at a high utilization number. I think if we can get the capital sale, I will say when a hospital makes a commitment that they are making, and they spend $500,000 on a system, and we launch it properly, we do those things. It is a big investment. They have real skin in the game.
I have seen lease programs before, and I will not speak directly to Intuitive Surgical's, but I have seen lease programs before where if you make the bar really low to start a program, then it is like, "Well, we can try it. We will see if it works. We will see if it does not." But they do not have skin in the game. What you do not want to do is get a whole bunch of placed systems under leases and then have people just say, "Well, it went six months. It did not really work out. I am going to return it." I think there is all sorts of models. I have seen them run at other companies when I was at Edwards.
You do something where you say, "Hey, we will give you the box for free, but you have to do X number of procedures." That all sounds fine and good until you get to the end of the year, and they did 70% of what they were supposed to do. Then what do you do? You can sue your customer for not meeting the terms of their contract, but I read a thing one time that said suing your customers is usually bad. I think that is not a great strategy. It is a contract that you have, but it does not really have any teeth to it, because if people do not meet their procedure numbers, what are you going to do? Take the box back? Are you going to just fold up on them as a customer and lose the 70 cases instead of the 100?
It is just not always a great model. You need to make sure if you are going to do leasing, that the lease terms work for you. We eliminated all these discounting practices. I am not against volume-based rebates. What I am against is having them be purchase-based and not procedural-based. If a hospital system wants to partner with us, and they say, "We want to make this our procedure of choice. Can we get a volume-based rebate for procedure growth?" I will absolutely work with people. I did that my whole career. I am just not going to pay people for loading up their warehouses and then consuming them for the next two quarters.
I know you touched a little bit on this realigned sales force and how that translates to utilization growth. Are there any green shoots you see within either the HYDROS systems, the systems that have transitioned or upgraded up to HYDROS, or the greenfield opportunities that leave you feeling decently comfortable that utilization growth will be something that ultimately returns to the company, either from an account basis or just from the proactive investments that you have made in the field?
I think I would say we have three cohorts of systems in the field. We have our legacy AquaBeams, which are performing the lowest right now as a cohort. We have our HYDROS systems, which are performing higher, but our highest system performance is ones that we have done under a launch team. That seems to indicate to me that we can influence utilization by our execution and by our sales plan in creating the right expectations.
I think the reason we invested heavily in the launch teams and the reason why I think that remains our biggest no-regrets decision is your best time to create good practices is when you launch. They have just spent a lot of money on the robot. Everybody is excited to see what it can do. That is your best time to get resources, to get block time, to get all those things, to set expectations. You should be doing three cases in a setting, not onesies and twosies cases. In our old launch world, I think people were excited to get that first case done. If you come out and you do one case and everybody takes their picture and puts it on social media, and then they do not do another case for two weeks, that is not a launched system. That is not a feature.
We want people to launch and get into a steady cadence of doing cases over and over, and I think that discipline is what the launch team has brought to the process. I think as we continue to do that, whether it is greenfield systems or replacement systems, we can create a different level of utilization. The biggest challenge, and I will just preempt a question that I get a lot is, "Hey, if launch teams are so great, why do not we see it in your numbers?" The reason you do not see it in the numbers is it is just not big enough yet. We did 20% of our systems in Q1 under a launch team. I do not know how many we placed, say 40 or 50 or whatever. That is going to be 8- 10 systems.
When you have 8- 10 systems that come in the middle of the quarter. You have an installed base of 800. Those 8-10 systems can't lift the entire field's utilization rate. Once that cohort gets big enough, then you'll be able to really ascertain the lift, but it's got to get big enough for that to be meaningful.
Kevin, maybe remind us on some of the seasonality comments into Q3, and if at all, how you're thinking about those today.
Yeah. I think seasonality is primarily more impactful for procedures in the third quarter. As opposed to capital. What I mean by that, it's typically the quarter where we see a lot of surgeons take vacation. If you look historically, the absolute number of procedures increase in the third quarter. The second quarter has been relatively insignificant, and I think that's what our guidance implies for this upcoming third quarter as well. What we would plan to see in the fourth quarter is a significant increase in sequential procedures. That's in line with historical averages.
I wouldn't suggest that our guidance is dependent on the fourth quarter on a lot of the initiatives really having a material impact. I really don't see that flushing through until 2027. That would be normal seasonality on the procedure side of the business. On the capital side, Q4 typically is our strongest quarter, like most other capital equipment companies.
But the timing, in general, on capital could be much more variable than I would suggest on procedures. We expect Q4 to be our highest number of capital sales as well.
Okay. Maybe on the competitive side and as it relates to AquaBeam penetration in the market, where do you think the next hanging fruit is? I think if you think about the different procedure sets, TURP, of course, is the biggest one. I think the last publicly available Medicare data that we have suggests that TURP really hasn't moved even though, or as Aquablation has risen to 15% and 16% of the market. So when you think about where the next opportunity for share capture is from, do you have to drive that conversion from TURP to get it? Are there still other opportunities in there? If it is on the TURP side, how do you get it?
Well, I think there's opportunities across the board. TURP's the largest single cohort, and I think there's a lot of attractive reasons why going after TURP makes a lot of sense for us. It's an in-hospital procedure. It generally is an overnight stay. And I think we're a much better procedure than TURP, and much more reliable, much more repeatable, much less physically demanding on the clinician than doing a bunch of TURP. So I think that is an attractive option for us and the number one place to go. I think there is still places for us to continue to win in some of the other therapies that are already declining. If they're already declining, we're perfectly happy to let them continue to decline and take any of that space.
I think the other part about it is there are 1 million men sitting out there who have gotten off their drug therapy, and what's it going to take to get them off the sideline? I think some of it is just a lot of patient education. The real reason that most men don't want a procedure is if you talk to most men and you say, "What's a procedure on your prostate look like?" They go right to a radical prostatectomy because that's what their dad had or their grandfather had, and they had a terrible outcome, and it destroyed their sexual function. They had to wear adult diapers after that. That's a pretty miserable thing for people to sign up for.
I think once people are educated that we can relieve your symptoms, that we can take good care of you, and you don't have to give any of those things up, I think that's a game changer. But we're going to have to take that case directly to the patients, and that's why we've started our patient programs.
Last two maybe in the last 90 seconds we have. Still on the competitive side, PAE. Curious as to how you're feeling about your competitive position against that product. It's a question I think a lot of investors ask. The second one would be on the prostate cancer opportunity. If you could just touch on quickly that, what the timelines are, and how you expect to go from there.
PAE isn't done by the urologist.
That doesn't consume any of our capacity. We have a lot of patients in the BPH funnel, and so I just don't think PAE is that significant of a headwind for us. Yeah, it's growing and yeah, it's out there, but we know what's driving it. It's all being driven off of the economics. It's not being driven off of great things for patients. I think a lot of the patients are either patients with very mild symptoms, that they're doing it almost preventively. If they are patients that have severe symptoms, we know the procedure doesn't work very well, and their re-intervention rates are really high, so I think those patients will come back. I think the cancer issue is a significant opportunity for us. It leverages our exact therapy. We're running the WATER IV trial.
The data comes out May of next year for the six-month primary endpoint. You look at the choice that men with BPH face, it's bad. The choice that men face with cancer is horrifyingly bad. Live with the cancer in your body and keep your sexual and urinary function, or get the cancer out of your body and give up your sexual function and take a one in three chance you're going to lose your urinary function. That is a terrible option, and the fastest-growing segment of cancer therapy right now is watchful waiting. Because men would just rather not have a procedure. They'd rather live with the cancer in their body and hope that they're a slow progressor than change.
I think if our data's positive and we show that we can get the cancer out of your body but not destroy your sexual function, urinary function, I think that's going to be a huge game changer for patients.
You get the data in May and then submission, approval, rollout. How does this-
Well, we'll see the. We're not contraindicated for cancer now.
Right.
If somebody wanted to start doing it, they certainly could. The issue for us is, what's the data say? I think I'm a big believer in the data drives your strategy, not the other way around. We'll have the six-month data in May, and we'll have the one-year data probably in the fall. I think those two data sets are going to be important for how we lay out our long-term strategy.
Okay. We're definitely over time, so thanks for joining us.
Thanks.
Thank you. Happy to be here.