Good afternoon, everyone. Thanks for joining us on Day 3 of the 23rd Annual Needham Healthcare Conference. My name is David Saxon. I'm an analyst on the MedTech Research Team here at Needham & Company. With me today, we have the RxSight team, including Dr. Ron Kurtz and CEO and CFO Shelley Thunen. This afternoon's session will be a fireside chat. If anyone in the audience would like to ask a question, you can do so electronically through the Needham Conference portal, or you can feel free to email me at dsaxon@needhamco.com, and I'll do my best to work those in. First, Ron and Shelley, thank you so much for joining today. I guess we'll start with some Q&A. ASCRS was this weekend, obviously. You hosted a great panel Saturday morning.
Would love to hear just your key takeaways from that conference, maybe include the level of interest you're seeing among doctors relative to the last year or two.
Yeah. Well, thank you, David. I appreciate the opportunity to be here. As you mentioned, we just returned from the American Society of Cataract and Refractive Surgery meeting, which was held in Boston from Friday to Monday. That is the second-largest ophthalmic meeting, and it's one that is really focused on front-of-the-eye conditions such as cataract. And so it's an important meeting for us. It's a meeting where we get to interact with a lot of our current customers as well as potential customers. The meeting includes kind of a formal part of the meeting, which are generally presentations made by doctors to their colleagues on either case presentations or research series. And that's certainly what we've seen over the last several years, is continued growth in the number of presentations or the number of mentions that the LAL, the Light-Adjustable Lens, gets.
We had over 20 presentations in the formal part of the meeting this year and too many to mention where the LAL came up as a topic during open portions of that meeting. So I think it was very positive in that way where doctors can hear from their peers how both the LAL, the results, the clinical results with the LAL, but also how they have used it in their practice. We also have presentations within our booth at the exhibit floor. We had very well attended. It was unfortunately bad weather in Boston, but it meant that the doctors were inside the exhibit floor. So we in the industry side liked that. And we had really strong traffic in the booth.
Again, an opportunity for us to touch base with current customers, but more importantly, to explain the technology and even demonstrate the operation of the Light Delivery Device in our booth to prospective customers. And again, overall, a very positive experience all the way around. I don't know if you have anything you want to add there.
No.
Okay. Yeah. I mean, just walking me forward, it seemed like there was a ton of interest and foot traffic through the booth. Following these conferences, ASCRS and AAO, is there any material bump in LDD placements following these conferences, or at least an increase in leads in the pipeline?
I don't know that we, in the old days, that may have been the case. But really, for the last 20, 25 years, the sales process doesn't just involve 1 doctor coming to your booth and making a decision. It's an important component of it. But these practices are pretty sophisticated organizations, and so they have their own process. And we certainly, and this is an important part of it, but not the only one. As you mentioned, the other major meeting is the American Academy of Ophthalmology, which is generally in the fall. So there's roughly 6 months between these two meetings.
But interspersed between these meetings are a number of other regional important meetings as well, which also get a lot of, cumulatively, probably similar attendance because a lot of times, doctors, it's hard for them to go across the country or even go halfway across the country for a meeting, but they'll go to their regional meeting in order to get caught up on the activities. So I don't think there's any that these are important meetings, but they're not I wouldn't say they're seminal events.
Okay. Got it. All right. So maybe moving on to kind of the core business. So, Ron, you talked about these 4,000 cataract doctors as doing kind of the majority of all of the cataract procedures in the U.S. Would love to hear if you have any visibility, at least, on how that 4,000 translates into practice count. How many cataract surgeons are typically in a single practice?
Yeah. As you can imagine, David, there's a lot of variability. And I would know that we use that 4,000 number as the group that is doing more of the premium cataract procedures. But I always like to remind people that there are about 10,000 cataract surgeons in the US, and the other 6,000 are also doing a lot of cataract surgery, but they may not be doing as much premium. So, and they may be in practices with those 4,000. So there are practices that'll have some of the higher-volume premium surgeons and some that are lower volume. And generally, there's not as good data on the number of doctors in a practice. I would tell you just anecdotally that there's a lot of variability. There are still single practitioners, but generally, there's more than one doctor in a practice.
We are, of course, focused initially on people who are doing a lot of premium. You fish where the fish are. But one of the unique aspects of our technology is it also appeals to doctors who may have not adopted premium as much, even though there's an incredible financial incentive and practice incentive for them to do that, because they weren't comfortable either with the clinical results of the technology was out there or with their ability to confidently deliver on the desire of their patients to have reduced dependence on glasses. And in both those situations, because the Light Adjustable Lens offers extremely high quality of vision and extremely high precision in terms of refractive outcomes, that's an advantage, a specific advantage that the LAL has in those doctors who may not have adopted premium in a large way yet.
Okay. Got it. So 4,000 doctors, maybe fewer actual practices. You ended the year with 666 LDD placements. So maybe talk about just the runway you see going forward. I mean, there's a ton of interest, obviously, but how many more years can we continue to see these really strong LDD placements?
Well, we think we're in the early innings of this market, penetrating this market. Even within those 4,000 surgeons, and while that can be less, a fewer number of practices, the key number is the number of offices. And recall that many, if not most, practices will have multiple offices in order to reach different capture areas in their region. They're generally too far away from each other for patients to drive, but doctors will drive to those offices. Or they'll have practices that have multiple doctors. They may have one doctor in one office and another in another. So the number of offices is probably quite a bit higher, even when looking at the 4,000 surgeons. And then, of course, when you're looking at the 10,000, that even expands it further.
We think we're in the early innings and that we've got a long way to go to penetrate the U.S. market.
Okay. Yeah. That makes a ton of sense. So you have the reconfigured LDD out there. Pricing's a little higher than the prior version, so around, call it, $125,000-$130,000, I should say. Any pushback you're hearing from doctors around that price point?
Well, I don't think it's anything specific to the price point. I think that doctors or practices always have resistance to capital purchases. That's true no matter what you're trying to sell them. However, the argumentation for the LDD is really quite strong, and it's based on the ROI. For practices that have faced over the last 20 years continued reductions in the payment for reimbursed services, really only have one option to overcome that, and that is the premium IOL business. And because the Light Adjustable Lens appeals to a broad range of patients, in our surveys, about 75% of patients who get an LAL would have otherwise received a standard monofocal IOL, which provides no additional revenue to the practice, or a toric or astigmatism-correcting IOL, which generally provides about half the revenue to the practice.
That additional revenue from the LAL, which is typically priced at the top of their offerings within the practice, is really compelling. It means that an average LAL customer will be able to pay for the LDD in approximately 6 months. We have customers who've paid for them much faster than that, even in 1 or 2 months, depending on their volume. That is really the answer to that. I'll let Shelley speak to the margins on that and such, but I wouldn't say there's any more pushback than what you typically see with any capital equipment.
Yeah. I think I would add just at a price point, ASP, of around $130,000, that it is not that much higher than a piece of, say, diagnostic equipment that's replacement and does not generate revenue for the practice. I think that's important. We also try and price the product so that we have a fair margin, but that the margin is not prohibitive for doctors. We try and get 20%-30% gross margin now that we have a lower-cost-to-manufacture LDD and took about a 10% price increase. We're at the top end of that 30%. But one of the things that we always get asked is about the macroeconomy, but it's really about the ROI and the fact that the vast majority of practices pay cash for the LDD.
Interest rates haven't had that big an impact on us, although they certainly can go to any third-party leasing company, and we'll also get a lease. Most people just pay cash.
Okay. Got it. All right. So one thing we heard over the weekend from some doctors, at least, is that they get patient transfers from surrounding practices for patients who specifically want the LAL. So I guess maybe a couple of questions here. So when you first place an LDD in a new region, do you see that kind of halo effect where surrounding practices come to you in order to kind of stay competitive?
Well, I would say that the most important thing is that doctors want to offer the best outcomes to their patients. And as they get experience, whether it's through meetings like the ASCRS or through patients that have had surgery at a local practice or through their colleagues who are doing these procedures at a local practice and who they typically are friends with, those are all great ways for them to find out the benefits of the Light Adjustable Lens. And when you combine that with the positive economics for the practice, that's the primary driver for a practice. So I think that those are likely the reasons why practices adopt. I'm not sure that we see a halo effect.
I think it's just part of the natural process that as there's typically an earlier adopter in a region, and then other people will typically follow, whether it's they're following that particular doctor or a friend of theirs in another region. It really depends on the practice.
Okay. Got it. All right. And then maybe just going back to the LDD pricing. So I guess what should we assume in terms of pricing pressure going forward? Is it like a low single-digit headwind annually, or is there any reason that you could kind of keep that stable?
Yeah. That's a good question. If you look at our ASP history over the last several years, you can see that we've had good pricing discipline with our sales force as well. With the 10% increase we did guide, that we should see that price hold into 2024. But we do expect a little bit of drift down. That naturally happens with capital equipment, but that's just a natural phenomenon as well.
Okay. All right. And then maybe we'll talk about the LAL Plus. So maybe first, just talk about that lens and how it compares to the kind of original or traditional LAL.
I would start out with the similarities. Both the LAL and the LAL Plus, obviously, are adjustable. They provide the same level of precision, and they provide essentially the same level of quality of vision. When we obtained approval for the LAL Plus, which is through what's called a non-clinical PMA supplement, we initiated a phase 4 data registry with about 10 clinical sites. Those results were presented at the ASCRS main meeting this year by Hunter Newsom from Florida. The clinical results have been really excellent. They're providing some additional near and intermediate vision immediately after placement of the lens compared to the LAL. The LAL Plus has a somewhat extended depth of focus, which is how that is mediated. Yet, it provides an excellent quality of vision as well. It can be customized in the same way as an LAL.
The results with the LAL Plus have been excellent. Generally, the anecdotal reports as well as the clinical data has been quite positive.
Okay. So that better vision right off the bat. I mean, we heard from doctors on your panel, they're able to kind of dial in the vision with fewer light treatments. So those doctors were obviously experienced with the LAL technology. So I mean, is that a dynamic we could see kind of in the hands of kind of the broader market, or is there anything that they do specifically that's allowing them to do fewer light treatments?
Well, I would say that there's a lot of variation in the amount of light treatments can be anywhere from 1 adjustment to 3 adjustments. So the average that we see is about 1.5. But we do see that more adjustments tend to be done on an eye, which is focused more at near. And so by providing a little bit more near vision initially, it certainly is not surprising that some of our customers are seeing perhaps somewhat fewer adjustments. But at the end of the day, we don't really think that really matters. What matters is that the patients receive the best vision after all their adjustments are completed. And that's very much an individualized process. Some patients and doctors can get that done in 1 visit. Some are going to take 2. A few will take 3.
At the end of the day, it's that customization that the patients are paying for. That is the benefit of the technology.
Okay. Got it. All right. So we heard from recent doctors outside of the conference, but also at the conference, they'll convert some LAL volumes over to the Plus version. But just to be clear, I mean, financially speaking, there's no impact on RxSight. Is that correct? I mean, pricing and COGS are identical or at least very similar, right?
That's right. It's the same ASP and the same cost. We do that intentionally so doctors will choose the most appropriate lens for that patient. I think it's really too early to tell where doctors, and it'll be varied. Different doctors will make different decisions. The original LAL is certainly known for the highest quality of vision that it provides. Recall that about 40% or 45% of patients who get an LAL would have received a monofocal IOL. Those are likely patients who have other ocular conditions. They might have mild glaucoma or mild retinal conditions or have had previous LASIK or other refractive surgeries where you don't want to do any you always want to maintain the highest quality of vision in those eyes.
But certainly, for patients who you might have considered some other lens to provide more range of vision, the LAL Plus is going to be a great selection as well. So I think over time, the field will kind of figure out where those lines are. But for us, it doesn't make any difference.
Okay. All right. Sorry to keep referencing the conference this weekend, but another thing we heard more about was this refractive lens exchange opportunity. It seems like some are already seeing that demand. Others think it's something that'll be much larger in three to five years. So how do you think about that opportunity? And I mean, is there any meaningful RLE volumes in your current business currently?
Yeah. I think it's important to be careful about how we define terms for this. Refractive lens exchange is kind of a historical term, goes back 25 or 30 years, and was really directed at a different patient population, younger patients. This is even before there was LASIK. And what I think that people may not be fully aware that once you get into your 40s, certainly 50s and 60s, most patients have cataract. They have some level of cataract. It may not be to the level where it is impairing their daylight vision, but it typically has caused some symptoms, particularly at night. And the decision about when to do cataract surgery, that's really an individual physician and patient decision.
One of the inputs in that decision is if somebody has early cataract, well, if they also have a refractive error for distance, if they're wearing glasses for distance, then does it make sense to do, for example, if that patient wants to reduce their dependence on glasses, does it make sense to do a procedure like LASIK and then five or 10 years later do a cataract procedure when their cataract progresses to the point where it is more typically removed? I think that that judgment is really based on a lot of factors. But having a procedure in cataract surgery that delivers essentially the same precision as LASIK is something that is going to tend to push people to consider cataract surgery at a little earlier time in the disease. But these are soft indications, and they're soft numbers.
It's very difficult to know in any individual patient because there's a lot of variability about when people develop cataract. You can be 60 years old and have quite a dense cataract. You can be 80 years old and have relatively minor cataract.
Okay. So I mean, I guess just to follow up on that, so I mean, if because some of the doctors were pretty adamant that it could be a significant opportunity. So if that really if that trend does take off, I mean, it doesn't sound like it would really cannibalize cataract volumes for 10, 15 years. Is that the right way to think about it?
Yeah. I don't think that you're going to automatically see the age of cataract surgery shift overnight. I think that the age of cataract surgery has come down over the last 20 years. And it's come down as technology continues to improve and offers additional benefits to patients. And so therefore, they consider it at an earlier time point. Even in the last 5 or 10 years, the age of cataract surgery has dropped a year or two. So it's a continuation of a trend. And I think that if you're considering early cataract in a patient, you certainly want to be able to provide the highest assurance to that patient that they're going to have the best refractive outcomes. And certainly, the LAL does that.
Can I add one thing? I think you used the word cannibalize in future years, David. Overall, the typical our patient population, I'll just talk about the US, and it's very similar in other nations, is about 25% population, and it continues to grow. So overall, cataract surgery continues to grow just because of the aging of the population. So I think that if some people end up getting cataract surgery earlier, it's not going to hurt the future, right, overall. And then, of course, we, like some of our competitors, also think in the US that the premium cataract surgery market, which is about 20% of the volume in the US and 10% worldwide, has a great opportunity to grow to 30% or 40%. Now, when that happens, we don't know.
But as results get better and better and doctors continue to be so pushed to give their patients really excellent vision, when the patient is paying for it, they do want to be glasses-free or largely glasses-free. They also need it from an economic standpoint as well, as Ron Kurtz talked about it, just decreasing reimbursement across all fronts. The premium IOL segment is really the only place that they can go.
Okay. So just on this premium penetration, I mean, Alcon says it's 30%-40%. You guys tend to agree, it sounds like. But some of the doctors we heard from, I think, were as high as like 65%-70%. So why is that the right number? Why couldn't it be higher?
Well, I think you're going to have a range just like with anything. So while there are some practices that have very high penetration, as you alluded to, there are some practices that are going to be lower penetration. Some of it's going to be dependent on the demographics of the capture area for the practice. Some of it's going to be dependent on the practice itself or the physician, on how well they are at educating patients about their options. But I think the trend is consistent that technology's getting better, doctors are getting better, and practices are highly motivated to move patients from standard monofocal IOLs that are reimbursed at approximately $500 to the practice.
That's 80% or 90% reduction in real terms relative to 25 years ago versus moving them into a premium lens that's going to give the patient better vision, and it's going to obviously be positive for the economics of the practice.
All right. So maybe we'll touch briefly on international. So you're in Canada. I think you're in Germany and Mexico. Correct me if I'm wrong. But what are your thoughts on expanding more broadly internationally and maybe specifically in Europe? Are there any markets that you think are attractive that you should be in over the next, call it, 3-5 years?
Absolutely. I mean, maybe I'll start by saying, ophthalmology is a global field. And while there are 4.5 million cataract procedures in the U.S., there are over 30 million globally. So the penetration with premium is lower, probably about half what it is in the U.S. But there's a good number of countries, approximately 20, where the bulk of the OUS premium procedures are being done. And so those are quite attractive markets. We have always felt that the first step is to establish a strong presence in the U.S. Even though ophthalmology is global, the U.S. market and physicians tend to set the pace. That was certainly true with LASIK, with phacoemulsification, with premium lenses in general. And so it has and will continue to be important for us to be successful in the U.S.
But as we continue to do that, we're certainly looking outside the U.S. at these attractive markets, both in Europe and Asia, where there's a regulatory component to those. And as we move through those, we'll certainly be looking to expand in those markets.
What's premium IOL pricing in Europe?
It's fairly similar. In the markets that I've referred to, it's fairly similar to what it is in the U.S.
Okay. All right. Maybe looking specifically at 2024 and guidance. So Shelley, maybe remind us what's assumed in guidance from a seasonality perspective, both for LALs and LDDs. And then, I mean, to the extent you can say or want to share, how is first quarter looking? Anything to call out there?
Okay. I'll talk with our general seasonality guidance and certainly what happened in 2022 and 2023 as well. We've seen this in other companies that Ron had founded over the last 20 years, is that there is definitely seasonality. It tends to be that your fourth quarter and your second quarter are the strongest, both for capital equipment as well as for procedures. Then the first quarter is a little softer, primarily on the capital side. It can be a little softer on the LAL side as well. Then third quarter tends to be the most seasonal because both doctors and patients are on vacation. So they're not as focused on it. What I would say about seasonality for us is because we're growing two ways. One is that we're growing by installing more LDDs and getting more practices.
But as well, our focus is on increasing the number of LALs, each of our practices' implants each quarter and even each month or week. And we're very focused on that. And we have a sales force as well as a clinical force that's focused on that. And so what you've seen is if you talk about sequential growth, and I'll talk historically, in the stronger quarters coming off, let's say, a very terrific but still weaker quarter and third quarter, you might get a 20%+ sequential increase. Whereas in your seasonally weaker quarters, you'll tend to get a 6%-10% sequential increase as well. So we haven't guidance specifically on that, but I think that those are just good trends to keep in mind as we think about the quarterly cadence.
Okay. So just to be clear, and historically speaking, even though looking at the fourth quarter to first quarter in the past couple of years, I mean, you still saw sequential growth and nothing to call out in 2024 that would change that trend or?
Yeah. What we were specific about is within 2024, we expect sequential guidance, increases each quarter. We had not commented on Q4 to Q1, but we did comment within the year.
Okay. All right. And then just on the margins, really strong gross margin guidance this year. And Shelley, you've talked about getting to 85%-plus at scale. So maybe just talk about the cadence to get there. I think this year implies 600 basis points of improvement. Maybe that slows some, but maybe just talk about the pathway to get to 85%. And I guess it'd be lower if you bake in LDDs, but 80%.
Yeah. No. We did give strong guidance. We had a 60% gross margin for 2023 and 62% last half of 2023, and we got it 65%-67%. What you see, of course, and it's typical of any kind of razor-razor-blade model, that your implantable, which is our LAL, will grow faster than the number of pieces of capital equipment. We certainly saw that in previous years as well. Mix is really what determines the increase in gross margin because the LAL has a much higher gross margin. As I mentioned before, we try and get 20%-30% on the capital, but obviously much higher on the LAL. So as LALs increase the percent of revenue, which happened in 2023 and in 2022, our margins naturally increase as well. We've always said that we'll never hold back sales of LDDs to manage margin.
And I think that, as Ron says, we're in early innings for LDD. And we should also see continued growth as we get into the international markets. I think an 85% would be where the company is very mature, and you would see predominantly, highly predominantly, LAL revenue. But I think we're a long ways away from that. And also, you get some margin improvement from the fact that our reconfigured LDD, we took about a 10% price increase, you mentioned that earlier, as well as the fact that it's less expensive to manufacture. So we get some benefit. We got that benefit in the second half of 2023, and we'll continue to get that benefit in 2024 as well. But really, the predominant thing is mix.
Okay. All right. Well, we're at time, so I think we'll wrap there. But Ron and Shelley, thank you so much for joining us this afternoon. Thanks to everyone who tuned in for the webcast, and really appreciate everyone's time.
Okay. Thank you. Appreciate your time and the invitation. Thank you.
Bye-bye.