Pulmonx Corporation (NASDAQ:LUNG) Q3 2023 Earnings Call Transcript

Pulmonx Corporation (NASDAQ:LUNG) Q3 2023 Earnings Call Transcript October 30, 2023

Pulmonx Corporation beats earnings expectations. Reported EPS is $-0.39, expectations were $-0.45.

Operator: Thank you for standing by. Welcome to the Pulmonx Third Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker’s presentation, there will be a question-and-answer session. As a reminder, today’s conference is being recorded. I would now like to turn the conference over to your host, Laine Morgan at the Gilmartin Group. Laine, please go ahead.

Dorothy Morgan: Thank you, operator. Good afternoon and thank you all for participating in today’s call. Joining me from Pulmonx are Glen French, President and Chief Executive Officer, and John McKune, Interim Chief Financial Officer and Vice President Corporate Controller. Earlier today, Pulmonx issued a press release announcing its financial results for the quarter ended September 30, 2023. A copy of the press release is available on Pulmonx’s website. Before we begin, I’d like to remind you that management will make statements during this call that include forward-looking statements within the meaning of federal securities laws, which are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995.

Any statements contained in this call that relate to expectations or predictions of future events, results or performance are forward-looking statements. All forward-looking statements, including without limitation those relating to our Chief Financial Officer transition, our operating trends, commercial strategies and future financial performance; the timing and results of clinical trials; expense management, expectations for hiring; growth in our organization; market opportunity; guidance for revenue; gross margin and operating expenses; commercial expansion and product pipeline for development, are based upon our current estimates and various assumptions. These statements involve material risks and uncertainties that could cause actual results or events to materially differ from those anticipated or implied by these forward-looking statements.

Accordingly, you should not place undue reliance on these statements. For a list and description of the risks and uncertainties associated with our business, please refer to the Risk Factors section of our filings with the Securities and Exchange Commission included in quarterly report on Form 10-Q filed with the SEC on August 4, 2023. Also during this call, we will discuss certain non-GAAP financial measures. Reconciliations of these non-GAAP financial measures to the most directly comparable GAAP financial measures are provided in the press release, which is posted on our Investor Relations website. These non-GAAP measures are not intended to be a substitute for our GAAP results. This conference call contains time sensitive information and is accurate only as of the live broadcast today, October 30, 2023.

Pulmonx disclaims any intention or obligation, except as required by law, to update or revise any financial projections or forward-looking statements, whether because of new information, future events or otherwise. And with that, I’ll turn the call over to Glen.

Glendon French: Thanks, Laine. Good afternoon, and welcome to our third quarter 2023 earnings call. Here with me is John McKune, our recently appointed Interim Chief Financial Officer, who’s been a leader on our finance team as VP Corporate Controller since our IPO. We are very pleased with our recent performance, as we achieved another quarter of record revenue. In the third quarter, we delivered $17.7 million in worldwide sales, representing 31% growth over the same period of the prior year and 29% on a constant currency basis. Growth was driven primarily by record U.S. performance as we achieved $11.8 million in sales, representing 41% year-over-year growth. Outperformance in the U.S. was due to continued momentum and traction of our focused commercial strategy and also to slightly less seasonal impact than expected.

Meanwhile, seasonal impacts internationally were more consistent with our expectations and historical trends. Given the strength of our business year-to-date, we are updating our full year 2023 revenue guidance to be in the range of $67 million to $68 million, up from our prior guidance of $64 million to $66 million. At the midpoint, this implies anticipated year-over-year growth of over 25%. We attribute our confidence largely to the traction we are seeing with our focused commercial strategy as we had planned this strategy designed to accelerate account productivity across our already meaningful footprint has resulted in one more existing treating centers with optimized Zephyr Valve programs; two, new treating centers launching with a greater ability to scale; and three, increased awareness around the benefits of our treatment among COPD physicians and the many patients, who stand to benefit from it.

In the third quarter, average U.S. account productivity was approximately 4.7 cases per center despite anticipated summer seasonality. We attribute this largely to improvement in the number of highly experienced and efficient accounts and the cases they performed, offset by continued growth in our base of actively treating centers. As a reminder, we have measured account productivity based on the average number of cases conducted in a given quarter by our active established Zephyr Valve treating hospitals, which are those that have been performing for at least four quarters and placed a revenue-generating order in the current quarter. While seasonal trends will drive some variability in this metric from quarter-to-quarter, on average, over time, we expect account productivity to continue to move higher into the fourth quarter and beyond.

Meanwhile, U.S. account activity in the third quarter of 2023 was 73%, representing 235 centers that placed a revenue-generating order in the third quarter. We continue to expect account activity to remain in the low to mid-70s range as we grow our denominator of treating centers. Lastly, we continue to expand our base of U.S. centers. We added 15 new accounts in the U.S. in the third quarter, bringing the total number of U.S. centers to 323 and we now expect to end the year having opened approximately 55 to 60 new accounts. Collectively, commercial trends year-to-date have demonstrated to us that treating centers, both established and new, are eager to adopt Zephyr Valve treatment and invest in their programs. This comes as patients and referring COPD physicians become increasingly familiar with our technology and its clinical benefits due to our ongoing education and outreach focused in geographies with optimized Zephyr programs.

Taken together, we believe that, one, there is still meaningfully more room to grow within existing centers; and two, we are still early in penetrating broader patient demand. As we look forward into 2024, we will invest in our commercial and educational capabilities to penetrate the market. We will continue to grow our base of highly trained and motivated new centers and strengthen existing centers by helping our champions explain the value of their programs and the value that they bring to the hospital system. And we will continue to share best practices on how to build advanced Zephyr Valve programs. In targeted geographies with well-developed programs, we will increase both patient outreach and education of COPD-focused health care providers with proven strategies that we can replicate and scale.

Taken together, these strategies will help develop a growing base of highly capable centers with increasing penetration of the substantial opportunity in these geographies. Meanwhile, we will continue to benefit from a growing body of published clinical evidence. Most recently, we were pleased to see the publication of data from a single-center retrospective analysis in Germany that published in the Journal of Respiratory Medicine. Results from the study suggested that patients who received endobronchial valve implantation experienced a reduction in severe COPD exacerbations in the 12 months following implantation as compared to the 12 months prior to treatment. This is similar to the documented reductions in severe exacerbations delivered by lung volume reduction surgery.

Moving now to our international expansion plans. We are excited to have recently been approved for reimbursement for our Zephyr Valve treatment in Japan, which allows pricing that is consistent with our global average. This marks an essential step toward commercialization in Japan, starting next year with a post-market approval study of approximately 140 patients at 10 to 15 sites, which will then be followed by broader commercial expansion. Now, turning to our clinical development pipeline, we remain on track with our AeriSeal program, which we expect will expand the addressable market for our Zephyr Valve solution for severe emphysema patients with collateral ventilation and continue to expect final data of the CONVERT 1 trial to be presented later next year.

Meanwhile, we are preparing to launch our CONVERT 2 trial, which will form the basis for our U.S. AeriSeal PMA submission. I’ll now turn the call over to John to provide more detailed review of our third quarter results. John?

John McKune: Thank you, Glenn, and good afternoon, everyone. Total worldwide revenue for the three months ended September 30, 2023, reached a new quarterly high of $17.7 million, a 31% increase from $13.5 million in the same period of the prior year and 29% on a constant currency basis. U.S. revenue in the third quarter reached a new record of $11.8 million, a 41% increase from $8.4 million during the prior year period. The growth in U.S. sales reflected continued commercial momentum and adoption of our Zephyr Valve therapy as well as less impact from seasonality compared to the prior year period. International revenue in the third quarter of 2023 was $5.8 million, a 14% increase from $5.1 million during the same period last year and a 9% increase on a constant currency basis.

The overall increase in international sales was driven by growth of Zephyr Valve procedure volumes. Gross margin for the third quarter of 2023 was 74% compared to 75% in the prior year period, reflecting higher inventory reserves in the quarter. We expect gross margin for the remainder of 2023 to be approximately 74%. Total operating expenses for the third quarter of 2023 were $28.2 million, a 17% increase from $24.1 million in the third quarter of 2022. Non-cash stock-based compensation expense was $6 million in the third quarter of 2023. Excluding stock-based compensation expense, total operating expenses in the third quarter of 2023 increased 12% from the same period of the prior year. Looking ahead, we continue to expect operating expenses for the full year 2023 to fall between $112 million to $114 million, inclusive of approximately $21 million of noncash stock-based compensation expense as we take a disciplined and prudent approach to managing expenses while contributing to invest to drive growth.

R&D expenses for the third quarter of 2023 were $4.2 million compared to $4.4 million in the same period of the prior year. The decrease was primarily attributable to lower AeriSeal program costs. Sales, general and administrative expenses for the third quarter of 2023 were $24 million compared to $19.7 million in the third quarter of 2022. The increase was attributable to continued investment in our commercial activities as well as an increase in legal and stock-based compensation expenses. Net loss for the third quarter of 2023 was $14.9 million or a loss of $0.39 per share as compared to a net loss of $14.2 million or a loss of $0.38 per share for the same period of the prior year. An average weighted share count of 38.1 million shares was used to determine loss per share for the third quarter of 2023.

Adjusted EBITDA loss for the third quarter of 2023 was $9 million as compared to $9.7 million in the third quarter of 2022. The year-over-year improvement demonstrates our ability to drive operating leverage. We ended September 30, 2023, with $139.8 million in cash, cash equivalents and marketable securities, a decrease of $7.9 million from the June 30, 2023, period. We continue to feel very good about the strength of our balance sheet and our pathway to cash flow breakeven. Finally, turning to our revenue outlook for 2023, given our strong performance in the third quarter, we are updating our full year 2023 revenue guidance to be in the range of $67 million to $68 million, representing approximately 25% to 27% growth over 2022 and up from our prior guidance of $64 million to $66 million.

I’ll now turn the call back to Glen for his closing comments.

Glendon French: So, in summary, I am very pleased with the way that we are executing our operational plans and with the resulting record third quarter results. We are confident in our long-term value proposition as we continue to drive increasingly predictable growth. Further, we are advancing key development projects and now entering Japan and in both ways are working to materially expand our already substantial addressable market. Finally, from a financial perspective, our revenue growth, strong balance sheet,and healthy gross margins together provide us a clear path to cash flow breakeven. With that, I’d like to thank you all for your attention, and we will now open the call for questions. Operator?

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Q&A Session

Operator: Certainly. [Operator Instructions] And our first question will come from Jason Bednar of Piper Sandler. Your line is open.

Jason Bednar: Hey. Good afternoon. Can you hear me okay?

Glendon French: Yes.

Jason Bednar: Great. Thanks. Congrats on the results in the quarter here, Glen. I want to go back to maybe the setup for — as we came into third quarter from your comments three months ago in early August. You talked about maybe some concerns around seasonality in the third quarter, but you clearly out-executed your plan, which is really great to see. So maybe could you help us understand where the quarter may have gone as you expected? Did you see the seasonality hit procedure volumes in maybe July and August? And then was the upside in the quarter and the raised the guidance here today, was that simply to what you saw then play out in September and October? Is that the right way to think about just how things unfolded for the quarter and really got us to where we’re at today?

Glendon French: Yes. Thanks, Jason. Yes, it was a very interesting quarter, and I remember talking to everybody sort of in early August, and July revealed a great deal of seasonality. And I think we probably signaled that when we were having those conversations. The good news is that August was not nearly as impacted as it was last year in the United States. And I think one of the things that’s fundamentally different as it relates to the U.S. situation this year versus last or at least what it appears at this point is that a good bit of that, which didn’t happen in the third quarter of last year, rolled into the fourth quarter. So you had these delays, you had people coming back from vacations and many cases they didn’t get those procedures executed until into the fourth quarter.

This year, in the third quarter, particularly in the U.S., though we had a delay in procedures in the early part of the quarter, they got completed later in the quarter. So I think that’s the dynamic that explains the strength of this period unto itself and also how it contrasts to what we saw last year.

Jason Bednar: Okay. And maybe if I could just come back then on maybe a real-time comment, I mean, can you talk about maybe the exit rate in September or maybe what we’re seeing here in early October and how that is contributing to the implied guidance here for the fourth quarter?

Glendon French: Well, the — what specifically are you — I mean I will give you as much detail as we traditionally provide in terms of inter-quarter results. But when you’re talking about the implied guidance, can you be more specific?

Jason Bednar: I guess I’m wondering to what extent the momentum you had coming out of September, how that influenced what you’re expecting now for the fourth quarter because this wasn’t just a typical beat and flow through the raise to the full year guide, this was a beat and then raise by even more than the beat. So I don’t want to speak for the rest of the Street, but I’m guessing that 4Q numbers are going to be moving higher today based on your updated guidance. So I’m trying to get a sense of how strong was that exit rate coming out of September that you were seeing in your business.

Glendon French: Yes. No. Our increase was greater than our beat for this quarter, but I think you’ll recall we had some catching up to do. So there were a number of questions in the past about making adjustments, we made them now. So in any case, I think as we look ahead, we are encouraged by the performance in the third quarter. We were sobered a little bit by the idea that we didn’t get any carryover into the fourth quarter in the way that we did last year. And we have a limited number of — if there’s a significant impact on the number of shipping days in the fourth quarter as well. So we feel good about the fourth quarter. We’ve always talked about that being a stronger relative quarter, but I think this third quarter performance is pushing up against that. And I think that’s reflected in the overall guidance and what that implies as it relates to what we expect to do in the fourth quarter.

Jason Bednar: All right. Perfect. And then one other maybe commercial-focused one from us, but it will be a two-parter, so apologies in advance. So you’ve got these new center additions in the U.S. You’ve been running well ahead of your expectations from where you started the year, which again is also really good to see. So first, are you able to support this better new account activity because the core productivity improvements have been as strong as they have been, like we’re just talking about in the last question? And then second part, given the commercial improvements you’ve made this year and the account activation adjustments that you’ve made, can you talk about maybe some context around the accounts that you’ve on-boarded this year, how they’ve scaled relative to the accounts that you on-boarded in 2021 or 2022? Just is there — are you having more success in scaling these accounts because you have this new commercial program in place?

Glendon French: Yes. So with regard to the — so first of all, the new additions are interesting. It’s always great to bring these new centers on. I mean we’re adding about one per territory per year. So we’ve got just — we got 55 reps, will be 55 to 60 new accounts this year. With regard to our metrics, the addition of new — of more greater-than-expected new accounts sort of dilutes the denominator in that regard. But with regard to our ability to absorb it, I think was what your question or comment was, this is kind of normal course activity, and we’re not realizing any challenges with regard to our ability to absorb those accounts. Although I will say that as those accounts mature and they get to the one-year mark and they get included into our calculations, they are diluted.