Pulmonx Corporation (NASDAQ:LUNG) Q4 2023 Earnings Call Transcript

Pulmonx Corporation (NASDAQ:LUNG) Q4 2023 Earnings Call Transcript February 21, 2024

Pulmonx Corporation beats earnings expectations. Reported EPS is $-0.36, expectations were $-0.39. LUNG isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good day and thank you for standing by. Welcome to the Pulmonx Fourth Quarter and Full Year 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. Please be advised today’s conference is being recorded. I would now like to hand the conference over to your host today, Laine Morgan at the Gilmartin Group. Laine, please go ahead.

Laine Morgan: Thanks operator. Good afternoon and thank you 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. Earlier today, Pulmonx issued a press release announcing its financial results for the fourth quarter and year ended December 31, 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 operating trends, commercial strategies and future financial performance; the timing and results of clinical trials; the impact of COVID-19 on our business and prospects for recovery, expense management, execution for hiring; growth in our organization; market opportunity; guidance for revenue; gross margin and operating expenses; commercial expansion and the product pipeline 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 November 3, 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, February 21, 2024.

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, everyone, and welcome to our fourth quarter and full year 2023 earnings call. Here with me is John McKune, our Interim Chief Financial Officer. Before I review our recent performance and strategic priorities for 2024, I’d like to first briefly discuss the announcement we made today regarding my intention to retire as President and Chief Executive Officer. It has been a privilege to serve as CEO for the past nine years and lead our mission to bring our Zephyr valve treatment to severe emphysema and COPD patients in need. I look forward to continuing this work as a member of the company’s Board of Directors. Following my departure, and as announced earlier today, Steve Williamson will become President and CEO, effective March 15th of this year, and I will work closely with him as a senior advisor, and then in my capacity as a member of the Board to ensure a seamless transition.

Steve brings nearly three decades of MedTech industry experience, driving revenue growth, innovative product launches, and numerous acquisitions and global expansion initiatives across high growth and well-established public companies. I am confident he will effectively lead our business as we embark on our next commercial growth phase. Now moving to our fourth quarter and full year 2023 performance. We are very pleased with our fourth quarter performance, capping off an exciting year for Pulmonx in which we achieved record sales. In the fourth quarter, we delivered $19.3 million in worldwide sales, driven by another record U.S. performance of $13.7 million in sales, representing 45% growth over the same period last year. As a result, we exceeded our initial expectations, achieving full year 2023 revenue of $68.7 million, representing 28% growth over 2022.

Beyond revenue growth, 2023 represents a year of strong execution. More specifically, we increased our U.S. commercial footprint in 2023, adding 59 new treating centers, of which 14 were added in the fourth quarter, bringing our total number of centers to 337. We saw improvements in our U.S. account productivity metrics as our focused commercial strategy gained traction throughout the year. We received approval for reimbursement for our Zephyr Valve treatment in Japan and are launching a post-market approval study there. And lastly, we received approval from FDA to proceed with the launch of our CONVERT II pivotal study for AeriSeal. Our success in 2023 positions us well for another strong year. In 2024, we will remain focused on further establishing Zephyr Valve treatment as a routine procedure, launching our post-market approval study in Japan and advancing our AeriSeal clinical development program.

Looking ahead, we anticipate full year 2024 revenue to be in the range of $81 million to $84 million. To accomplish this, we expect to maintain our three-pronged U.S. commercial strategy, which demonstrated success in 2023. Specifically, we will continue to focus on, one, training new hospitals that have the potential to be high-performing Zephyr Valve centers, two, facilitating the sharing of best practices to existing centers to optimize their Zephyr Valve programs, and increasingly, three, building local awareness of the benefits of our treatment among COPD physicians and patients. On training new Zephyr Valve centers, as mentioned earlier, we added 14 new centers in the U.S. in the fourth quarter of 2023, bringing our total number to 337 centers.

We will continue to selectively identify potentially high-performing Zephyr Valve centers and expect to establish 10 to 15 new accounts per quarter, consistent with our historical pace. Meanwhile, we were very pleased to have achieved our goal to see average U.S. account productivity grow to over five cases per active established center by year-end 2023. From an account activity perspective, we saw 73% or 245 U.S. centers place a revenue-generating order in the fourth quarter in line with our year-end expectations. As a reminder, we designed and reported these account activity and productivity metrics to measure and demonstrate the early success of our focused commercial strategy. As we look ahead, we expect to continue to benefit from year-over-year gains in activity and productivity on an annualized basis.

Given our success through 2023, we plan to maintain our three-pronged U.S. commercial strategy in 2024 with an increasing focus on investing more broadly in cost-efficient education around the benefits and availability of Zephyr Valve treatment. More specifically, we plan to begin educating providers within targeted geographies where there are already well-developed programs and allocating additional resources designed to cultivate patient interest. In addition to our nationwide education efforts, such as our online CME & Webinar programs, in 2024, we will be organizing education sessions in local geographies to engage physicians, nurses, and allied health professionals on the clinical benefits of our Zephyr Valves. In terms of patient education, we are driving efficiency and precision in our direct-to-patient efforts by identifying specific keywords and other elements of our digital ads that most resonate with patients to increase engagement.

As a result, we are seeing a greater volume of patient inquiries and deeper engagement on our website and social media channels. In addition to our initiatives to build awareness, we continue to share best practices with less mature accounts to help support our customers as they build more advanced programs. We will also continue to launch new accounts that have the potential to be high-performing Zephyr Valve Centers. Internationally, we are confident in our opportunity to drive further market penetration, particularly in Europe, as growth in the U.S. continues to outpace growth in international markets in 2023. While our commercial focus will remain primarily on growing our U.S. presence, we are working this year to continue optimizing our international operations and to adapt several highly effective tools we developed in the U.S. for our largest OUS markets.

We look forward to investing in COPD community education programs to support the development of more successful programs at Zephyr Valve treating centers while increasing peer-to-peer education and support for clinical best practice sharing. We believe our efforts will collectively serve as the foundation for sustained growth in the future. More specifically, we anticipate the impact of our international efforts to become increasingly evident next year as we focus on foundation building this year. Additionally, we have commenced our post-market approval study in Japan and expect to enroll our first patients in the first half of this year. As a reminder, we received approval for reimbursement for our Zephyr Valve treatment in Japan last year and will initiate sales through a post-market approval study of approximately 140 patients at 10 to 15 sites.

At this point, we are working closely with key opinion leaders to generate awareness of the clinical benefits of our Zephyr Valve and to train sites for enrollment. This study marks an essential step toward broader commercialization in a new market where we estimate approximately 100,000 patients stand to benefit from our treatment. Meanwhile, we are very happy to be advancing our clinical development pipeline following the receipt of approval from FDA to commence the AeriSeal Pivotal Trial, CONVERT II. This study marks a critical step in our efforts to expand our addressable market to include the one in five patients who undergo a Chartis assessment and are not currently eligible to receive Zephyr Valves due to the presence of collateral ventilation in the target lobe.

CONVERT II is designed to evaluate the safety and effectiveness of the AeriSeal system in limiting collateral ventilation in severe COPD and emphysema patients. The study will enroll approximately 200 patients in and outside the U.S., patients who experience conversion following AeriSeal treatment will then be implanted with Zephyr Valves per current standard-of-care for lung volume reduction. Procedural success defined as lung volume reduction and other clinical parameters will be evaluated at six months post-valve treatment, which will be used to support our PMA application. We are thrilled to be moving forward with CONVERT II, which we currently expect to enroll through approximately at the end of next year. We also look forward to the presentation of final data from CONVERT I following enrollment completion.

We continue to expect final data to be presented at the European Respiratory Society Congress in early September of this year in Vienna. In summary, we are very pleased with our 2023 performance and remain as confident as ever in our strategy and long-term growth trajectory of our business. I will now turn the call over to John to provide a more detailed review of our fourth quarter results.

John McKune: Thank you, Glenn, and good afternoon, everyone. Total worldwide revenue for the three months ended December 31, 2023 was a record $19.3 million, a 25% increase from $15.4 million in the same period of the prior year and an increase of 23% on a constant currency basis. Our strong performance was driven by sustained momentum across the U.S. and reflects our expectation for near-term growth to be driven by U.S. performance as we work across international markets to optimize our commercial infrastructure and introduce new tools. U.S. revenue in the fourth quarter reached a new high of $13.7 million, a 45% increase from $9.5 million during the prior year period. International revenue in the fourth quarter of 2023 was $5.6 million, a 7% decrease from $6 million during the same period last year and a decrease of 12% on a constant currency basis.

Gross margin for the fourth quarter of 2023 was 75% compared to 73% in the prior year, reflecting benefits from efficiencies in production and increasing pricing. In 2024, we expect gross margin to fall within the range of 74% to 75%, remaining near 74% in the first half of the year and trending towards 75% in the back half of the year. Total operating expenses for the fourth quarter of 2023 were $28.3 million, a 10% increase from $25.8 million in the fourth quarter of 2022. Non-cash, stock-based compensation expense was $5.6 million in the fourth quarter of 2023. Excluding stock-based compensation expense, total operating expenses in the fourth quarter of 2023 increased 6% from the same period of the prior year. Looking ahead, we expect operating expenses for the full year 2024 to fall between $132 million to $134 million, inclusive of approximately $30 million of non-cash stock-based compensation expense as we take a disciplined and prudent approach to managing expenses while continuing to invest to drive growth.

Excluding non-cash stock-based compensation expense, our operating expense guidance implies an increase in operating expenses of 11% to 13% in 2024 over 2023, demonstrating operating leverage as we expect to increase our cash operating expenses at a meaningfully lower rate than we expect to grow revenue. R&D expenses for the fourth quarter of 2023 were $3.9 million, flat from the same period of the prior year. Sales, general and administrative expenses for the fourth quarter of 2023 were $24.4 million compared to $21.9 million in the fourth quarter of 2022. The increase was primarily attributable to investment in our commercial activities, as well as an increase in legal and stock-based compensation expenses. Net loss for the fourth quarter of 2023 was $13.9 million or a loss of $0.36 per share as compared to a net loss of $14.3 million or a loss of $0.38 per share for the same period of the prior year.

An average weighted share count of 38.4 million shares was used to determine loss per share for the fourth quarter 2023. Adjusted EBITDA loss for the fourth quarter of 2023 was $8.4 million as compared to $9.8 million in the fourth quarter of 2022. We ended December 31, 2023 with $131.5 million in cash, cash equivalents and marketable securities, a decrease of $8.3 million from September 30th, 2023 and $37.2 million of debt outstanding. Over the full year 2023, our total cash burn was $36 million compared to approximately $44 million in 2022, well ahead of our initial expectations. We believe our prudent cash management in 2023 combined with our expectation to further improve our burn rate in 2024 and beyond keep us comfortably on track to reach cash flow break-even in our current operations with the capital that we have on hand.

We continue to manage our business to maintain a cash runway of at least three years of forward cash burn until we turn cash flow positive. Now turning to our revenue outlook for 2024, we expect to deliver full year 2024 revenue in the range of $81million to $84 million. We anticipate a neutral to slightly positive impact on revenue from foreign exchange. As is typical in our business, we expect sales in the first quarter of 2024 to be down sequentially compared to the fourth quarter of 2023 before seeing improvement throughout the balance of the year similar to what we saw in 2023. As Glenn mentioned, we also expect to continue to see much stronger growth in the U.S. compared to international geographies throughout 2024. With that, I will turn the call back to Glenn for closing comments.

Glendon French: Thanks, John. In summary, we are very pleased with our fourth quarter and full year 2023 performance and remain confident in our ability to execute on our commercial and clinical development goals to drive long-term sustained growth. Further, we remain focused on expanding and strengthening our account base in our current markets while we are also advancing our AeriSeal CONVERT II clinical trial and executing our post-market approval study in Japan. Lastly, our revenue growth, strong balance sheet and healthy gross margins together provide us with a clear path to cash flow break-even. Again, it has been a pleasure to serve as CEO for the past nine years. I look forward to continuing to support the business as a member of the company’s board of directors and to welcoming Steve Williamson to Pulmonx in a few weeks.

Together, we will work to ensure a very smooth transition. With that, I’d like to thank you for your attention and we will now open the call up for questions. Operator?

Operator: Thank you. [Operator Instructions] And our first question is going to come from the line of Jason Bednar with Piper Sandler. Your line is open. Please go ahead.

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Q&A Session

Jason Bednar: Hey, good afternoon. Thanks for taking the questions. And first off, Glenn, congrats on the retirement, everything you’ve done for Pulmonx and the emphysema community. Really hoping the best for you and really enjoyed working with you here. Wanted to start off really just, first question, Glenn, three-pronged effort you’ve talked about in driving growth in the U.S. and then talking about leveraging some of those items as you look to your OUS market. I guess of those levers that you’ve talked about and you’re pulling on, can you talk about which of these that you’d expect to have the greatest impact in 2024? And would you anticipate the upside that’s leading to your guidance this year? Is that coming probably more from account productivity, a increase in the active accounts that you’re talking about? I think you finished at 73%. Is there any upside there? How do we think about the growth algorithm coming together this year?

Glendon French: Jason, thank you very much for your initial comments. Appreciate that. With regard to the question in terms of the three-pronged efforts, our business is obviously out of the blocks. We needed to open up some accounts, but it’s never been central to what we do to open up these new accounts. It’s been fairly organic. We provide no specific incentives to open them up. They’re folks that we come upon either because geographies are not well covered or physicians decide that they really want to try to push us to open up a specific account in a specific geography. So training more hospitals, I don’t see, is sort of central to any kind of upside this year. I think we’ll continue to be opening up new accounts, as I mentioned.

We’ve always talked about 10 to 15 per quarter. I imagine that’ll continue. So in any case, that’s where we are. I think that it’s the second and the third element. Most of the performance that we have seen over the last five quarters has been driven by the second point, which is facilitating best practices and increasing efficiency at our Zephyr Valve centers, sort of taking them from left to right on this very well-defined process that we’ve established. And I know that we’re not nearly where we want to be with that process. And I would imagine that as we look across the year, if you were to say, if hypothetically there was upside to what we’re talking about, it would probably come from continuing to execute very well on that additional element.

Also, as we’ve talked about earlier in the script, we’re going to turn up a little bit on the activity in increasing local awareness. And so that too could be a contributor, but we’ve had what I would say is less experience in that vein to this point, although we’ve tested it over the last several years and are very confident in our ability to bend the curve in a positive way there. We don’t have as much experience as we do optimizing the existing accounts. So I would say those second two elements will likely be bigger contributors to upside if that was to present itself.

Jason Bednar: Okay, that’s actually a nice segway. I’m going to have a little bit of a two-part follow-up here. Maybe first on that, I did pick up on that, on raising awareness in the local community point. It did sound more comprehensive maybe than we’ve heard in the past. Is that what’s driving the greater uptick in OpEx that the OpEx spend looked a little bit higher in the guide than what we were thinking? Or are you diverting funds that you had previously allocated elsewhere and this actually isn’t as much of a raise as what maybe I’m thinking it is? So that’d be one point, but then moving back up the P&L, I guess, what’s it going to take from a volume perspective to get gross margins working even higher than where we’re at right now? That’s mid-70s are nothing to sneeze at, but it seems like there should still be a little more upside, especially if a lot of this growth is coming from a higher margin market like the U.S.

Glendon French: Yes, Jason. Well, as always. Yes, good questions, Jason. Yes, I’m going to hand this off to John in just a second here, but before we talk about the driving up OpEx, which was the first part of the question where you were wondering if increasing local awareness was materially increasing our OpEx, I’ll leave that to John to comment on. I will say that on the margin side of things, our business is sensitive or our margins are sensitive to volume. And so as volume goes up, that’s probably the greatest way that we can continue to inch up our margins. So I’ll leave you with that if John wants to embellish that further. Great, otherwise, John, you want to take the first element of the question?

John McKune: Sure. As far as OpEx goes, Jason, yes, the part of the increase is going to be increasing the spend as it relates to further educating the community about the benefits of the Zephyr Valve. So a very simple answer, yes, that is driving part of the increase in the OpEx.

Jason Bednar: Okay, helpful. Maybe I’ll save one more for our audience. I’ll save that for later. But just maybe to come back to that mid-70s, I mean, is there anything we can think about as far as like where U.S. gross margins sit today and like maybe incremental margins as like that incremental volume comes through?

Glendon French: Yes, you are correct that as the U.S. continues to grow, that has a positive impact on our global gross margin number. And as I talked about before, volume also positively impacts. There’s some counterbalancing elements, increasing costs associated with raw materials and so forth, which factor into that. But the net of it is that both of those, you’ve hit on the two things that are most significant in inching us further up on that margin scale. So getting into the upper half of the 70s is helped by growing faster in the U.S. and it’s helped by spreading our overhead here in Northern California across a greater number of units.