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.

Jason Bednar: Okay, very helpful. Thanks so much, Glenn. Congrats again.

Operator: Thank you. And one moment for our next question. Our next question is going to come from the line of Rick Wise with Stifel. Your line is open. Please go ahead.

Rick Wise: Good afternoon to you both. Glenn, just as Steve Williamson’s new advisor, counselor, whatever words you used, and a member of the board, what’s the agenda coming in? Is it simply, and I say that in air quotes, is it simply continue to execute the plans that you’ve laid out? I was just struck that you used the phrase about him taking the company to its next commercial growth phase. So just maybe you could expand on what you’ve charged him or asked him to do and maybe give us a little more color on what you see as the next commercial growth phase.

Glendon French: Got it. So Rick, you in particular, I know we’ve talked a lot about sort of where we are in our process and we’ve talked about this three-step process where we have to have really well-trained accounts that are executing this procedure routinely and efficiently. And then we need to engage with the surrounding COPD physicians who control as many as 90% of the patients in a given geography and get them to the right place and then activate the patients that are rolling in. And as it relates to that sort of a third, a third, a third, we are in the early innings here. We are literally, maybe we’re in the second or third inning as we’re trying to bring these accounts forward. So we have a lot of additional work, some of which we’re doing in sort of staggered parallel and geographies that are more advanced in terms of their development than others, but we’re still in the early innings.

And so there’s plenty of opportunity to continue to execute against the existing plan. As we begin to learn about, or engage more and more in the driving patients in off the edges and our more developed geographies, I think there will be opportunities for us to accelerate even further. AeriSeal provides an incremental way to accelerate expanding in the marketplace does. I think we feel like this ship is pointed in the right direction. The sales are up and with regard to Steve’s charge, he’s going to be, I think he’s got a great background of moving markets and as it relates to us, I think, probably finding additional ways to get more wind behind those sales.

Rick Wise: Yes, that makes total sense. And to what degree is international an important or a stepped up aspect of this next phase? I mean, obviously with Japanese approval, that’s going to make a difference in the post-market study underway, but maybe give us that larger perspective and at the same time, help us better understand just as we look ahead to next year, should we expect that the international business is going to be, sort of returned to more compelling growth or how do we think about that set up for 2024? Thank you.

Glendon French: Okay, see, we’re talking about 2024 cause you said next year. I just want to make sure we’re talking about the same year.

Rick Wise: I’m sorry, the same year, yes, 2024. Well, 2024 and beyond.

Glendon French: Okay. Yes, no, I think it’s a great question. We have, it’s a really good question. So let me try to answer it concisely. I think that we have demonstrated what good looks like and what essential is to our business in the United States. We have always known that everywhere in the world, the great majority of patients are controlled by doctors in geographies that are sort of outside the field of view of the treating centers. We feel very strongly that centers of excellence is the right approach. And so I don’t care where you are in the world. Most of the patients are sort of “outside” the field of view of the treating physicians. So in the United States, we might have a dozen different tools that we are testing and using and identifying the things that work and work really well.

Some of those tools are processed. Some of those tools are literally, selling tools and so forth. We also know that the sales reps that are most productive in this kind of environment have a certain personality, certain skillset. And so with regard to our team outside of the United States, we have been intentionally evolving it in the direction of having the kind of profile that we’ve demonstrated works really well in the United States. We’re identifying that subset of tools that have worked really well in the United States. And I think really this year, 2024, is going to be about taking a handful or fewer of those key tools that are working great and making sure that we put them in place, the processes and tools in our major markets. We’re in 25 different markets, but 80% of our international business is in Europe, and it’s probably in about four different countries.

So that’s going to be our focus as it relates to our international business. Again, 85% of that business is in Europe. So we’re going to really be focused on best practices and installing those with our newly strengthened, essentially, team that’s well-focused and well-equipped. So that’s this year. And I think that we’re going to get things moving in a good and solid direction this year, probably harvesting a good bit of the upside in 2025. So we’re setting things up, getting them moving in the right direction. I wouldn’t over-index on the international contribution in 2024. Part of that’s for the reasons that I just talked about, and part of that is what’s going on in Japan. We’re going to put a little bit less than half of the patients into the study that stands between us and sort of freedom that fully operate commercially in Japan.

We are generating revenue through the study that we’re executing, but out of the 140 patients, we’re going to get a third or so of them into this study this year. There’s a lot of startup steps that have to go along the way here, including training the physicians, getting them up and running, and making sure that we’ve got the referral paths all opened up. The good news is that we’re going to be making a lot of noise in Japan as we’re executing on this study, which probably bodes well for us when things open up. But if we get a third of the patients in this year in Japan to populate that study, and the balance in next year, we don’t see material revenue coming out of Japan until 2026 when we’re able to open it up more broadly. And the good news, again, just as a reminder, is that we don’t have to wait for any kind of six-month follow-up or anything like that on those patients.

Once we get through that 140th patient, that gets opened up more broadly in a market that is going to be very well aware of this technology because we handpick these sites, not only because they’re most influential, but also because they’re very well dispersed geographically. So there’s going to be broad awareness, I expect, at the time that this opens up, late 25, early 26 in Japan.

Rick Wise: That’s great. Glenn, thank you for everything and congrats.

Glendon French: Rick, it’s been a pleasure working with you over the last couple decades.

Operator: Thank you. And our next question is going to come, one moment for our next question. And our next question is going to come from the line of Jon Young with Canaccord. Your line is open. Please go ahead.

Jon Young: Hi, good, I’m Jon. I just want to ask my friends congratulations on their retirement. Congrats on a strong Q4. I just kind of want to circle back to some of the comments from the Q&A session. First, I just want to make sure I heard you correctly on Jason’s question when I think about that for next year. These increases sounds like mostly SG&A from the education efforts. I also know you’re enrolling CONVERT II through the year. So how should we think of R&D increases for next year too?

John McKune: I’ll take that one. Jon, thanks for the question. Yes, we expect R&D to be up in 2024 compared to 2023 as we are, as you pointed out, as we enroll in our CONVERT II study and get that going. So we do expect to see on the OpEx front, both increases in SG&A driven by our investment on the commercial side of things. And then in R&D as well as we invest in the CONVERT II study.

Jon Young: Thanks, John. And then Glenn, just on Japan and your comments on Rick’s question there, is that timing a deviation from initial expectations, especially if one third of the patients being enrolled in 2024? And can you talk to maybe a little more color about maybe some of the intricacies of the market and some of the time it takes to enroll these patients?

Glendon French: Sure. I don’t know if it’s a deviation. I will say that these trials are hard to predict when they’re going to be done. Until you get about a third of the patients in, it’s really hard to see when the end is going to be. You probably enroll a third of the patients in the last three or four months of these studies. They absolutely pick up steam over time. There’s also, in all of these studies, non-trivial amount of startup time. Meaning the regulatory authorities give you a green light and that just allows you to go in and negotiate the contracts with the sites. You have to get the approval of ethics committees at those sites, and then you have to open up their referral process. And you can’t do any activity beyond what I just said until you have ethics committee approval.

And so there’s a great deal of lead time. So we’ve always anticipated that, I mean, this is like the 10th study I’ve done in this particular space over the last 27 years. And I think the shape of the curve is going to look very much like we’ve seen in all the prior studies. So I wouldn’t say the shape of the curve is in any way a surprise. And we’re just getting up and going and would expect to announce our first patient in both of these trials, the Japanese study as well as CONVERT II in the first half of this year.

Jon Young: Great, thanks again, Glenn. Congratulations.

Glendon French: Thank you.

Operator: Thank you. [Operator Instructions] And our next question comes from the line of Alex Nowak with Craig-Hallum. Your line is open. Please go ahead.

Unidentified Analyst: Hey, good afternoon. This is Connor [ph] on for Alex. Thanks for taking my questions and congrats on the retirement, Glenn.

Glendon French: Thank you.

Unidentified Analyst: So with $68 million in revenue this year, is there any possibility of adding on a related product to the portfolio in the future?

Glendon French: I think that we would be, is there any possibility? Sure, there’s a possibility. We’re not in the midst of anything. But we are open to accretive types of things that we would be able to leverage with our current call point if we could fully rationalize that. Having said that, we’ve got to be super careful that we don’t distract this finely tuned commercial organization that is growing at a high rate of speed with high margin products that they’re selling right now. And we just scraped the surface in terms of our market penetration, depending on whether you look at a prevalent market or an incident market, at the very best in our most penetrated market, we’re 20% penetrated. So we got a lot of upside that we, so we would be extremely discriminating, but yes, we’d be open to considering things.

Unidentified Analyst: Great, and then could you remind us on the AeriSeal timelines and then maybe frame up how large this opportunity could be?

Glendon French: AeriSeal timelines, well, so we’re commencing this trial and we will be probably enrolling it through next year to get to the couple hundred patients that we’re targeting. And it’s got six months follow up, a few months to collect the data and then however long it takes to get through FDA, good round numbers a year. So I guess that kind of gives you an idea of the timeline. So I would characterize the timeline as outside the normal scope of what your kind of out years would be if you were looking at 2024 through 2026. But the good news, I think about this situation that we’re in is the magnitude of the impact it could have on our business and the probability that as we say, this thing falls jelly side up, meaning whenever you do one of these trials, there’s always a risk associated with an unforeseen outcome.

And the CONVERT II trial is so similar to CONVERT I that we will, when we’re reporting those data later this year, I’m certainly going to be paying close attention, I imagine that many others will be as well because it should give us a pretty good sense of both the probability or the frequency with which we can convert the target patients and then how they behave once we put valves into them. So the question on what this does to, so I would imagine we’re going to be increasing our confidence with regard to the impact of this over time as these CONVERT I data become available. And then with regard to the impact, right now, no, this is probably not terminology I should use, but this is what I call from a marketing perspective kind of shooting fish in a barrel, meaning that the patients that we’re targeting with CONVERT are the very patients that have already signed up for valves.

They undergo, they get a StratX and it gives them a green light and then they undergo anesthesia. And at the front end of the procedure that we’re intending to put valves in, we do a Chartis assessment. And 20% of the time, those patients get woken up and told and they’re incredibly disappointed. They find out that they weren’t a candidate for valves because collateral ventilation was detected, again, one out of five times with the Chartis. And so what we’re targeting, the groups that we’re targeting in CONVERT-I and CONVERT-II are those patients. And so there’s, we’re going to get, we hope about 80% of those patients to a place where they get a positive benefit, and we’ll know in advance whether they’re candidates for AeriSeal. But we see this as roughly a 20% TAM expander, but it’s not like sort of a tangential market that we have to go penetrate.

These patients have already said they want valves, they’re already on the table. And when they find out they don’t get them, they go home crying in many cases. So it’s, I mean, this is, we’re going to, as you might imagine, prior to the procedure, we will tell the patient that there’s about an 80% chance you’re going to get valves. And if you don’t, we’d like you to authorize the use of AeriSeal, that’s what the physician would be saying. And we don’t anticipate that there will be many or any patients that will say that they’re not interested in getting AeriSeal as a path to getting valves, that there’s a 80% chance that when they get AeriSeal, they’re going to subsequently get valves.

Unidentified Analyst: Awesome, that’s very helpful. Thanks for taking my question.

Operator: Thank you. And I’m showing no further questions at this time, and I would like to hand the conference back to Glenn French for any further remarks.

Glendon French: Great, thank you very much, operator. Again, I’m very pleased with our 2023 performance and what it says about the future. I’m also very pleased with our forward going plans, and as well as the many wonderful people who will continue to deliver both performance and on the execution, ongoing execution of these plans. So thank you all very much for your time and interest in Pulmonx. I wish you a good afternoon or evening.

Operator: This concludes today’s conference call. Thank you for participating. You may now disconnect.