PROCEPT BioRobotics Corporation (NASDAQ:PRCT) Q4 2023 Earnings Call Transcript
PROCEPT BioRobotics Corporation (NASDAQ:PRCT) Q4 2023 Earnings Call Transcript February 28, 2024
PROCEPT BioRobotics Corporation 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 Q4 2023 PROCEPT BioRobotics 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. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker, Matt Bacso, Vice President of Investor Relations, please go ahead.
Matt Bacso: Good afternoon, and thank you for joining PROCEPT BioRobotics' Fourth Quarter 2023 Earnings Conference Call. Presenting on today's call are Reza Zadno, Chief Executive Officer, and Kevin Waters, Chief Financial Officer. Before we begin, I'd like to remind listeners that statements made on this conference call that relate to future plans, events, or performance are forward-looking statements as defined under the Private Securities Litigation Reform Act of 1995. While these forward-looking statements are based on management's current expectations and beliefs, these statements are subject to several risks, uncertainties, assumptions, and other factors that could cause results to differ materially from the expectations expressed on this conference call.
These risks and uncertainties are disclosed in more detail in PROCEPT BioRobotics filings with the Securities and Exchange Commission, all of which are available online at www.sec.gov. Listeners are cautioned not to place undue reliance on these forward-looking statements, which speak only as of today's date, February 27, 2024. Except as required by law, PROCEPT BioRobotics undertakes no obligation to update or revise any forward-looking statements to reflect new information, circumstances, unanticipated events that may arise. During the call, we will also reference certain financial measures that are not prepared in accordance with GAAP. More information about how we use these non-GAAP financial measures, as well as reconciliations of these measures to their nearest GAAP equivalent are included in our earnings release.
With that, I'll turn the call over to Reza.
Reza Zadno: Good afternoon, and thank you for joining us. For today's call, I will provide opening comments and a business update, followed by Kevin who will provide additional detail regarding our financial performance and initial 2024 guidance before opening the call to Q and A. Starting with our quarterly revenue results, we are pleased to report another strong quarter with total revenue for the fourth quarter of 2023 of $43.6 million, representing growth of 83% compared to the fourth quarter of 2022. On a full-year basis, total revenue was $136.2 million representing growth of 82%, increased average monthly utilization in the U.S. by approximately 10%, and exceptional fee, especially considering the substantial 89% increase in our U.S. install base.
The significant increase in new accounts in conjunction with our ability to get these accounts of the utilization care faster, further amplifies my pride in our team's accomplishment throughout the year. Given the strong underlying demand for Aquablation therapy, we were able to deliver average utilization of approximately 6.6 handpieces per account per month in 2023 and a record 7.3 handpieces per account in our fiscal fourth quarter. As a reminder, our initial 2023 guidance had assumed utilization of approximately 6.0 handpieces per month. Due to this rapid rate of adoption and support for Aquablation therapy, I am more confident than ever in our company's ability to become the standard of care for BPH patients. As we enter 2024, we believe there are several positive factors which will allow us to continue to execute against our long-term growth plan, while being disciplined in showing a path to profitability.
We believe these underlying fundamentals like the technology that is laying the foundation to become the BPH surgical standard of care and a business that will be a leading urology franchise globally. Starting with the current urology market in the United States, we are very fortunate to operate in a large market where the number one reason men see urologists are symptoms associated with BPH. Given the shortcomings of current surgical alternatives, an aging population that continues to increase, and the millions of men who currently forego treatment, we believe underlying market growth will be attractive for many years to come. We also believe urology patient volumes at our accounts continue to grow nicely. In fact, some urologists have indicated that in addition to normal patient activities, an increasing number of men who have failed medication are now seeking to schedule Aquablation therapy procedure as it pertains to hospital capital spending.
2023 was a challenging year for most hospitals due to accelerating inflation pressure to lengthen the average recovery from the pandemic. Through these persistent headwinds, we were able to achieve our 2023 sales goals. However, we believe the market is more stable now compared to the previous six to nine months. With a growing and increasingly educated patient population along with motivated urologists, we are seeing hospitals continue to prioritize investment in cutting-edge technologies to ensure they stay competitive and not lose patients to other area hospitals. We believe our AQUABEAM Robotic System allows hospitals to offer a cutting-edge technology in the BPH surgical space. We also exited the fourth quarter of 2023 with the U.S. installed base of 315 system out of a target market of 2,700 total hospitals that perform BPH surgeries.
While our initial commercial strategy was to target the most influential KOLs at the 860 high-volume hospitals, we have also been successful selling Aquablation therapy programs to remaining 1,800 low-volume hospitals. It is important to point out that a low-volume BPH hospital does not mean it is small. A significant number of low-volume BPH hospitals are large surgery centers, who historically did not perform resective surgeries. Given the disruptive nature of our technology and that patient outcomes are independent of surgeon skill or experience, low-volume centers can build a robust BPH practice with Aquablation therapy and not have to refer patients out to area specialists. Given this market dynamics, we are still very early in our adoption curve with the long runway in front of us.
In terms of our pipeline, a number of opportunities continue to grow meaningfully as we expand into new greenfield territories and add to our capital sales team. Compared to a year ago, we currently have more than doubled the opportunity to have cleared the stage where we assigned a high level of competence to close. Also, a significant percentage of our pipeline consists of low-volume hospitals. As Kevin will discuss later, our guidance philosophy continues to be informed by what we are seeing in our pipeline, how opportunities progress, what customers are telling us, and overall close rate. Turning to commercial organization. As mentioned on previous earnings call, our plan was to further expand our field-based commercial team in 2023. Speaking specifically about our capital sales personnel, we entered 2024 with approximately 40 capital reps, of which 10 were added in the third and fourth quarter of 2023.
As a reminder, we believe the productivity curve of capital reps is approximately six months. Over this six-month period, they are responsible for building out their respective pipelines. Thus, we do not expect the capital reps added in the fourth quarter of 2023 to start meaningfully contributing to U.S. system sales until the second half of 2024, which is factored into our 2024 guidance. However, we entered 2024 with the highest percentage of capital reps who have been with PROCEPT for more than 12 months. This is an important metric we track closely since continuity within territories correlates strongly to increased confidence of future deals closing. Additionally, we hired a new strategic account team which is not included in the 40 capital reps mentioned previously.
The role of our strategic accounts team will be focused exclusively on partnering with strategic idea networks across the country to improve our sales efficiency in both the capital selling process and improve utilization at targeted IDNs. As a reminder, we were successful in establishing sales and legal contracts with the majority of large strategic ideas in 2023. Despite not receiving any corporate IDN bulk buys in 2023, we believe we are making progress building these relationships, which could be a tailwind in our initial 2024 revenue guidance. Next, touching on our utilization team. Given our strong commercial momentum and expanding pipeline, 2023 was an investment year to meaningfully increase headcount and add capacity to support future growth.
Similar to our capital rep team, we entered 2024 with the most experienced utilization team in the company's history. While we will continue to increase headcount in 2024, it will be at a much slower pace compared to 2023. Our goal in 2024 will be for these reps to continue identifying, training, and educating new surgeons at existing and new accounts to increase utilization. Turning to surgeon interest and patient awareness. As we've communicated to investors over the last 12 months, our primary focus is for Aquablation therapy to become the standard of care for BPH surgery, and to achieve this goal, we have prioritized surgeon engagement, patient outcomes, and training. Surgeon interest has increased meaningfully, resulting in active surgeon growth of approximately 70% compared to 2022 levels.
While the primary driver of procedure volume continues to be active surgeon growth, our ability to also sustain surgeon retention rates above 90% quarter-to-quarter demonstrates the clear patient and surgeon benefits of our technology, which ultimately leads to increased utilization. As a company, we benefit greatly from this high-level of surgeon retention as our commercial team can focus on adding new surgeons. As it relates to specific Aquablation therapy, patient interest we have also seen a meaningful uptick in our search activity. Hospital customers continue to drive a significant amount of direct patient advertising and have reported attracting many new patients to their hospital that are seeking Aquablation therapy. Our current strategy will continue to be focused on surgeon engagement and awareness.
However, we believe patients actively researching Aquablation therapy and following through to see a surgeon is another positive indicator for our expanding product awareness and presence in the marketplace. Next, I want to touch on reimbursement and private pay coverage. The fourth quarter of 2023, CMS finalized its 2024 hospital outpatient prospective payment system. The Level 6 APC code for our procedure will provide the hospital approximately $8,800 for each Aquablation procedure, which is roughly 2.5% increase over the 2023 rates. Following the addition of United Healthcare in June, we now estimate roughly 95% of men in the U.S. have access to Aquabulation therapy, which is an increase from approximately 75% in January of 2023. With respect to the international market development activities, we generated $3.3 million of international revenue in the fourth quarter of 2023, representing growth of 64% compared to the prior year period.
Growth in the fourth quarter was driven primarily by strong sales momentum in the United Kingdom. Since NICE granted its strongest endorsement, the standard arrangement, recommendation for Aquablation therapy in October, our pipeline of large NHS hospitals has increased meaningfully. With respect to market development activities in the UK, we are very pleased with the initial momentum we have generated. Given the accelerating interest from UK surgeons and strong unit economics on handpiece and system average selling prices, we plan to make further investment over the next 12 months in the UK to accelerate growth and expand patient awareness. Additionally, in December, we completed enrollment of our post-market survey in Japan to treat 100 patients with Aquablation therapy.
While we view Japan as a very attractive market long term, it's going to take some time to build our pipeline and launch accounts to start generating meaningful procedure volume. Like the U.S. and United Kingdom, our strategy is to lead with clinical data to support a more robust and sustainable commercial launch. Lastly, we continue to make progress enrolling patients in both prostate cancer studies. In fact, since we announced our prostate cancer initiative in September, we have received numerous inquiries from urologists all around the world, who are not only interested in BPH, but also very enthusiastic about the potential to treat prostate cancer. As we continue to make progress on the clinical front, we will disclose information when appropriate.
In summary, as I look back over the last 12 months, I'm extremely proud of what our company was able to accomplish in a challenging macro environment. Despite this macro headwind, we generated significant revenue growth by selling capital and increasing utilization at active accounts. Additionally, we moved into a new and larger facility and hired a significant number of commercial team members, which presented its own execution challenges that the team was able to successfully navigate. These investments were necessary as essential for our future growth. Moving into 2024, I have a higher degree of confidence in our ability to achieve our long term growth plan. Every metric we track is moving in the right direction. And to summarize, these catalysts, our pipeline, and sales funnel continue to grow nicely in what we currently believe is a more stable macro environment.
On average, the longer an account has been active, the more procedures they do. We are launching new accounts with more surgeons while sustaining retention rates consistently above 90%. Our commercial organization is the largest and most tenured in the company's history, which we believe will lead to increased productivity. And lastly, we will continue to enroll patients in both prostate cancer studies to support Aquablation therapy's clinical value in this therapeutic area to expand our footprint in the larger urology market. Given this positive momentum, we believe Aquablation therapy is laying the foundation to become the BPH surgical standard of care and PROCEPT is emerging as a leading global urology company. With that, I will turn the call over to Kevin.
Kevin Waters: Thanks, Reza. Total revenue for the fourth quarter of 2023 was $43.6 million, representing growth of 83% compared to the fourth quarter of 2022. U.S. revenue for the quarter was $40.3 million representing growth of 85% compared to the prior year period. In the fourth quarter, we sold 44 AQUABEAM Robotic Systems with average selling prices of $376,000, generating total U.S. System revenue of $16.6 million, representing system revenue growth of 59% compared to the fourth quarter of 2022. U.S. handpiece and consumable revenue for the fourth quarter of 2023 was $21.6 million representing growth of approximately 109% compared to the fourth quarter of 2022. Handpiece growth was driven by an increase in the installed base of AQUABEAM Robotics System, which has grown 89% from the fourth quarter of 2022.
Additionally, we have seen an increase in utilization from our install base. Monthly utilization per account, 7.3, increased approximately 13% compared to the fourth quarter of 2022. Utilization outperformance in the fourth quarter was due to normal fourth quarter seasonal strength from elective procedure volumes, the direct reflection of strong commercial execution, and surgeons taking the next step to adopt Aquablation therapy as their treatment of choice for all resective procedures. We continue to see increased account level utilization over time as we train new surgeons and increase utilization of our existing surgeon base. We shipped approximately 6,400 handpieces in the United States in the fourth quarter, representing unit growth of 116% compared to the fourth quarter of 2022 with stable average selling prices.
We also recorded $1.6 million of other consumable revenue in the fourth quarter of 2023. International revenue for the fourth quarter was $3.3 million representing growth of approximately 64%. Gross margin for the fourth quarter of 2023 was 49%, which was negatively impacted by approximately $2.5 million of items primarily associated with the relocation of our corporate headquarters on September 2023. To provide more detail on this $2.5 million impact, first, we recorded year-end inventory adjustments, which were mainly due to certain write-offs primarily attributable to our move. Second, we produced fewer units than anticipated in the back half of 2023, thus increasing the average cost of inventory sold due to unabsorbed overhead expense. Lastly, we incurred an approximate 35% increase in scrap when producing units compared to the third quarter of 2023.
We have addressed these factors and are already seeing improvements in the first quarter of 2024. I will discuss guidance shortly where we will see margin levels return to the mid-50% range in the first quarter, sequentially increased throughout 2024. Moving down the income statement. Total operating expenses in the fourth quarter of 2023 were $50.8 million compared to $35.7 million in the same period of the prior year and $44.5 million in the third quarter of 2023. Although operating expenses sequentially increased $6 million when comparing revenue growth to operating expense growth, we grew revenues 83% in the fourth quarter on 42% operating expense growth. In the fourth quarter, operating expenses exceeded our guidance as we pulled forward investments to expand our commercial organization and accelerated R&D investments ahead of 2024.
Total interest and other income was $2 million as quarterly interest expense from our $52 million term loan was offset by favorable interest income from our cash balances, which were significantly increased with our recent equity financing in August 2023. Net loss was $27.5 million for the fourth quarter of 2023 compared to $28.2 million in the same period of prior year. Adjusted EBITDA was a loss of $23.3 million compared to a loss of $21.7 million in the fourth quarter of 2022. Our cash and cash equivalents balance as of December 31 was $257 million. We believe our strong balance sheet will provide the liquidity and capital resources needed to support and grow our current business. Moving to our 2024 financial guidance. We expect full year 2024 total revenue to be approximately $210 million, representing growth of approximately 54% compared to 2023.
Starting with U.S. Systems, we expect full year system sales that exhibit a similar cadence to 2023 were roughly 45% of our system sales or in the first half of the year, which we attribute to normal seasonality and our expanded sales force becoming more productive in the second half of 2024. We also anticipate stable average selling prices in 2024 compared to 2023. Turning to U.S. Handpieces. We expect to sell approximately 33,000 handpieces for the full year with average selling prices of approximately $3,150. We also expect other consumables revenue to be approximately $9 million for the full year. Regarding quarterly cadence, similar to 2023 seasonal trends, we expect first quarter 2024 utilization sequentially decline compared to the fourth quarter of 2023.
Additionally, we expect U.S. service revenue to be approximately $11.5 million. Lastly, on international revenue. Given another strong quarter and positive momentum in the United Kingdom, we expect full year international revenue to be approximately $18 million, representing growth of approximately 60%. Moving down the income statement. We expect full year 2024 gross margins to be approximately 57% to 59%. Based on what we are seeing quarter to date, we expect first quarter gross margins to be in the 53% to 55% range and increasing sequentially throughout the year. Regarding 2024 gross margins, we believe 2023 was a transition year with temporary headwinds associated with moving into a larger facility and investments to support future growth.
I provide this context to demonstrate why 2024 will begin to show meaningful margin expansion. First, we are now firmly in our new facility and are operating with stability and have refined our manufacturing processes to reduce production-related expenses such as scrap. Second, the pace of hiring production personnel will slow in 2024. Third, and most importantly, the largest cost component of our disposable handpieces are fixed overhead expenses, which at forecasted production levels and spend in 2024 provide us with increased confidence that we will begin to more fully absorb these expenses, which we believe will allow us to show consistent gross margin expansion. Turning to operating expenses. We expect full year 2024 operating expenses to be approximately $231.5 million, representing growth of 29%.
When comparing our revenue growth guidance to operating expenses, we expected to deliver leverage of 1.9 times, which is an improvement compared to 2023 at 1.5 times. This increase in operating expense is associated with strategic investments in R&D, commercial team expansion, and underlying general and administrative costs to support the business and put us in a favorable position to execute on our long term growth plan. Given current interest rates, we expect to generate net interest income of approximately $7 million in 2024. We expect a full year 2024 adjusted EBITDA loss to be approximately $73 million. Lastly, given our move to San Jose is complete, we expect 2024 CapEx spend to be more normalized at approximately $6 million to $8 million, down significantly from $25.2 million in 2023.
At this point, I'd like to turn the call back to Reza for closing comments.
Reza Zadno: Thanks, Kevin. In closing, I want to thank our employees, customers, and shareholders for all their support to help us along our journey to becoming the standard of care for BPH. We will continue to leverage our commercial and clinical investment to execute on our long term strategy. Have a great day and I look forward to meeting many of you at upcoming investor conferences. At this point, we will take questions. Operator?
Operator: [Operator Instructions] One moment for our first question. And our first question will come from Craig Bijou of Bank of America. Your line is open.
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