Good day, ladies and gentlemen, and thank you for standing by. Welcome to the Pulmonx Third Quarter 2020 Earnings Conference Call. [Operator Instructions] At this time, I would like to turn the conference over to Mr. Brian Johnston of the Gilmartin Group. Thank you. Sir, please begin.

Thanks, 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 Derrick Sung, Chief Financial Officer. Earlier today, Pulmonx released financial results for the quarter ended September 30, 2020. A copy of the press release is available on the company'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 and future financial performance; the impact of COVID-19 on our business and prospects for recovery; expense management; expectations for hiring; growth in our organization; market opportunity; guidance for revenue, gross margin and operating expenses; commercial expansion; and 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 public filings with the Securities and Exchange Commission, including the final prospectus filed with the SEC pursuant to Rule 424(b)(4) on October 1, 2020, in connection with our initial public offering. This conference call contains time-sensitive information and is accurate only as of the live broadcast today, November 10, 2020. Pulmonx Corporation 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 now turn the call over to Glen.

Thanks, Brian. Good afternoon, everyone, and welcome to our third quarter 2020 earnings call. Here with me today is Derrick Sung, our Chief Financial Officer. Before I get started, I'd like to thank 2 important groups of people: first, our pulmonary and critical care customers around the world who have been on the front lines combating COVID-19; and second, the entire Pulmonx team that has persevered through and delivered during this particularly challenging time across the country and in the pulmonary space in particular. Thank you all. As many of you are aware, this is our first earnings call since we completed our IPO and listed on NASDAQ in October. Before I begin, I'd like to say thank you to all who participated in the offering, which raised approximately $201 million in net proceeds to the company; and to those of you who have invested in the company since. With your support, we are now well positioned to take the next steps in our journey toward establishing ourselves as the global leader in minimally invasive treatments for lung disease. While we had the chance to tell our story to many of you through our IPO process, I'll start today's call with an introduction to Pulmonx and our platform solution before moving on to cover our recent updates and vision for the future. Pulmonx is a commercial-stage medical technology company that provides a minimally invasive treatment for patients with severe emphysema, a form of chronic obstructive pulmonary disease or COPD. Our platform solution, anchored by our Zephyr Endobronchial Valve, treats patients who despite medical management are still profoundly symptomatic and either do not want or are ineligible for surgical approaches. As background, emphysema accounts for approximately 25% of all COPD patients and is a debilitating and life-threatening disease. More specifically, it…

Thank you, Glen, and good afternoon, everyone. Total worldwide revenue for the 3 months ended September 30, 2020, was $10.6 million, a 17% increase from the $9.1 million in the same period of the prior year and an increase of 15% on a constant currency basis. U.S. revenue in the third quarter was $5.3 million, a 57% increase from $3.4 million during the prior year period. The year-over-year increase in U.S. sales was primarily driven by increasing commercial traction from the launch of our Zephyr Valve as we continued to expand our sales force and drive adoption into new accounts. International revenue was $5.3 million, an 8% decrease from $5.7 million during the same period last year. On a constant currency basis, international sales decreased by 11%, as our business continued to be impacted by the COVID pandemic. Gross margin for the third quarter of 2020 was 70.3%, relatively flat compared to the prior year period and back to the level that we experienced prior to the COVID pandemic. As we look ahead, we plan to continue to drive gross margin expansion and operating efficiencies by spreading fixed overhead costs across increasing production volumes as we meet the growing demand for our products. Total operating expenses for the third quarter of 2020 were $12.8 million, a 28% increase from $10 million in the third quarter of 2019. R&D expenses for the third quarter of 2020 were $2 million compared to $1.4 million in the same period of the prior year. The increase was primarily due to an increase in personnel and clinical study-related expenses needed to support our product development and clinical research activities. Sales, general and administrative expenses for the third quarter of 2020 were $10.8 million compared to $8.6 million in the third quarter of 2019. The increase…

[Operator Instructions] Our first question or comment comes from the line of Bob Hopkins from Bank of America.

Great. I appreciate all the commentary that you guys made as an intro. But I was just wondering if you could maybe give us a little bit more of a detailed sense for what you're seeing out there right now and whether or not that Q4 guide assumes that things kind of deteriorate from where you are right now or basically stay the same from where you are right now. And I apologize for the short-term oriented nature of the first question, but it's obviously a unique time.

Yes. Thanks, Bob. Yes, it's a very, very interesting time. We're literally getting updated almost on a daily basis. We have navigated in the United States through some of this in the past. I think the situation that we're seeing right now is significantly different as things are building. I mean obviously, you're probably looking at the same data as I am. In the United States, we are seeing some number of cases being rescheduled, getting pushed off into the future in certain hotspots, which we experienced in the third quarter as well and in the second quarter to a much greater extent, where a certain geography becomes a hotspot and things get pushed off. Right now the middle of the United States is really generally that hotspot. And it's kind of a U shape around the United States from the West Coast, down South and across the Eastern Coast, where most of the accounts are still scheduling and doing these procedures. So -- and that is where most of our business is, frankly. So that is encouraging, but we don't know whether this is going to spread out from the middle. Of course, as you probably know, Bob, we -- through the third quarter, about 50% of our business was in the U.S. and 50% was outside the United States. Of that 50% outside the United States, 85% of our business is in Europe. And you're obviously aware of what's going on in Europe. I mean, right now, all elective procedures are down until early December in France. Something north of 20 different countries, there's various different degrees of lockdown. But if you look across our biggest markets, Germany is continuing to do cases, but there are certain hotspots in Germany that are impacting and having rescheduling. And then there are certain other countries that have done things that will, no doubt, make it more difficult to get patients to hospitals. We've tried to factor in to the extent that we can, but it's a very -- these implications. I would say right now the only major market that's gone -- that's stopped elective procedures is France. And they are projecting to pop back out in early December, and we're still assessing patients in France. And there's actually a couple 2 to 4 hospitals in France that are continuing to do procedures, albeit at a low level.

Okay. So it sounds like you're assuming from kind of where you were in October and early November that you assume that things do get a little worse rather than stay the same just in terms of the guidance you provided?

Yes. We -- I think we are anticipating that there will be some impact from this. I will say that we were able to navigate across this in the third quarter. And if this does -- if this kind of turns itself around. And there's indications, for example, in Belgium and in France that they may have already reached the peak and the other countries are hoping that they're not far behind, but we'll know a lot more in a week.

Right. Right. Dynamic times. So the other quick question I wanted to just get a sense, another kind of data point is, in the U.S., what percentage of the centers that were kind of up and running and operative pre-COVID are up and running today in the U.S.?

We have -- our active accounts are around 80% of our accounts right now. And yes, so it's -- we're a little bit off. We were -- sort of in the pre-COVID phase, we were in the 90s, if you will, in terms of active accounts, accounts that have ordered in the recent past. So that felt like kind of the norm, and we'd expect to bounce back to that sort of neighborhood in sort of the post-COVID phase. But this is reflective of hotspots, how many accounts are active in the U.S. So we've got 135 accounts, about 80% of them are active.

Our next question or comment comes from the line of David Lewis from Morgan Stanley.

Glen, just -- you had been kind enough to give us the intra-quarter trends here in the third quarter during the road show and, obviously, it's not perfect math because you're working off a bar chart, but it sort of implied that if you were kind of at first quarter levels with 2 to 3 weeks ago in the third quarter, if that trend line stayed constant, it kind of gets you to where you are now around this $10.5 million or $10.6 million number. So is that generally how the back half of September when things were pretty constant? Or from your perspective, was there incremental improvement in the business in the back half of September? And then related to that, per Bob's question, are you seeing an impact on procedures in the U.S. or ex U.S. or simply just cautious that we may see impact?

So the second question was, are we seeing impact on procedures in the U.S. or OUS?

Yes. Are you actually seeing procedure impact in the U.S. or ex U.S.? Or are you simply just being more conservative that we may see impact here to the extent the resurgence continues?

No, we're seeing cases that are being -- like France is our #2 market, and it's down. We -- and we are seeing cases in the United States being rescheduled, getting pushed off. Now that's not happening in a wholesale fashion, and it's not happening, I would say, in the United States in a way today that is altogether dissimilar to what we saw in the third quarter. We've been navigating around COVID hotspots basically since they presented themselves. And we shut down, we popped back out and then some number of markets went through kind of a second wave, and we had to deal with those. So I would say that we're not seeing a widespread impact on our business in the U.S. at this point. And we're just -- like I said, we're kind of -- we'll know a lot more in a couple of weeks. Right now the impact -- we keep a really close eye on hospital beds being used for COVID and ICU beds in particular because when that tops out, they tend to pull back on these elective procedures. So we do have some regional hotspots, but we've had some regional hotspots in the U.S. in the third quarter as well. Going back to your first part of your -- did I answer the second part of your question?

Yes, sir. And the first part was just the quarter-to-date numbers sort of imply stable trends into the back half of September. I just wonder if that implication is sort of how you saw the business performing in the last few weeks of September.

Yes. That's the short story. I mean we had a really nice quarter. There was, obviously, some pent-up demand in the front part of the quarter. And if we sort of back that out and look at the -- at what we see as the actual demand on a monthly basis, we had a nice progression across the quarter. And in fact, October was a really solid month for us. So it looks good.

Very helpful, Glen. And then just 2 quick ones for me. The first is just how you're building your -- how you're building the business here. It looks like, generally speaking, you could add about 40 centers this year. Just to kind of get a sense of -- is that a good way of thinking about how you could build? I mean should we assume a similar number of center adds in '21 versus '20? Or should that number be higher or lower? And just one also kind of related question on just the vaccine topic because it's top of mind is, we're probably going to roll the vaccine out for patients that are at high risk. Would you generally assume as you think about these severe emphysematics that they are probably first on the list in terms of high-risk groups that probably get vaccinated? Sorry for these bifurcated questions.

Yes, you bet. So the first question was, I think, specific to how you should think about us expanding, we were adding 15 to 20 accounts per quarter in the pre-COVID phase. In the COVID phase, we've been adding about 10. So I would say that, hypothetically, if COVID was largely in the rearview at midyear next year, then the front half of the year, we'd be chugging along at about 10 centers per and in the back part, we would probably be 15-plus per quarter. So I think that's kind of the rate you ought to think about, and it's really largely driven by COVID, which impacts our -- it distracts our customers but it also impacts our access -- sort of free access to the hospitals as well, which has an implication. With regard to the vaccines, yes, I mean, I think that these -- the first -- as I understand, the first people who are going to get vaccinated or offered vaccination are going to be health care workers. I may be wrong. But as far as patients go, I would think that these types of patients, along with others who have significant comorbidities that are at risk of COVID would likely be -- have the option to go ahead and get this pretty early on.

Our next question or comment comes from the line of Larry Biegelsen from Wells Fargo.

A couple for me. Glen, could you talk about the time line here for -- and process for AeriSeal? What are the next steps here? How should we think about that? And I had a follow-up.

Yes. AeriSeal is something that's off on the horizon. The good news is we have some data on it already. It's an acquired technology. We've done some clinical work. We've got some interesting signals. The meaningful studies are out ahead of us. The first one that we're executing is a European multinational, multicenter study. We have already commenced the process, which I'm sure you know is a multi-step process. The first is to go through ethics committee and then you get those sites initiated and then they start enrolling. And we're in the initiation process right now. We've had several ethics approvals. We're trying to get these sites up and running. What impact COVID has on the initial enrollment is to be determined. We are trying to do the study in places like France and Germany that are presently preoccupied with a good bit of COVID. So we'll have to see sort of how that progresses. But we're expecting to significantly enroll that study across the coming year. So that's where we are OUS. In the U.S., we have already started discussions with FDA. We expect to gain IDE approval next year. But we're quite a ways out, as you could probably do the math on this, in terms of getting the sites up and running. We'll likely have a 1-year follow-up after enrolling the patients and treating the patients, and so you're probably into late 2024 in terms of a technology that's going to be available in the U.S. We'd expect it to be available in Europe before then.

That's helpful. And one more for me. Could you give us an update on geographic expansion? Are there new markets outside the U.S. that you're excited about? And any time lines?

Well, I think the sort of the elephant in the room, if you will, is Japan. That's a market. We've had a lot of interaction with the PMDA. We're expecting to file there next year. We expect in 2023 to have both approval and reimbursement in place. So that's clearly the biggest market that we're not presently in. It's important to note that certain of the markets -- so first of all, the data that we have is only -- is fairly recent relative to some of the European markets that we're in. And as a consequence, we're sort of relaunching in those markets. So that gives us a nice opportunity. Some of the markets are relatively new, for example, France, which is our #2 market in Europe. So it's our #3 market around the world. That has been a great market for us. It's only -- we've only been in there for a couple of years. So we're very excited about that. And we have made -- we just had a meeting yesterday, actually, specific to continued investment across some of these European markets in an effort to really take greater advantage of those. And we're -- and we -- pre-COVID, China was a very large and very interesting market for us. It's still small, but we were growing quickly, and we were prepared to continue to deepen our investment in China when COVID hit. And unfortunately, as you probably know, as you can -- this COVID is very interesting. You can literally look at the headlines in the papers and project kind of what -- where our business is getting most impacted. And with Asia almost as a whole largely shutting down in response to the COVID virus, cases have basically stopped. So our expansion plans and our investments in China were put on hold, but we're going to -- we're in the process of talking about ways to restart those as we move forward. So that's another market that we're very excited about.

Our next question or comment comes from the line of Rick Wise from Stifel.

Maybe starting off with reimbursement. Obviously, really excellent news on the BCBS front with HCSC now covering. And you made the point, obviously, that 90% of cases get reimbursed without coverage. But I've got to believe that's a positive. Could you just remind us the impact that a decision like that has on doctors, patients [indiscernible] on you guys, then how we should think about it?

Yes. That's a great question. I really appreciate it. It's -- our issue is not with -- we've got this incredible reimbursement team. It's incredibly tenacious. And we've got 4 randomized controlled trials that are published in the top-tier journals and all of the data within each of these studies is amazingly consistent. So our issue is not really with getting pre-authorization. The issue is because it's literally 90 -- I think it's 95% of the time when we seek pre-authorization, we get it. The issue is with the time frame that it takes. So if, for example, Blue Cross Blue Shield Association is negative, which made this HCSC doubly interesting because they went again -- they're the #2 largest Blue Cross Blue Shield affiliate, and they went in a different direction by giving us this approval. So that kind of a group could take 2 or 3 months to get through, Blue Cross Blue Shield, whereas if we've got prior approvals, we can get through, in some cases, in less than a month. So it does create certain efficiencies for us. We haven't seen any patients sort of fall out of the process through the waiting time. But we have to expend a good bit of energy and these plans need to expend a good bit of energy. When I think about reimbursement, it's great to get HCSC, it's great to get SelectHealth. Pre-authorization right now is at about 95%, but we're seeing a significant increase in requests for pre-authorization. If you look, for example, in the third quarter of this year versus the third quarter of last year, we've had 125% step-up in terms of the number of requests. And in addition to the number of requests going up, we're seeing a reduction in the time to pre-authorization that's considerable. If you look across, for example, all commercial cases, it's come down 35% from nearly 60 days to about 40 days for our average commercial case. So it came down roughly 18 days or 35%. And if you look at, for example, even in a situation where we don't have a green light with the payer, which is Blue Cross Blue Shield Association, like I said, we're getting those through. The average time in 2019 through Blue Cross Blue Shield was 80 days. We brought that down to 68 days. So it's not a big reduction. That will go way down with HCSC coming online. But the really interesting thing is if you look at our success rate, which I talked about before, at 95%, Blue Cross Blue Shield in 2019, we were successful 80% of the time getting pre-authorization. And so far, this year, we've been 95% successful. So it's a bit of a war of attrition, if you will. Everybody's got to kind of look at it. We've got a ton of really good data. And so when we get into the review process, we almost invariably win because we've just got the data.

Very helpful. Another key aspect of your commercialization, as you highlighted right upfront, Glen, is both training new docs and adding new reps. Can you help us think about -- and take any time to [ think you want ] -- we'll take anything. It's like -- how should we think about preening your training goals of -- for docs over the next quarter or 4, whatever you want. And ditto for reps. I mean, is that -- I think you said, whatever, it was 48 reps. Where are we a year from now? And just talk us through that.

Yes. Well, as far as reps go, we're going to -- we're at 42 in the U.S. I assume that was where the question was coming from. And we're 28 OUS. And the -- I think the way to think about the docs is that they're aligned with the accounts. And I think we've talked a lot about number of accounts, the number of doctors. So we're targeting about 500 docs about -- I mean, 500 accounts and about 800 doctors. So there's a ratio there of -- so the number of doctors that are doing the procedure itself, that's probably the way to think about it. One of the silver linings, if there is such a thing in this crazy environment that we're in, is that we have developed remote training, basically. We used to fly people into a training center or bring somebody out to teach people how to do the procedure. And now we've been able to hold multiple physician training classes online, which allows us to expand the kind of profile of the people that we're able to bring in. So -- and the other thing that's really great about that is that we're beginning -- we've already started and have been very successful at holding these types of information or training sessions to bring referring docs up online. We were struggling with how do we get those people together for training programs, and Zoom is a pretty efficient way to get a very large number of referring docs together learning more about the procedure. So that's been -- that's been a bit of a silver lining for us. It's also been beneficial from a rep training perspective. We actually have a sales training class in right now. And we're doing -- we're not in, I mean, literally online right now. And so those folks are sitting at their homes, and they're going through a week-long sales training. They'll get out in the field and they'll ride along and cover cases with other reps. As far as adding reps go, as I mentioned, we're at 42 in the U.S. And I would say next year, we're going to be at 50-ish, if you will, if I can say such an imprecise number. But we think that we can cover the U.S. with roughly 50. And I think the decisions to go beyond that are really going to be about just subdividing major metro areas and so forth. So -- and I expect we're going to definitely land on a number above 50. But the impetus for that is just -- is going to be an opportunity to just subdivide and realize greater efficiency in some of these larger geographies.

That makes sense. One last one for me. Maybe I'll ask the CFO a question. Derrick, you talked about R&D, SG&A, OpEx, et cetera. And I don't know where others were, but you came well below my OpEx expectations. Just maybe can you help us think about R&D and SG&A trends in the fourth quarter? Does it look a lot like the third? Or how do we sort of frame those numbers and the outlook there?

Yes. Thanks for the question, Rick. So I would say we will see -- expect to see a step-up in OpEx in the fourth quarter. Primarily in the SG&A front, I think some of that's going to be due to public company costs that are regularly going to hit in the fourth quarter because some of those did not hit in the third quarter as we were not yet a public company and then continued investment into our commercial infrastructure. R&D spend we expect to step up a little bit, but will be sort of roughly sort of at the level of what you saw this quarter. Again, some of the increasing activity that we are doing on the clinical front that Glen described earlier is going to be the primary contributor of an increase in R&D spend.

Our next question or comment comes from the line of Bill Plovanic from Canaccord Genuity.

A couple of questions here. Just first on -- and thanks for providing about 80% of the accounts up and operational. What level do you think they're operating at today? Do you think they're operating at maybe 70, 80-ish percent capacity if you had to take a guess on kind of -- because while they're operating, they may not be at full capacity? Just your thoughts there to start with.

Bill, that's a really good question. The -- yes, you are correct. They are, in fact, about -- they're functioning about 80%. We're sort of, I would say, in the neighborhood of, on average, 5 to 6 cases on a quarterly basis, and we were at about 7% sort of in the pre-COVID phase. So we're sort of in that neighborhood.

Okay. And then just in terms of U.S. pricing, has there been any changes? I know there wasn't any commentary and usually when they're not, it means it's stable, but I'd rather ask the question than not.

Yes. We sell at list.

Okay. That's good to hear. And then just in terms of -- you've talked about this direct-to-patient a little. I think sometimes when companies say that you get a little nervous that you can spend a lot of money there. And I just wonder if you could frame kind of the activities and maybe any amount or quantification or if it's a small amount, just qualification, just so we have an understanding of roughly what the plans are there.

I mean in terms of how much money we're spending?

The program itself, like the exactly -- I think you're currently rolling it out. It's in a couple of geographies. Kind of what's the intent there? And then when we think about this, is this a very small amount per geography, so this is in the 5 or 6 figures, not the 7 figures. Just conceptually how we should think about it.

Yes. I mean, we're piloting it right now. We're in far more than a couple of geographies. We are focused on sort of trying to drive folks to our website. We're also trying to, most importantly, drive leads. So that we consider leads sort of people first time callers who call -- who respond to the outreach and call into hospitals. They may also opt in on an e-mail basis. They may choose to participate in one of -- we've had patient information sessions online, which have drawn hundreds of patients into those. So it's been very, very interesting. And the response that we've gotten, we haven't spent a tremendous amount of money. I was just going through -- I won't mention the other company. But there's other companies doing this that are spending a lot more than we are, but we're not to the point where it makes sense for us really to drive this. As I said in my earlier comments, this is really part of our longer-term growth strategy. But we have seen a real nice responsiveness year-over-year in the third quarter. We saw about 140% increase in web visitors in terms of the leads that we've gotten, which again are either people who are calling us or opting in on email. We've seen 126% year-over-year or third quarter-to-third quarter increase in those. So there is a good bit of engagement that we've seen, and we're quite encouraged as we are in the very, very early stages of sort of calculating cost per types of numbers. So very, very, very encouraged by what we're seeing on that front.

Okay. And then the last question, if I may, is just on the new account funnel. COVID, obviously, has an impact on your current customers. But with new technologies kind of getting in there and educating folks and getting them up and running, as you look at the top of the funnel, the new ones coming in, in the last 6 months, what kind of changes have you seen directionally? And how should we think about that? And that's all I have.

Yes. In the last 6 months, we added about 20-ish accounts. The bulk of those -- the majority of those came in the third quarter. And we do have a large number that are in process in various different stages. We are -- it's an interesting process for us because we're not doing business with any of these new accounts. So when we go in, we're negotiating terms and conditions on just establishing this relationship and then going through the step-by-step process to get ourselves set up. So we are in a very good position with regard to our funnel. And we -- as I mentioned earlier, we're expecting that we'll be adding on the order of 10 new centers on a quarterly basis. And then once COVID is in the rearview, then that number will get bigger.

I'm showing no additional questions in the queue at this time. I'd like to turn the conference back over to Mr. Glen French for any closing remarks.

Well, thank you all for your time. I really appreciate it and your interest and so forth. We wish you all a very good afternoon or evening, depending on where you are. And again, thank you very much.

Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may now disconnect. Everyone, have a wonderful day.