Thank you for standing by, and welcome to the Pulmonx Q1 2022 Earnings Conference Call. At this time, all participants are in a listen-only. After the speakers, there will be a question-and-answer session. As a reminder, today's call is being recorded. I would now like to turn the call over to your host, Mr. Brian Johnston, at the Gilmartin Group. Sir, you may begin.

Thanks, operator. Good afternoon, and thank you all for participating in today's call. Joining me from Pulmonx are Glendon French, President and Chief Executive Officer; and Derrick Sung, Chief Financial Officer. Earlier today, Pulmonx released financial results for the quarter ended March 31, 2022. 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 Annual Report on Form 10-K filed with the SEC on March 1, 2022. This conference call contains time-sensitive information and is accurate only as of the live broadcast today, May 3, 2022. 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. With that, I'll turn the call over to Glen.

Thanks, Brian. Good afternoon, everyone, and welcome to our first quarter 2022 earnings call. Here with me is Derrick Sung, our chief financial officer. Overall, we were encouraged by the progress of our business in the first quarter. We saw widespread impact from the Omicron wave followed by a recovery that gained momentum as treatment centers began to reschedule and conduct procedures. The strength and timing of this recovery enabled us to achieve $10.8 million in worldwide sales above the high end of our expectations. We observed recovery trends, which extended not only to hospital procedure upticks, but also to leading indicators such as StratX uploads and calls into our patient reimbursement support team. Based on these trends, we have increased confidence in our ability to achieve our previously communicated full-year revenue guidance of $55 million to $60 million. Despite the impact of COVID, we also continued to make steady progress on initiatives to expand our global commercial footprint and to drive clinician and patient awareness of our Zephyr Valve. Centers and physicians remain eager to begin offering our treatment, resulting in the addition of 16 new treating centers in the US during the first quarter, bringing our total US treating centers to 230. We remain on track to meet our year-end objective of offering Zephyr Valves to at least 280 treating centers in the United States. As we accelerate sales, we are investing in infrastructure to support increased patient and physician demand. To help respond to the significant levels of patient interest in our technology, we have launched a call center to field product-related patient inquiries. Further, we recently opened our second US physician training center to provide clinical education for the growing number of clinicians interested in performing our Zephyr Valve procedures. On the reimbursement front, we secured yet another positive policy win, adding over 3 million covered lives with Independence Blue Cross, the third largest payer in Pennsylvania and a key payer in the Mid-Atlantic region. Independence Blue Cross is the 12th Blue Cross Blue Shield plan to post positive coverage for Zephyr Valves, and we have now streamlined access to treatment with Zephyr Valves to over 75% of all Blue Cross Blue Shield covered lives and over 90% of all US commercially covered lives. Reflecting additional progress on the clinical front, the Society of Cardiothoracic Surgery in Great Britain and Ireland released its standards for lung volume reduction, which endorsed the use of endobronchial valves to improve outcomes in patients with severe emphysema. We were also pleased that the Journal Respiratory Medicine published a study in April finding that bronchoscopic lung volume reduction may extend the life expectancy of patients with COPD and severe lung hyperinflation. In this observational study of nearly 1500 severe COPD patients, those treated with valves to reduce their lung volume survived significantly longer than those patients who did not receive an implant. And treatment with valves was found to be an independent predictor of survival. The study adds to the ever-growing body of evidence demonstrating the clinical benefits of our Zephyr Valves. We also look forward to attending the American Thoracic Society International Conference from May 13 through the 18th in San Francisco. Our treatment remains a central topic of discussion across the pulmonary medicine space as reflected by the numerous scientific posters and presentations that will feature bronchoscopic lung volume reduction at ATS this year. This will be the first major pulmonary medical congress since the start of the pandemic where we will have an in-person booth presence, and we look forward to driving commercial and clinical awareness of our Zephyr Valve therapy. We also continue to make good progress with our clinical development initiatives. We're excited about our AeriSeal clinical development program, which stands to expand our addressable market to patients not currently eligible for Zephyr Valves due to an incomplete fissure between lobes, which allows collateral ventilation. We estimate some level of collateral ventilation to be present in just under half of severe emphysema patients presenting a tremendous opportunity for AeriSeal to complement our Zephyr Valve therapy. Our development program is now focused on using AeriSeal to seal fissure gaps. This will provide a path to treatment with Zephyr Valves for many patients who are not candidates today. This application of AeriSeal is being studied in our CONVERT trial, a multi-center, multinational feasibility study, which we are running in Europe. We hope to present a first look at the preliminary data from a subset of these CONVERT patients later this fall. Information that we learn from CONVERT will be used to inform the design of our U.S. IDE study. Lastly, from a geographic expansion perspective, we continue to expect regulatory approval of our Zephyr Valve treatment in Japan by the end of the year. Following the establishment of reimbursement, we expect to launch commercial efforts in the back half of next year, entering what we estimate to be a $1 billion opportunity with approximately 100,000 patients in need of Zephyr Valve treatment. In summary, I'm optimistic about the trajectory of our business as we accelerate out of the pandemic. In particular, I'm looking forward to the back half of this year when we expect to demonstrate our ability to grow our business in the absence of significant COVID headwinds. And when we hope to achieve some of the previously mentioned long-term growth milestones to expand our addressable market.

Thank you, Glen. And good afternoon, everyone. Total worldwide revenue for the three months ended March 31, 2022, was $10.8 million, a 17% increase from $9.2 million in the same period of the prior year and an increase of 20% on a constant currency basis. US revenue in the first quarter was $6 million, a 40% increase from $4.3 million during the prior year period. International revenue in the first quarter of 2022 was $4.8 million, a 4% decrease from $5 million during the same period last year and an increase of 3% on a constant currency basis. Global revenue was affected by the COVID Omicron variant that swept across nearly all regions of our business at the start of the year and impacted the ability of hospitals to schedule procedures. Hospitals restarted procedures in the back half of the quarter as a COVID wave passed through. Gross margin for the first quarter of 2022 was 75%, compared to 72% in the prior year period. The year-over-year expansion in gross margin was driven by increasing production efficiencies, and we continue to expect gross margin to remain in the 74% to 75% range for the remainder of the year. Total operating expenses for the first quarter of 2022 were $23.8 million, a 24% increase from $19.1 million in the first quarter of 2021. Stock-based compensation expense was $3.4 million in the first quarter of 2022. We continue to expect operating expenses for the full year of 2022 to fall between $100 million to $105 million, inclusive of approximately $16 million of non-cash stock-based compensation expense, as we continue to build out our commercial operations, invest in our research and development programs and further scale our business. R&D expenses for the first quarter of 2022 were $3.5 million, compared to $3 million in the same period of the prior year. The increase was primarily due to an increase in personnel, clinical study, regulatory and development-related expenses needed to support our product development and clinical research activities. Sales, general and administrative expenses for the first quarter of 2022 were $20.2 million, compared to $16.1 million in the first quarter of 2021. The increase was attributable to an increase in sales and marketing expenses as we expanded our commercial team and increased commercial activities and an increase in public company expenses related to the scaling of our general and administrative infrastructure. Net loss for the first quarter of 2022 was $15.8 million or a loss of $0.43 per share, as compared to a net loss of $12.5 million or a loss of $0.35 per share for the same period of the prior year. An average weighted share count of 36.8 million shares was used to determine loss per share for the first quarter of 2022. We ended March 31, 2022, with $176.5 million in cash, cash equivalents and marketable securities, a decrease of $14.5 million from December 31, 2021. Finally, turning to our outlook for 2022. With the recovery that we are seeing in our business, we remain confident in our ability to achieve full-year 2022 revenue in the range of $55 million to $60 million. We expect to see sales in the second quarter recover back to levels seen near the end of last year, followed by sequential growth through the remainder of 2022 as procedure volumes normalize. And with that, I'd like to thank you for your attention, and we will now open the call up for questions.

Thank you. Our first question comes from Travis Steed of Bank of America. Your line is open.

Hi. Congrats on the quarter, and thanks for the questions. I'd love to get a little more color on March and April kind of versus early Q1. And Derrick, it looks like the guidance for Q2 is basically unchanged versus three months ago, still in line with Q4. But you mentioned the recovery leading indicators. So I'd love to see why you're not updating the Q2 guidance at this point.

Sure, Travis. Thanks for that question. I'll take the latter part on guidance and Glen can provide some of the commentary that we saw through the quarter into Q2. So Travis, we're feeling very good about our business based on the recovery that we saw in the back half of Q1, right. All the early indicators suggest an enduring recovery is underway. The momentum that we're seeing going into Q2 does give us a lot of confidence in our ability to achieve the $55 million to $60 million guidance that we previously laid out. That said, I would say that at this early point in the year, having just laid out our initial guidance two and a half months ago, it just feels premature for us to be changing our guidance based only on a couple of months of relative strength coming off a pretty deep bottom that we hit at the beginning of the year. So we certainly expect and hope that the worst of the pandemic is behind us. But if we've learned one thing from last year, it's not to underestimate the continuing impact that COVID might have. So there still remains some uncertainty around the impact of hospital staffing and possible future variants, and we just don't want to get ahead of ourselves at this point before we get some more visibility into how some of these uncertainties might play out. So again, we feel very good about what we're seeing in the recovery to this point and the momentum going into the quarter, but we just don't want to get out in front of ourselves. Glen, do you want to comment on the monthly cadence and what we're seeing into the quarter?

Sorry about that. I was on mute. As we reported last time, the first half of the quarter was - I mean, January was significantly impacted by COVID. In the back half of the quarter, we accelerated out. We had, as is always the case, the first cases that are done are those that are rescheduled. And so those January cases that were scheduled and halfway through February as well were the first ones to pull back out. So March contained a good bit of, I guess, what some people call backlog, and that explains kind of how we came out of the quarter. And we think that most of that backlog got consumed, if you will, across the latter part of February and into March.

No, that - thanks for the color, and it all makes sense in the Q2 guidance. When you think about the staffing constraints, just curious what you're seeing on the ground. Is that still a pretty big constraint now and how you're expecting that to improve over the course of the year?

Yeah. So we have definitely seen - it hits in a lot of different ways, and I'm sure you hear it a lot. I mean, we're not in that many centers, right? So we're at about in the low 200s right now. And in the centers that we're in, the way that it impacts us is in multiple ways actually. Physicians and some of the treating docs are getting impacted. But the turnaround in terms of how long folks are out before they come back is relatively short. The broader staffing issue, which I believe is probably the theme that you're talking about has impacted things. The way that we see that, we are able to continue to do procedures in virtually all the hospitals, I would say staffing probably delayed the rebound of some of the hospitals coming out of the sort of the Omicron wave. And what's happening is that I think they're trying to sort of spread things around. So it's not uncommon in certain hospitals that might have been clipping along sort of prior to the stresses on staffing at, say, four patients per month to be asked to do fewer than that as we come back out. As it relates to working our way through this, there are some broader issues that I think are going to take some time to get through. I think when I listen to folks who are running hospitals are talking about staffing issues carrying through the end of the year. I think as it relates to the kinds of patients that we're treating and the staffing associated with the execution of procedures, I think a quarter or two, and those will largely wash away just because of the revenue generation of having those procedures properly staffed.

Thanks for the color, and again, good start to the year.

Thanks.

Thank you. Our next question comes from Cecilia Furlong of Morgan Stanley. Your line is open.

Good afternoon, and thank you for taking the question. I wanted to follow up a bit on the staffing issue, but really ask just what you've seen from an account productivity standpoint coming out of this wave versus what you've seen in prior waves. And again, just factoring in what you're seeing on the ground from a staffing standpoint, potentially limiting greater acceleration.

Yeah. Well, we report on productivity really on a quarterly basis and productivity was significantly impacted in the first quarter, as you might imagine. So it was quite a bit down from sort of where we had been running through the prior waves, which is really just explained, I think, entirely by the fact that no other wave hit everywhere at the same time. And so it was whether you're talking about our global business or whether you're talking about regions within the United States, there were always engines that were running at full speed while we were getting crushed in other regions, which wasn't the case with Omicron. And as a consequence, if you can imagine, effectively shutting down, to a large extent, procedures during nearly half the quarter, that's not literally the case. But I mean it really impacted us. Our productivity got impacted as well. So it's probably not even a particularly interesting measure for the quarter. The - and account activity, which is another metric that we've looked at has also got impacted, as you might imagine, in similar ways to the way that it has, I think, in the past, down into the 30s and so forth, most particularly in the January and February timeframe. How much of that is due to account staffing, I think it was where - I think that the - how we're pulling out of this is really more impacted by the actual shutdown of accounts. I think the - our business was impacted in the first half of the quarter because there was still a significant proportion of the population that had yet to be vaccinated. There continued to be about a 13-fold increase in the number of unvaccinated people who - the probability they were occupying an ICU bed versus a vaccinated person. I think the difference in the environment that we're in right now is that nearly everyone in the United States is no longer naive to COVID. We've got two thirds of the population that's been vaccinated twice, at least considered fully vaccinated, 77% to 85% of the US population, depending on which source you want to look at, has been vaccinated once. And last week, I think there were multiple reports of new data coming out of the CDC, which indicated that 60% of people in the United States have had COVID already. So if you - I mean, there's just very few people, less than 10% of the US population, less than 10% of the European population is naive, where two years ago, the human race was naive to COVID. So we anticipate that as we look ahead, we think COVID is going to continue to be an issue for us. We think staffing is probably going to be a little bit of an issue for us as we pull out of this and move ahead, but we see that waning in the relatively near term, certainly before the end of the year.

Okay, great. And if I could follow up as well, specifically on referring physician awareness and how you would really quantify that at this point. And as you look forward, as COVID is pulling back, just the initiatives you have in place to continue to drive referring physician awareness higher?

Thank you for that question, Cecilia. It's a very important and insightful question. Obviously, over the long haul, this business is going to really grow based on account productivity and 80% of patients are coming through - right today, 80% of our patients that get treated are coming through referring physicians. And we don't have sufficient awareness. At least we haven't to this point, we've been really focused on getting treating sites up and running. And I think as you've heard from us, and probably this is where the question is coming from, we believe that increasing the awareness and the support of the referring physicians is really central to both our marketing and sales activity as we move ahead. So we've fundamentally reoriented our sales process to focus more on the referring physicians than was the case in the past where we're really talking about what are the best practices for opening up new centers. We're going to continue to do that. But we've really shifted the focus not only of sales training, but also sales execution on opening up these new sites. Now this has become a primary area of focus effectively starting at the beginning of this year. So it faced a good bit of headwind and crosswind from the Omicron insult that we experienced. And as a consequence, we're still gathering data as we move forward as to the direct results. I mean it will clearly be seen we expect in our revenue numbers as we move ahead. That's probably the best metric of how we're going to have an impact through the referring physicians. The other thing that I think we've talked about before, and I mentioned in the script, is that we're really focusing on engaging with the patients as well. Often the patients can provide introduction to the referring doctors. We have a talk to my doctor program where they can actually come to us in a very compliant way and ask us to follow up with their doctors to give them some information. And there's no hotter lead than you're going to get than it is for a patient to their doctor, where we can specifically go in and say that Jane Doe has indicated. We're seeing those going up, those requests for us to engage. We're also seeing from the direct contact from patients their willingness to opt in to provide us with authorization to go back and forth with them and help nurture their information needs and, in a sense, their journey toward the treating physician. So we're attacking the referring physician, not only through sort of marketing activity, sales activity, but also equipping the patients to be their own advocates with physicians or being a surrogate with that talk to my doctor program.

Great. Thank you for taking the questions.

Thank you. Our next question comes from Jason Bednar of Piper Sandler. Your line is open.

Hey, good afternoon, guys. Thanks for taking my questions. This is Joe on for Jason. So I just have a question on the Japanese regulatory submission. Has there been any interaction or feedback with the Japanese authorities thus far? And then in terms of any structural dynamics or anything pre or post off that we should be thinking about for when those operations launch in that market that would make the penetration factor any different from what we've seen in the previous market entries?

The Japanese regulatory process has been remarkably and consistently interactive. So we have had - I don't - I would say - I haven't been directly involved, but I would say we are interacting weekly. So one way or another. So it's been great. And we've gotten questions. We've addressed those questions. We've scheduled meetings, and those meetings have gone actually shorter and better than we had anticipated. So it seems to be moving along well and the interactions to this point have been frequent and substantive, and I frankly would have expected that if there were going to be any major issues that would have popped already. So we feel comfortable and confident that we'll get that regulatory approval before the end of this year, as we've stated multiple times in the past. With regard to structural requirements, we are in the process of trying to identify a great general manager for that marketplace. I think we talked about either in the last quarter or so that we had added our first employee in Japan. So we've got feet there. We're working through a bunch of consultants that are in the market as well, and we're going to be building out sort of a relatively small framework of an organization there to ensure that we're ready to move when we've got reimbursement in place. And again, reimbursement is tagged on to the end of that process. So we see ourselves in that market late next year. So with regard to how we expect that market to behave as it relates to, for example, launching in the US or any other of the markets that we've entered relatively recently that when we enter the market is important because the US was the first market that we entered in the world where we had all of the data published, we were in the global guidelines, reimbursement was in place. And so Japan, like the US and like markets that we've entered since we entered the US, we would expect to benefit from that. Having said that, it's a very hierarchical market, which means that there's a handful or two handfuls of physicians that we will be going to first. They will be setting the tone and woes to anybody who doesn't go to them first. So we know who they are. We have relationships with most of them already, and we will make sure that they were the first ones to do the cases, and they will lead the way. So we see year one and year two maybe relate in contrast to, say, France, the market that we entered around the time we entered the United States or the United States, maybe not being quite as steep a slope, but we see it sloping up and looking very much like these other markets maybe on a per capita basis.

Great. That's super helpful. And then just one more for me. Just touching on like new roles as you mentioned in Japan, but moving over to new territories in the US and Europe, as you've mentioned. And through these calls, could you just give an update on whether there have been any other notable adds, I guess, outside of Japan in the past few months? And then what's the plan today in terms of actually filling these roles?

I missed part of that question. Derrick, did you get it all?

I did. So I think you were asking, Joe, about new territory adds outside the US and within the US. In Q1, we did not add any new territories either outside of the US or within the US. So we still have 34 active territories outside the US and 54 in the US. We continue, as we mentioned now in the last call, to plan to add selectively in both geographies. And we expect to be near 60-ish by the end of this year in the US, and we'll add a handful, three to five or so internationally as well throughout the year. So we plan to continue adding but none specifically in Q1.

Great. Thanks a lot.

Thank you. Our next question comes from Bill Plovanic of Canaccord. Your line is open.

Hello. This is David on for Bill Plovanic. All the questions that we wanted to ask were answered. So thank you very much, and congrats on a great quarter.

Thank you, David.

Thank you.

Thank you. Our next question comes from Joanne Wuensch of Citi. Your line is open.

Good afternoon. This is actually Anthony on for Joanne. Thanks for taking our question. Can you just talk about what early demand has been like at the new training facility and then just give maybe any general commentary on what the physician training pipeline is like? Thanks.

Demand. So things have been - it's been great, I think. We opened it up. I think we're doing a training class today, I think, at that new facility in the Midwest. I think that is our second that we have done so far since we've opened it up. The first returns from the first training program was that the guy who's running it is doing a spectacular job and that all elements, ranging from the hotel to the program to the presenters has all been very, very positive. So, it effectively doubles our capacity. I think what will happen was well - we won't likely run twice as many people through now that we have a second training center. I think what we'll do is we'll make the classes a little bit smaller, and we'll just probably going to be happening something on the order of every other week, something on that order. So we'll be clipping along and it's great to have this new capacity in the sky, like I said, this new center is doing a spectacular job.

Great. Thanks.

Sure.

Thank you. I'm showing no further questions at this time. I'd like to turn the call back over to Glen French for any closing remarks.

Wonderful. Thank you very much. As we've talked about, the first half of the first quarter was just very difficult for us with Omicron hitting sort of in every market effectively at the same time. In light of this, I was very, very pleased with our performance in the first quarter. As we look ahead, we anticipate a very steep revenue slope. But given some of the challenges that we faced in the past and those that go along with scaling new medical technology, we want to be sure that we don't get ahead of ourselves. Having said that, I'd like to talk about just very quickly or summarize some of the things that give us a great deal of optimism as we look ahead. Number of treating centers is increasing. We have an increasing number of trained physicians, awareness of our treatment option with referring doctors as a central focus of our marketing and sales activity. We've got a process in place where we're sharing best practices across our treating centers. And then finally, this concept of inbound patient interest, COVID shut us down for roughly half of the first quarter, but it didn't shut down patient interest. When you looked at the fourth quarter of 2021 and you compare it to the first quarter of 2022, in the first quarter, social media connections were up, calls into our treating centers were up relative to the fourth quarter. We have now more than 100,000 patients that have opted in, which gives us that opportunity to go back and forth. And we've kicked off this patient-centric call-in center, which will allow a single point of consistent contact for two-way exchange of information with our treating physicians. So we believe we have the right plans in place and a great team in place with a great deal of experience that's working toward making those plans a reality. So I just want to thank you all for your interest in Pulmonx and for your time today, and good afternoon.

Thank you. Ladies and gentlemen, this concludes today's conference call. Thank you all for participating. You may now disconnect. Have a great day.