Pulmonx - Q4 2023
February 21, 2024
Transcript
Operator (participant)
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. To ask a question during this session, you will need to press star one one on your telephone. You will then hear an automated message advising you your hand is raised. To withdraw your question, please press star one one again. Please be advised that 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 (Associate VP, IR)
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 31st, 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 related 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, expectations for hiring, growth in our organization, market opportunities, 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, including our quarterly report on Form 10-Q, filed with the SEC on November 3rd, 2023. Also, during this call, we will discuss certain non-GAAP financial measures. Reconciliation 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 21st, 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.
With that, I will turn the call over to Glen.
Glen French (President and CEO)
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 ten, 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 med tech 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 US 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 US 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 US 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-2 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-$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 10-15 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 5 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 and 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 we'll initiate sales through a post-market approval study of approximately 140 patients at 10-15 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-2.
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-2 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-2, 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-1, following enrollment complete. 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 (Interim CFO)
Thank you, Glen, and good afternoon, everyone. Total worldwide revenue for the three months ended December 31st, 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%-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-$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%-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 31st, 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 breakeven 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 $81 million-$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 Glen 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 Glen for closing comments.
Glen French (President and CEO)
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-2 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 breakeven. Again, it has been a pleasure to serve as CEO for the past 9 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 (participant)
Thank you. As a reminder, to ask a question at this time, please press star one one on your telephone and wait for your name to be announced. To withdraw your question, please press star one one again. Please stand by while we compile our Q&A roster. Our first question is gonna come from the line of Jason Bednar with Piper Sandler. Your line is open. Please go ahead.
Jason Bednar (Managing Director, Senior Research Analyst, Medical Technology)
Hey, good afternoon. Thanks for taking the questions. And first off, Glen, you know, congrats on the retirement, everything you've done for Pulmonx and the asthma community. Really hoping the best for you and really enjoyed working with you here. Wanted to start off really just, you know, first question, Glen, you know, 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, you know, which of these you'd expect to have the greatest impact in 2024? And would you anticipate the upside for, you know, that's leading to your guidance this year?
Is that coming, you know, probably more from account productivity, an increase in the active accounts that you're talking about? I think you finished at 73%. Is there any upside there? Just how do we think about the growth algorithm coming together this year?
Glen French (President and CEO)
Jason, thank you very much for your, your initial comments. Appreciate that. With regard to the question, in terms of the three-pronged efforts, you know, our business is, you know, 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, it's been fairly organic. We provide no specific incentives to, to open them up. They just- they're folks that we, that we, 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 as 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 10-15 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, you know, best practices and increasing efficiency at our Zephyr Valve centers. You know, sort of taking them from left to right on this very well-defined process that we've established.
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, we talked about earlier in the script, we're gonna turn up a little bit on the activity in increasing local awareness. And so I would, 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.
You know, 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 (Managing Director, Senior Research Analyst, Medical Technology)
Okay. No, and that's actually a nice segue. I'm gonna have a little bit of a two-part follow-up here. You know, maybe first on that, just I did pick up on that, on the you know, raising awareness in the local community point. It did sound, you know, more comprehensive maybe than we've heard in the past. Is that what's driving the greater uptick in OpEx? That, you know, the OpEx spend looked a little bit higher in the guide than what we were thinking. Or are you just diverting funds that you had previously allocated elsewhere, and, you know, 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, you know, I guess, what's it gonna take from a volume perspective to get gross margins working even higher than where we're at right now? That's, that's, you know, mid-70s% are nothing to sneeze at, but, you know, 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 US.
Glen French (President and CEO)
... Yeah, well, as always. Yeah, good, good questions, Jason. Yeah, I'm gonna hand this off to to John in just a second here. But, before we talk about the, you know, driving up OpEx, which was the first, part of the question, where you, you, 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, on the margin side of things, our business is sensitive, or our, our margins are sensitive to volume, and so as volume goes up, that's probably the, the greatest way that we can continue to inch up our margins. So I'll, I'll leave you with that if, if John wants to embellish that further. Great. Otherwise, John, you want to take the first element of the question?
John McKune (Interim CFO)
Sure. As far as OpEx goes, Jason, yeah, the part of the increase is gonna be increasing the spend as it relates to further educating the community about the benefits of the Zephyr Valve. So, very simple answer, yes, that is driving part of the increase in the OpEx.
Jason Bednar (Managing Director, Senior Research Analyst, Medical Technology)
Okay, helpful. You know, maybe I'll save one more for later. But just to maybe come back to that, that mid-70s, I mean, is there anything we can think about as far as, like, where US gross margins sit today and, like, maybe incremental margins as, like, that incremental volume comes through?
Glen French (President and CEO)
Yeah, you are correct that, as the US 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 moving and inching us further up on that margin scale. Getting into the upper half of the seventies 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 (Managing Director, Senior Research Analyst, Medical Technology)
Okay. Very helpful. Thanks so much, Glen. Congrats again.
Glen French (President and CEO)
Thank you.
Operator (participant)
Thank you. And one moment for our next question. Our next question is gonna come from the line of Rick Wise with Stifel. Your line is open. Please go ahead.
Rick Wise (Managing Director, Senior Equity Research Analyst, Healthcare)
Good afternoon to you both. Glen, just as Steve Williamson's new advisor, counselor, or 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 his -- 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.
Glen French (President and CEO)
Got it. So Rick, you and, you in particular, I, I know we- we've talked a lot about sort of where we are in our process, and, 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 the, that sort of a third, a third, a third, we are in the early innings here. We are literally, you know, 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 in 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, you know, or engage more and more in the, in the driving patients in off the edges in our more developed geographies, I think there will be opportunities for us to accelerate even further. You know, 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.
With regard to Steve's charge, he's gonna be, I think he's got a great background of moving markets. And as it relates to us, I think, you know, probably finding additional ways to get more wind behind those sails.
Rick Wise (Managing Director, Senior Equity Research Analyst, Healthcare)
Yeah, 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 gonna 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 you know, sort of return to more compelling growth? Or how do we think about that setup for 2024? Thank you.
Glen French (President and CEO)
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 (Managing Director, Senior Equity Research Analyst, Healthcare)
I'm sorry. The same year, yes, 2024. Well, 2024 and beyond.
Glen French (President and CEO)
Okay. Yeah, no, I think it's a great question. You know, 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, quote, unquote, "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, you know, 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 skill set. And so with regard to our team outside 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. You know, 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 it's gonna be, that's gonna be our focus as it relates to our international business. Again, 85% of that business is in Europe. So we're gonna 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, you know, we're gonna, we're gonna get things moving in a good and solid direction this year, probably harvesting most of, or a good bit of the upside in 2025. So we're just, we're setting things up, getting them and 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 gonna put a little bit less than half of the patients into the study that stands between us and sort of freedom to fully operate commercially in Japan.
We are generating revenue through the study that we're executing, but out of the 140 patients, you know, we're gonna 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, you know, training the physicians, getting them up and running, and making sure that we've got their referral paths all opened up. The good news is that we're gonna 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 what 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 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 gonna be broad awareness, I expect, at the time that this opens up, late 2025, early 2026 Japan.
Rick Wise (Managing Director, Senior Equity Research Analyst, Healthcare)
That's great. Glen, thank you for everything, and congrats.
Glen French (President and CEO)
Rick, it's been a pleasure working with you over the last couple decades.
Operator (participant)
Thank you. And our next question is gonna come... One moment for our next question. And our next question is gonna come from the line of John Young with Canaccord. Your line is open. Please go ahead.
John Young (Equity Research Analyst)
Hi, good. I'm John. Just want to echo everyone, congratulations on the retirement, and congrats on a strong Q4. I just kind of want to circle back to some of the comments we from the Q&A session. First, I just want to make sure I heard you correctly on Jason's question when I think of OpEx for next year. You know, these increases sounds like mostly SG&A from the education efforts, but I also know you're enrolling CONVERT-2 through the year. So, you know, how should we think of R&D increases for next year, too?
John McKune (Interim CFO)
I'll take that one. John, thanks for the question. Yeah, we expect R&D to be up in 2024 compared to 2023, as we are, and as you pointed out, as we enroll in our CONVERT-2 study and get that going. So, we do expect to see, on the OpEx front, both increases in SG&A, driven by our investment in, on the commercial side of things, and then in R&D as well as we invest in the CONVERT-2 study.
John Young (Equity Research Analyst)
... Thanks, John. And then, Glen, just on Japan and your comments on Rick's question there, you know, is that timing a deviation from initial expectations, especially with one-third of the patients being enrolled in 2024? And can you talk to maybe a little more color about, you know, maybe some of the intricacies of the market and some of the time it takes to enroll these patients?
Glen French (President and CEO)
Sure. I don't know if it's a deviation. I will say that these trials are hard to predict when they're gonna be done. Until you get about a third of the patients in, it's really hard to see when the end's gonna 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, nontrivial amount of startup time, meaning, you know, 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 tenth study I've done in this particular space over the last 27 years. And it's. 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.
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-2, in the first half of this year.
John Young (Equity Research Analyst)
Great. Thanks again, Glen, and congratulations.
Glen French (President and CEO)
Thank you.
Operator (participant)
Thank you. And again, ladies and gentlemen, if you would like to ask a question at this time, please press star one one on your telephone. And our next question comes from the line of Alex Nowak with Craig-Hallum. Your line is open. Please go ahead.
Connor Glienke (Analyst)
Hey, good afternoon. This is Connor on for Alex. Thanks for taking my questions, and congrats on the retirement, Glen.
Glen French (President and CEO)
Thank you.
Connor Glienke (Analyst)
With $68 million in revenue this year, is there any possibility of adding on a related product to the portfolio in the future?
Glen French (President and CEO)
There's... You know, I mean, we're—I think that we would be—we're not— Is there any possibility? Sure. There's a possibility, or we're not in the midst of anything. We're not, you know, but we are open to accretive types of things that would be, you know, we would be able to leverage with our current call point, if we could fully rationalize that. Having said that, you know, we've got to be super careful that we don't distract this finely tuned, you know, commercial organization that is growing at a high rate of speed with high-margin products that they're selling right now.
We've just scraped the surface in terms of our market penetration, depending on whether you look at a prevalent market or an incident market, you know, at the very best in our most penetrated market, we're 20% penetrated. So we got a lot of upside that we, you know. So we would be extremely discriminating, but yeah, we'd be open to considering things.
Connor Glienke (Analyst)
Great. And then could you remind us on AeriSeal timelines, and then maybe frame up how large this opportunity could be?
Glen French (President and CEO)
AeriSeal timelines. Well, so we're commencing this trial, and we will be probably enrolling it through next year to get to the 200 patients that we're targeting. And it's got six months follow-up, you know, a few months to collect the data, and then however long it takes to get through FDA, good round number is a year. So I guess that kind of gives you an idea of the timeline. So I would, I would characterize the timeline as outside the normal scope of what your kind of out years would be if you were looking at 2024-2026. So it's...
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, you know, whenever you do one of these trials, there's always a risk associated with an unforeseen outcome. And the CONVERT-2 trial is so similar to CONVERT-1, that we will, you know, when we're reporting those data later this year, you know, I'm certainly gonna 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 gonna be increasing our confidence with regard to the impact of this over time as these CONVERT-1 data become available. And then with regard to the impact, right now— I know 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 to...
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. So what we're targeting, the groups that we're targeting in CONVERT-1 and CONVERT-2, are those patients. So there's, you know, we're going to get, we hope, about 80% of those patients to a place where they get a positive benefit. But, 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 per 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 gonna, 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, you know, the use of AeriSeal. This is what the physician would be saying. 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, if there's a 80% chance that when they get AeriSeal, they're going to subsequently get valves.
Connor Glienke (Analyst)
Awesome. That's very helpful. Thanks for taking my question.
Operator (participant)
Thank you. I'm showing no further questions at this time, and I would like to hand the conference back to Glen French for any further remarks.
Glen French (President and CEO)
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 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 (participant)
This concludes today's conference call. Thank you for participating. You may now disconnect.