CG MEDTECH, DIAGNOSTICS AND DIGITAL HEALTH & SERVICES FORUM - PULMONX CORP

Good morning, everyone, and thank you for joining us at Canada Corps Juniors' 2026 MedTech Diagnostics Digital Health and Services Forum. My name is John Young. I'm one of the MedTech analysts here. I'm very pleased to be joined today by Derek Sung, Chief Operating Officer and Chief Financial Officer at Pulmonix. Derek was Pulmonx's CFO from 2019 to 2023, including the company's 2020 IPO, and then rejoined in November 2025. For those less familiar with the story, Pulmonics is a commercial stage medical device company focused on severe emphysema. Its product, the Zephyr valve, is a one-way valve placed in the lung through a bronchoscope that blocks off the diseased part of the lung so healthier parts work better and patients can breathe more easily. So Derek, thanks for being here today. Lung just reported its first year-over-year revenue growth after declines in Q4, Q1, and Q2. Looking back on the one year you and Glenn have returned, what was the core problem that you found, and how much of the turnaround is behind you versus ahead? Sure. And thanks for having me, John, and thanks for that introduction and the brief overview on the company. So when Glenn and I returned a year ago, what we found was that the company had just lost focus. We were trying to do too many things, trying to it all at once. And while much of it was well intentioned, the end result was that we saw a rapid slowdown in our sales. We saw our expenses kind of go in the opposite direction and those increased. And we saw turnover across our employee base, specifically in our U.S. sales force, which is where we saw the biggest slowdown happen. So we came in with a turnaround plan. And it was a really simple three-step turnaround plan, right? Step one was to realign our cost structure. And so we had just, again, started spending way out in front of revenues that just never materialized. And so, we took out roughly 10% of our recurring costs, brought our cash burn down. We burned $32 million last year. where we're going to burn closer to $22 million this year, so nearly a 30% reduction in our cash burn. So that was step one. And the second step was we wanted to strengthen our balance sheet. So we had $40 million of debt that was coming due earlier this year. We refinanced that debt. We kicked it out five years, interest only, so we don't have to worry about it until 2031. And in that process, we also got access to an additional $20 million of undrawn capital That'll give us a little buffer. And so with those two steps from a financial perspective, we went from having less than a year's worth of cash to now we have the capital that we need to get to cash flow break even. So those two pieces of our turnaround are largely complete. The third and most important step to our turnaround is, of course, getting our company back to positive sales growth. And this is a work in progress, but we're making really good progress. We've refilled the majority of the open positions in our U.S. sales team. We've re-focused our U-S sales strategy. And as you mentioned, we're seeing early signs of good progress. We returned to growth for the first time, which is a real milestone, since we got back here in Q3. And also, though, even prior to that, every quarter since we've been here, we've seen a nice year-over-year improvement in our revenue profile. So plenty of work to be done. But, you know, we're on track with the plan that we laid out for ourselves, and we're feeling good about it. I definitely want to dive deeper into those, but maybe also taking a step back. You rejoined as both CFO, but now also COO. Maybe you could talk about your increased responsibilities. And also, what brought you back to Pomonix? What did you see that made you want to rejoin the company, too? Sure. So what brought me back was, look, I knew the market opportunity was large. I knew our technology worked. You know, our technology, our ZephyrValve technology, it's serving a huge unmet need in these patients with severe emphysema. These are patients who really have exhausted all, you know, medical options available to them. Most of them aren't candidates for a surgical procedure. And, you Know, what our ZEPhyrvalve does is it really, you knows, rolls back the clock on their disease. It gives them their lives back. So, you KNOW, it is a critical unmet needs. The product works, I mean, and we know it works. And, You know it has been proven in multiple clinical studies. And when I looked at the company and was making my decision to come back, what I knew was that the market hadn't really changed, that the broader end market hadn' changed. We weren't facing any new large competitive threat that wasn't there before. There wasn't any disruptive reimbursement that wasn' there before, none of these things had changed. So I felt confident that it was something that we could fix. It was something internal that we can come back and fix it. And I also felt, from a personal perspective, that there was just a lot of value that we create here. This is, yeah, you know, Pomonix is, we're a $90 million plus revenue company. We're a 75% plus percent gross margin company. And, you Know, if we can get back to positive growth and sustainable growth, which I do believe we can. I mean, I just, I felt like there was a lot of value to be created. Got it. So that was the reasons why, you Now, what drove me back here. You Know, in terms of roles and responsibilities, when Glenn and I kind of laid out our plan, we took a divide and conquer approach. Glenn is spending a lot of his time focused on the commercial turnaround. So he's getting involved in the day-to-day operations of our commercial team. He's driving that turnaround in the U.S. sales force, managing directly our area vice presidents on the U!S. side. And so to give him that leverage and to give them the bandwidth, I've taken on responsibilities for all of the non-commercial operations within the company. So R&D, clinical, quality, regulatory, and manufacturing ops in addition to the finance and G&A functions. So, you know, of course, we all have really great leaders and great talent in place, you know, running all of those functions, and those leaders are really executing and bringing our execution to kind of the next level. So that's how we've divided things up, and it seems to be working out pretty well. Got it. And then Q3, your revenue roughly beat consensus by about $1 million, yet fully your revenue guidance of $90 million to $92 million was reiterated. How has your approach to forecasting changed since you got back? And maybe just talk about your guidance philosophy so far. Yeah, we have always been, since we were here last and currently, I mean, very focused on delivering on our commitments, It's focused on not getting out in front of our skis in terms of what we're committing to. And especially now, I think we know that we're a show-me story at this point, and we want our results to speak for themselves rather than our words. And so that continues to be our philosophy. We came in with a plan, as I described, at the start of this year. We set out a guidance range at the beginning of the year. the guidance that you mentioned, $90 to $92 million, we haven't deviated from the start of this year. And that's a reflection of the fact that we're on track with the plan that we laid out for ourselves. Got it. And then a big part of that plan is the U.S. commercial sales force. As you highlighted, there was a lot of turnover when you came in, 50% in 2025 to be specific. The mean and median tenure now, I think, is at 1.8 and 1.2 years now. What did you and Glenn do to stabilize the sales force? What are you doing differently in hiring, training, and retention? And what are you seeing today that makes you optimistic? Sure. So there are a lot of reasons for the sales first turnover that we saw last year. It was kind of a confluence of events, almost a perfect storm that included changes in roles, and changes to comp plans and to what the sales reps were being asked to do and how they were being managed. So I think the first thing we did was we really took kind of a back-to-basics approach and tried to address these issues that were causing a lot of the angst. We shuffled the organization a bit. As I mentioned, Glenn got involved. We have new sales managers in place. And we've been really largely successful in refilling all of the open territories that were opened up. At this point, we've got nearly all of our territories filled in the U.S. There's always going to be some level of turnover, which I think is healthy in any medical device sales organization, but we're back to kind of normalized turnover rates, if you will. And we're focused on getting these folks up to speed. So we have worked on optimizing our training program to get these folks up to speed. We do have a lot of new folks, as you mentioned, right? Average tenure has gone down. We not only have new territory managers, new sales reps, we also have new sales managers in place as well. And so it's all a matter of getting these folks up to the speed, up the learning curve. That can take some time. but I think we're making good progress and it feels like morale has improved and we're really in the right direction. Got it. And any KPIs that you look at that makes you optimistic about just how they're returning to productivity and just thoughts on that productivity too? Yeah, I think typically it takes anywhere from roughly six to nine months to get territories back to where they were before Or that can vary, though, by territory by territory. We're obviously looking at that. It depends on the state that the territory was left in. It also depends on whether or not we have a junior rep in some of these territories, a non-quota-carrying junior rep, in these territories. And in some cases, we'll have promoted a junior rep into a more quota-carry senior rep level, and those will go faster. In other cases, we're bringing someone new from the outside, but they're a very experienced territory manager, and they'll come in with a lot of medical device selling experience, but they'll need to learn our business. So it varies, but overall, from what we've seen, we were happy with the progress that we're making. Got it. And then the full-year guidance for Q4 implies revenue roughly between $23.8 to $25.8 million. It's about 5% to 14% year-over-year growth. What gets you to the higher part of that range, and what gives you confidence in exiting the year at or near double-digit growth? So I'd start by pointing out that the midpoint of our revenue guidance range that you just gave reflects roughly 10% growth, so double-digit growth. And so if you think about it, the question is, what are the variations? What drives variation around that midpoint? And I would say that the biggest piece is what I just talked about, which is the time it takes to get the new team, the new folks up the productivity curve. And really, we're doing everything that we can to try and drive that ramp up the productivity curve. And I think that's probably the biggest driver of variation within our guidance range. There is a little bit of seasonality in Q4 that's always a little tough to predict, too. You've got the holidays, you've got end-of-year effect, and so that probably drives a little variation there within the range as well. Got it. And then maybe also, just touching on 2027, consensus of roughly $99 million or high single-digit growth. You did say in the call that you guys are committed long-term, sustained double-digits growth. What has to go right beyond, obviously, the Salesforce maturation to get to that level long- term? And when do you think we see that sustained level of growth quarter to quarter? Yeah, I mean, I think that you said it. I think it's all about sales force maturation. It's all About commercial execution. Again, we feel like we've got the right strategy in place. We've got The right people in place it's a matter of executing to that sales strategy, you know, frankly, and you know that that sales Strategy again from a strategic from a sales strategy perspective. I think we've also kind of taken a back-to-basics approach, you know, where we've really narrowed the focus of our sales team down to kind of the key things that matter and the key things that we know have worked in the past, and that's focusing on the treating centers, starting with our clinical champions, making sure that they are getting good clinical outcomes it's focusing on ensuring that our clinical champions have the support the administrative support that they need within the treating centers whether that's coordinators or service level support and then it's identifying you know those COPD physicians who are treating these COPD patients that are you know already aligned in some way or fashion with the treating centres and the treating physicians and we're really kind of taking a very narrow focus on on this selling strategy. And going back to your original question, I think it's just a matter of executing on that sales strategy and keeping folks in their seats. Got it. Then maybe we can just jump to AirSeal. Convert to enrollment is expected to complete in the back half of next year, with limited AirSea launch in Europe in 2027 and then material revenue in 2028 upon FDA approval. What are the key milestones that investors look for between now and then for example when could we see the data from the trial and then also how should you think about the investment required to get it commercialized yeah so so just so just to clarify in terms of timeline so we were currently enrolling our convert to pivotal IDE study we expect to complete enrollment of that study in the back half of next year when we do complete that enrollment. We do have CE mark of the product available outside the U.S. and so in those countries where we do have C mark we'll initiate a limited commercial launch next year. We expect to to see you know first revenues from that next year, material revenues from that OUS launch in 2028. In the U S the FDA timeline, the timeline to commercialization is a bit longer. So probably roughly two years, a couple years post completion of our clinical study is the time it'll take for us to get through the treatment and follow up these patients and the preparation of the submission. And so we probably expect to be commercial in the US market a couple of years after completion of enrollment. Maybe just to even just take a step back and talk about Aracel in general. We're really excited about AeroSeal. It's our sort of next pipeline product. And just to talk a little bit about how it works and the opportunity that provides for us, the way our Zephyr valve works, and you mentioned this a bit in your introduction, is that emphysema is a disease of tissue destruction and air trapping. So what happens in these emphysem patients is that the emphySEMA destroys the lung tissue. The lung tissue loses elasticity. see the airways collapse, and basically dead air gets trapped in these lungs. And our Zephyr valves, the way they work is we insert them into the airwaves that feed the most diseased lobe of the lung, cuts off the air to those diseased lobes of the lungs, essentially deflates them. And then the healthy lung tissue expands into space, and that's what gives the patients relief from these symptoms. Well, there's a subset of patients who have what we call collateral ventilation between the lobes of their lungs. So that means that the completeness of the fissure, the division between the lobes or their lungs, isn't complete. And what you can do is, what that leads to is, air can flow in from an adjacent lung into the target lobe that we're trying to drop down, even after we cut off the air from the airways with our valves. And so those patients don't respond today to our Zephyr valve procedure. And roughly today, after patients have gone through the workup process, they're ready to get the procedure, we do a final sort of physiological test with our chartus catheter to determine whether or not they have this collateral ventilation. And about 20% of our patients have this collateral ventilations, and they aren't candidates for valves. So what the Aeroseal product does is the Aereseal product, essentially it's a polymeric foam that's injected into, that's injected through the airways, and it kind of seals off those incomplete fissure defects, if you will, between the lobes of the lungs and takes those patients who have collateral ventilation or collateral ventilation positive and converts them to collateral ventilation negative patients who can then be recipients of Reval. We conducted a feasibility study, it's a roughly 100 patient OUS feasibility study a couple years ago that has, that we've presented already at scientific conferences that has shown that roughly 75% of these patients in this feasibility study were able to convert from CV positive, collateral ventilation positive, to collateral ventilation negative. And so then now we're kind of initiating this convert to larger pivotal study that's going to drive us towards FDA approval. So that's a product that we think is a real market expander for us, and we're really excited about. I know you guys have talked extensively too about some of the physicians who refer their patients for a Zephyr valve, and unfortunately, they come back with a negative. They're part of that 20%, and it kind of dissuades them from continuing to convert, I mean to convert to, refer patients to that. So how have you thought about just the ability for AirSeal, once it is approved and on market, to really unlock beyond that 20% TAM, but really just make referral patterns easier and more strong for pulmonics, too. Yeah, I think it will. I mean, we haven't quantified it, if you will. But I think there's a halo effect where, as you said, I mean no one wants to see two out of 10 patients come back disappointed. And it's kind of a reality of the current situation. But I do think that when this product gets out there and it's now 95% of patients who go through our procedure able to get a valve versus you know 80% I think that that'll make a difference and I think I'll certainly have a halo effect overall and in volumes that's what we would hope got it and then moving just to China you know the registration has been renewed and shipments your distributor resume by early next year China is just about 2% of company revenue but what is embedded if any for China revenue in q4 and also how should we think that the gross margin drag as China sales return yeah so you know I think so China is a market that that we like it you know we don't want to over index on it as you said you know it's a couple percent of total global sales it drove some wacky comps this year and so that's why you know it we've been talking about it this year we're happy to have gotten the renewal of our registration certificate behind us we're working with our distributors we're restarting our accounts within in China expect to have completed and gone through that delisting process by the end of this year. And as you mentioned, we do expect to get our first shipments out to China by early next year. Whether or not some of that gets pulled in I think is contemplated within the range of our guidance for Q4. It is a slightly, it is a lower gross margin product for us, but remains very profitable to our bottom line. It's accretive on a bottom line perspective, has very attractive operating margins. So as China comes online, we would expect a very modest impact to our gross margin, but I do believe that we'll stay above 75%, at or above 75% from a gross margin perspective, even with China coming online. We've got a lot of different forces that are driving our gross margin. And we're continuing to see improvements to our supply chain. We're continuing see production efficiencies and overhead absorption. And so I think all of those wash out. And so from a gross margin profile, I'm comfortable that we'll stay at or above 75%. Got it. And then it's moving down the P&L just to OpEx, you know, down 18% year over year as those cost reductions that you have taken really come to fruition. You know, you said you expect only modest growth in OpEx from here. If revenue in the top line just outperforms, where would you reinvest first in the business? And is there anything that you cut this year that you would put back? Sure. We're very comfortable with the cost structure that we've established, right? So we made a one-time adjustment in our cost structure at the start of this year. We really rolled back our cost infrastructure, if you take a look at it, to where we were a couple years ago, back in 23, just before I left. And at that time, we were growing the company healthily in the 25%, 30% range. So I feel like we have a cost structure that is in place today that can drive the growth that we need. So I don't think there's nothing that I would say we need to put back or we do expect to grow our cross-structure, I would say low single digits as we move forward. And so that's how we think about it. But if we accelerate revenue growth, I think that's great. It just drops down and we get to cash flow break even that much easier, that much earlier. Got it. And just long-term gross margins, how should we think of them once AeroSeal is commercialized? Obviously, you're going to have the benefit of more valve sales from it, too. And I know you haven't given ASPs yet to investors on it, but just how should we think about the margin structure going forward? Yeah, so we'll see two benefits from AeroSeal. One, it takes patients who weren't qualified for valves, and they will become qualified for valve. So we'll get the valve revenue benefit. And then we do expect our plane to charge for AeroZeal. We haven't talked about ASP, as you mentioned, but we'll have revenue benefit from there. So when you put those two together, I don't expect a meaningful impact negatively to gross margin from AeroSeal. So my comments on 75% plus gross margin moving forward still hold. Okay, great. You ended Q3 about $53 million in cash, and you expect to burn roughly $22 million in 2026, which is down about 30% year over year. On the Q3 call, you know you have a very clear pathway to cash flow breakeven with that debt facility you had put in place. Just what revenue level and timeline do you think you'll reach cash flow break even at this point? Yeah, I mean, I don't want to put a timeline on it specifically. You know, again, I think we can get there, you Know, with modest growth, I would say, you know, in the range of from from an annualized revenue perspective, the range of $120-ish million is probably what I would say gets us to cash flow break-even. And again, I think we can get there within the runway of the capital that we have access to today. Got it. And then just lastly, if we sit down together at this time next year, what do you want to be able to point to as proof that Pulmonix has turned the corner? I think it's just going to be in our numbers. Like I said, we want a result to speak for themselves. And when we sit here today, I would expect that you'll see it and hear it in our numbers. CFO loves the numbers. Thank you. Appreciate it. Thanks, John. Thanks for having me.