PROCEPT BioRobotics Corporation (PRCT) Q2 2022 Earnings Call Transcript

Image source: The Motley Fool.

PROCEPT BioRobotics Corporation (NASDAQ: PRCT)
Q2 2022 Earnings Call
Aug 04, 2022, 4:30 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good afternoon, and welcome to PROCEPT BioRobotics second quarter earnings conference call. [Operator instructions] As a reminder, this call is being recorded for replay purposes. I would now like to turn the call over to Matt Bacso from the Gilmartin Group for a few introductory comments.

Matt BacsoInvestor Relations

Thanks, operator. Good afternoon, and thank you for participating in today’s call. Joining me from PROCEPT BioRobotics are Reza Zadno, CEO; and Kevin Waters, CFO. Earlier today, PROCEPT released financial results for the quarter ended June 30, 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. These 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 sales and operating trends and future financial performance, expense management, expectations for hiring or growth, market opportunity, revenue guidance, commercial expansion and future product development and approvals are based upon our current estimates and various assumptions.

10 stocks we like better than PROCEPT BioRobotics Corporation
When our award-winning analyst team has a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has tripled the market.*

They just revealed what they believe are the ten best stocks for investors to buy right now… and PROCEPT BioRobotics Corporation wasn’t one of them! That’s right — they think these 10 stocks are even better buys.

See the 10 stocks

*Stock Advisor returns as of July 27, 2022

These statements involve material risks and uncertainties that could cause actual results or events to materially differ from those 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 most recent annual report on Form 10-K filed with the Securities and Exchange Commission on March 22, 2022, and available on EDGAR and in our other public reports filed periodically with the SEC. This conference call contains time-sensitive information and is accurate only as of the live broadcast on August 4, 2022.

PROCEPT BioRobotics disclaims any intention or obligation, except as required by law, to update or revise any financial projections or forward-looking statements whether because of new information, future events or otherwise. And with that, I will now turn the call over to Reza.

Reza ZadnoChief Executive Officer

Thanks, Matt. Good afternoon, and thank you for joining us. For today’s call, I will provide opening comments and a business update, followed by Kevin, who will provide additional details regarding our financial performance and updated 2022 financial guidance before opening the call to Q&A. Starting with our quarterly revenue results.

Total revenue for the second quarter of 2022 was $16.7 million, representing growth of 97% compared to the second quarter of 2021 and 18% sequential growth compared to the first quarter of 2022. U.S. revenue for the quarter was $14.8 million, representing growth of 126% compared to the prior year period. In the second quarter, we sold 23 AquaBeam Robotic Systems, generating total U.S.

revenue of $8.5 million, representing growth of 79% compared to the second quarter of 2021. AquaBeam Robotic Systems continues to be primarily driven by sales at high-volume BPH hospitals. U.S. handpiece and consumables revenue was $5.7 million, representing growth of approximately 246% compared to the second quarter of 2021, and this growth was driven by an increase in the installed base of AquaBeam Robotic Systems, which has grown 56% from the second quarter of 2021.

Additionally, we have seen an increase in utilization from our installed base as measured by handpiece sold per account. Utilization per account increased approximately 90% compared to the second quarter of 2021. We believe the combination of releasing positive long-term clinical data, increased private payer coverage, and outstanding real-world patient outcome continues to drive certain interest and hospital adoption of our AquaBeam Robotic Systems. Before providing a business update, let me briefly address the current macro environment, specifically supply chain and hospital capital equipment spending.

First, I want to highlight we have not experienced material product constraints in our ability to meet customer demand, nor has inflation been a concerning issue to date. While we continue to take the challenges associated with this global supply chain seriously, we have been able to navigate this disruption period well, having successfully increased inventory levels for key components. As we progress through the year, we are focused on ensuring we can supply our customers with what they need in a way that is high-quality and timely. As it pertains to hospital capital spending, we believe we are uniquely positioned for continued momentum around our AquaBeam Robotic Systems sales in the back half of the year due to multitude of positive factors around our technology and our early stage of market penetration.

First, BPH is the No. 1 reason men visit the urologists, with many men seeking durable surgical treatment option at high-volume hospitals. Additionally, many of these men forgo treatment due to the inferior safety profile of current surgical alternatives. With a growing and increasing educated patient population, hospital systems are motivated to invest in cutting-edge technologies to ensure they stay competitive and not lose patients to other area hospitals.

We believe our AquaBeam Robotic System allows hospitals to offer a cutting-edge technology in the BPH surgical space. Next, we exited the second quarter of 2022 with an installed base of 114 U.S. systems. With approximately 2,700 total hospital performing surgeries, of which 860 are high-volume targets, we are still very early in our adoption curve with a long runway in front of us.

It is also an important reminder that the high-volume BPH hospitals we target are well funded, with ample liquidity, which we believe mitigates some of the risks associated with an uncertain macro environment. Additionally, since the approval of purchase of AquaBeam Robotic System is typically managed at the local hospital level and can routinely be authorized by the hospital CEO and CFO, this streamlines the more complex approval process that may be required for other higher-priced capital equipment. Lastly, given AquaBeam’s unique ability to treat all shapes and size of prostates, hospitals are now more than ever standardizing their BPH surgical protocol. This standardization, along with our increased insurance coverage, makes Aquablation a logical choice.

In summary, we continue to monitor all aspects of the macro environment and its impact on our business. We would not be increasing our revenue guidance, which Kevin will provide details on shortly if we felt pressure associated with the capital equipment environment. Now turning to quarterly business updates, starting with our commercial organization. We have successfully hired a highly efficient commercial team of experienced medical device sales professionals.

We implemented an attractive training and onboarding program to put us in position to execute our 2022 commercial growth plan. While we approximately doubled our field-based commercial team at the end of 2021, the number of reps has been relatively unchanged for six months. Given the commercial momentum, excellent real-world clinical outcome and increased demand our technology has been able to generate, we plan to meaningfully expand our field-based commercial team in the third and fourth quarter of 2022 to further penetrate the market and expand our sales presence in the U.S. This increase is captured in our updated operating expense guidance.

Even with the tight labor market, we continue to see strong interest from high-quality candidates, which gives us additional confidence in meeting our hiring and growth objectives heading into 2023. Next, I would like to comment on utilization and procedure trends which we have seen in the last 12 months. We continue to believe the majority of Aquablation procedure volumes are converted to cases, which is the most commonly performed surgical procedure for BPH. We also believe we are taking resective procedures from other modalities like simple prostatectomy and laser procedures of the prostate.

On hospital utilization, we are seeing meaningful annual increases in utilization from our customers. We believe, based on our clinical data, the increase in utilization is attributable to the following factors. Given the predictability, reproducibility and low learning curve associated with the AquaBeam Robotic System, we are generally seeing an increasing number of surgeons using our system each quarter at our accounts. As a result, we believe an increasing number of accounts are beginning to standardize their effective procedure protocol in favor of Aquablation therapy.

Additionally, since our clinical data support outcomes that are independent of prostate size and shape, surgeons are using Aquablation therapy in a broader range of prostate sizes. Specifically, when analyzing patient data from January 2021 to June 2022, we found that most prevalent size range treated fell between 60 to 80 milliliters. Given the size range of prostates treated over the last 18 months, we believe surgeons are beginning to standardize their procedures to Aquablation given the limitation of surgical alternatives. Turning to clinical updates.

In May, we announced four-year WATER II Study Data at the American Urological Association Conference in New Orleans. As a reminder, WATER II was a prospective FDA study with an objective performance criterion for both efficacy and safety in large prostate ranging in size from 80 to 150 milliliters. The four-year data were consistent with the previously reported primary endpoints, with no change to safety results. The efficacy results as measured by change in IPSS and Qmax, also consistent at four years.

Lastly, durability remains strong with only 30% of patients requiring surgical retreatment at any time up to year four. More recently, in early July, we attended the European Association of Urology Conference in Amsterdam. This was the first in-person European event since the pandemic and was well attended with more than 7,000 registrants. A key talking point among surgeons and key opinion leaders was our five-year WATER data published in February 2022.

As a reminder, our five-year WATER data are the only prospective randomized double-blind multicenter FDA clinical study comparing the safety and efficacy of Aquablation therapy to TURP. This study proves Aquablation’s superior safety due to low irreversible complication and superior symptom relief for prostate ranging from 50 to 80 milliliters. Aquablation at five years exhibited durability that was two times lower risk for retreatment due to recurrent BPH symptoms when compared to TURP. This is measured by patients going back to med or requiring surgical retreatment, which is represented by an approximate 1% annual retreatment rate.

In Europe specifically, surgeons are enthusiastic about strong clinical data which is driving them to learn more about Aquablation therapy. Given this backdrop, we believe five-year WATER and four-year WATER II data will be a significant differentiator for our customers when choosing to replace their historical BPH surgical modalities with Aquablation. Lastly, touching on recent payer coverage policy updates. In the second quarter, we received numerous insurance coverage updates, adding to the already strong list of payer for Aquablation therapy.

In April, Aetna published its updated policy noting Aquablation therapy as a covered surgical alternative for BPH, providing coverage for their roughly 21 million commercial members in the U.S. Additionally, in the second quarter, numerous Blue Cross Blue Shield Association healthcare plans also issued positive coverage as well as medical mutual. In aggregate, these policies, along with existing coverage policies, provide coverage for approximately 180 million members. As it relates to the impact of coverage on our business, there is both a long-term benefit and a short-term benefit.

The obvious long-term benefit is increased utilization, which will take time as we penetrate the surgical market. The more important short-term benefit is the increased value proposition of our technology and the lowering of barriers to sell capital equipment to targeted high-volume BPH hospitals. Additionally, in mid-July, CMS published its 2023 proposal for hospital outpatient prospective payment system. The Level 6 APC code for Aquablation has a proposed payment that would provide the hospital approximately $8,700 for each Aquablation procedure, which is an approximate 3.5% increase over the 2022 rates and in line with our expectations.

The final rule is estimated to be published in November. In summary, we are pleased with our performance year-to-date and continue to execute our strategic growth plan of penetrating high-volume hospitals, increasing utilization by treating the full range of prostate sizes and shapes, and expanding private payer coverage. Given this positive momentum and the announcement of our long-term clinical data, highlighting durability, we believe Aquablation therapy will truly revolutionize the treatment of BPH. With that, I will turn the call over to Kevin.

Kevin WatersChief Financial Officer

Thanks, Reza. As Reza highlighted, our revenue for the second quarter of 2022 was $16.7 million, representing growth of 97% compared to the second quarter of 2021. The increase was primarily driven by U.S. revenues, including both system sales to new hospital customers and increased handpiece revenue.

In the second quarter, we generated total U.S. system revenue of $8.5 million, representing growth of 79% compared to the second quarter of 2021. In the U.S., we sold 23 AquaBeam Robotic Systems with an average selling price of approximately $370,000. Average selling price increased approximately 6% sequentially and 10% compared to the prior year second quarter.

Our ending second quarter U.S. installed base was 114 AquaBeam Robotic Systems. Second quarter 2022 U.S. handpiece and consumable revenue was $5.7 million, representing growth of approximately 246% compared to the second quarter of 2021.

Handpiece average selling prices in the quarter were approximately $3,000. We shipped approximately 1,740 handpieces in the U.S. in the second quarter, representing annual unit growth of 176%. International revenue for the second quarter was $1.9 million, which was roughly flat compared to the prior year period and increased 15% sequentially.

International revenues in the second quarter of 2021 benefited from a meaningful number of rescheduled procedures and the deferral of capital sales from a severely impacted first quarter of 2021 due to COVID. Our strategy in Europe continues to be to increase brand awareness and market development activities. On a year-to-date basis, international revenue has increased approximately 23% from prior year and is in line with our expectations. Gross margin for the second quarter of 2022 was approximately 51%, an increase from 42% in the second quarter of 2021.

The increase in gross margin was driven by a variety of factors, including higher U.S. sales, increased average selling prices, and higher production volume as we spread the fixed portion of manufacturing overhead costs across a larger number of units produced. Total operating expenses in the second quarter of 2022 were $26.4 million, compared to $16.8 million in the prior year period and $23.4 million in the first quarter of 2022. The increase [Inaudible].

Net loss was $19.2 million for the second quarter of 2022, compared to $14.6 million in the same period of the prior year. Adjusted EBITDA was a loss of $14.6 million, compared to a loss of $11.6 million in the second quarter of 2021. Our cash and cash equivalents balance as of June 30 was $270 million, while our long-term borrowings totaled $50 million. We believe our strong balance sheet will provide the liquidity and capital resources needed to support and grow our current business.

Moving to our financial guidance. Given our strong start to the year and continued underlying momentum in the business, we are increasing our full year 2022 total revenue guidance to be in the range of $66 million to $68 million. Although utilization trends in the third and fourth quarter are expected to be down relative to first half levels, our updated revenue guidance assumes sequential growth in handpieces sold per quarter. As explained previously, as our installed base increases throughout the year, this will provide a natural headwind to average utilization rates as new accounts are added.

Regarding handpiece average selling prices, we expect pricing to be in the $3,000 range for the remainder of 2022, which is in line with year-to-date actuals. Turning to AquaBeam Robotic Systems sales. We continue to expect modest sequential increases to the number of systems sold throughout the year with average selling prices now expected to be in the range of $360,000 for the second half of 2022. Lastly, on revenues, we expect 2022 international revenue growth of approximately 30% compared to 2021.

Moving down the income statement. We now expect gross margins to be in the range of 50% to 51%, which is an increase from our previously issued range of 47% to 49%. Turning to operating expenses. We now forecast expenses to be approximately $110 million.

As Reza mentioned previously, the majority of the incremental spend will be allocated toward expanding our commercial team and initiatives in the back half of 2022 to put us in a favorable position to execute on our long-term growth plan. Lastly, we continue to expect full-year adjusted EBITDA to be in the range of negative $63 million to $60 million, although we are trending more toward the high end of the range. At this point, I’d like to turn the call back to Reza for closing comments.

Reza ZadnoChief Executive Officer

Thanks, Kevin. In closing, I want to thank our employees, customers and shareholders for all their support to help us along our journey to becoming the standard of care for BPH. We will continue to leverage our commercial and clinical investments to execute on our long-term strategy. Have a great day, and I look forward to meeting many of you at our coming investor conferences.

At this point, we will take questions. Operator?

Questions & Answers:

Operator

[Operator instructions] Our first question comes from Joshua Jennings with Cowen. Your line is open.

Joshua JenningsCowen and Company — Analyst

Hi, good afternoon. Thanks for taking my questions, and congratulations on another strong quarter. I was hoping to start with just asking about the raise of the revenue guidance range, and it suggests that sales funnel continues to fill against a backdrop of tightening capital budgets in the U.S. hospital budgets.

But can you talk about the sales pipeline for AquaBeam and how PROCEPT is navigating through the soft capital spending environment?

Reza ZadnoChief Executive Officer

Yeah. Thanks, Josh. We feel very good about our updated guidance and expect unit sales to increase sequentially in Q3 and Q4. Yes, there is some discussion about macro environment, but we are in a unique competitive position in the sense that we are early in our adoption curve.

And there are a number of factors helping with adoption and utilization, and that starts with the clinical outcomes and real-world outcomes that physicians are seeing with our procedure. Hospitals and surgeons are using our procedure for all prostate sizes and shapes. And in fact, we are seeing in some hospitals standardization of the procedure. And also with the broad coverage, now we have full Medicare coverage.

Many commercial payers are covering. And more importantly, patients are now seeking more durable, safe and effective procedures. All these factors are driving for better adoption and utilization. And I think, Kevin, do you want to add anything on utilization here?

Kevin WatersChief Financial Officer

Yeah. Great. Josh, just to frame the guidance raise, Reza gave a lot of background on the capital pipeline, but the high end of our guidance raise essentially is about a $3 million raise on capital, $3 million on handpiece. So it’s both penetration and utilization that’s driving the increase in the revenue range.

Joshua JenningsCowen and Company — Analyst

Thanks for that. And then just a follow-up. I wanted to ask about the proposed rule that you cited, maintaining Aquablation procedures at Level 6 APC code and that’s, I think, 3.5% tick-up in reimbursement. I think everyone — you guys have been clear that the transitional pass-through payment is going away next year.

But maybe you could help us understand relative to other resective procedures the profitability of this proposed level that CMS just issued. And then also just touch on the reimbursement premiums that Aquablation procedures are receiving from private payers. Thanks for taking the questions, guys.

Reza ZadnoChief Executive Officer

Yes. Thanks, Josh. So related to APC Level 6, this was expected and we obtained the APC Level 6. And we believe our customers, we are confident they will be satisfied with the APC Level 6.

As far as the transitional pass-through is concerned, this is not new, it’s not a surprise, and quite frankly, not a concern in the sense that pass-through was transitional. And if you look a year ago, we compare the coverage that we have today, compare where we are compared to last year, we have many private payers covering that on top of the Medicare. And we believe that addition — based on the conversation with hospitals, addition of this private payer outweighs the transitional pass-through going away. And again, this is an information that we have been communicating with all customers and they were aware and we believe this is not a material issue.

Joshua JenningsCowen and Company — Analyst

Great. Thanks again.

Operator

Our next question comes from Craig Bijou with Bank of America. Your line is open.

Craig BijouBank of America Merrill Lynch — Analyst

Great. Thanks for taking the questions, and congrats on another strong quarter. I wanted to ask first on utilization and maybe a little bit more about what you’re seeing from individual doctors. Reza, I appreciate your comments that hospitals are — you’re starting to see hospitals bring on new urologists to the system.

But maybe if you can talk a little bit about the trends, the individual utilization trends once a urologist decides to adopt. You guys have been in the market now for a number of quarters, so maybe you can touch on maybe where the early adopters, where their utilization is now. Does it continue to grow within their own practice?

Reza ZadnoChief Executive Officer

Yes. Thanks for this question. I mean utilization increase is driven by multiple factors. As I mentioned, starts with clinical outcomes.

And physicians and hospitals are using on a broad range of prostate. In fact, in the last 18 months, when we look at where the majority of these cases are done, it’s on the prostate in the 60 to 80 milliliter range. And they are using, again, on all prostate sizes and prostate shapes. And in fact, they are standardizing resective procedures, many accounts to our, and some accounts have converted all their resective procedures to Aquablation.

And these are the driving factors for utilization. And I don’t know, Kevin, do you want to add on the more — definitely, accounts which have been with us for many quarters, we see sequential growth of utilization of those accounts and Kevin can —

Kevin WatersChief Financial Officer

Yeah. No. So to Reza’s point, I mean, we still recognize that the largest or highest utilized group are the customers that have been with us the longest. And the utilization dynamic is still one that we’re keeping a close eye on.

And it’s important to remember that our installed base is growing significantly. It grew roughly 40% in the first half of the year. By the time we get to the end of the year, we’re going to have an installed base that is up 100% over the end of 2021. So as we get additional cohort each quarter, Craig, we’ll be able to provide more specificity around utilization metrics.

But for now, it’s fair to say that our oldest customers have our highest utilization. And then on top of that, we are also seeing, even in those customers that have been with us for multiple quarters, they’re still adding new physicians to those accounts today which is helping the utilization rate.

Craig BijouBank of America Merrill Lynch — Analyst

Got it. That’s helpful, guys. And on the sales reps, the adds that you expect in the second half, I’m not sure if I missed it or not, but did you say whether they were going to be capital or Aquablation reps, maybe both? And then maybe if you could go into a little bit of detail on the strategy for adding those reps. You guys have obviously been doing extremely well thus far.

So maybe the strategy there, whether they’re targeting certain geographies or you just need more feet on the street in current geographies.

Kevin WatersChief Financial Officer

Yeah, this is Kevin. Let me start with the strategy. We’ve been very clear on this that we would increase the size of our sales force when we felt it won’t jeopardize the excellent real-world commercial outcomes that we expect. And we’re at that point now where we feel comfortable with our clinical data and commercial performance that we will increase the size of the field team.

So that’s the strategy. In terms of the bifurcation, we’re going to continue to add at this time probably equal number of both capital and Aquablation sales reps. We’re nowhere near penetrated in every U.S. territory where we need to be.

We have capital reps right now in some fairly large territories that we want to take a look at. But my point being is we have a long runway in front of us in terms of adding commercial headcount to the business. And we’ll continue to do that. The other point I want to make on our reps is our guidance in the back half of 2022 doesn’t imply really any meaningful contribution from these new folks.

What we do want to do, however, though is make sure they get on board, we get them trained, they learn the protocol such that they could be productive as we enter 2023. But again, back to the strategy, we felt now is the right time given what we’re seeing in the real world to both outcome physician and patient interest.

Craig BijouBank of America Merrill Lynch — Analyst

Great. Thanks for taking the questions, guys.

Operator

Our next question comes from Amit Hazan with Goldman Sachs. Your line is open.

Amit HazanGoldman Sachs — Analyst

Good afternoon, guys. I wanted to maybe start with a couple of the macro questions that have been on other earnings calls in the sector and just get your take on it. One is just on hospital staffing shortages and whether you all are seeing an impact from that at all that you would call out? Is it making it hard to get into case observations, training done, installations? Anything like that that you would call out that’s impactful to you?

Reza ZadnoChief Executive Officer

Thanks, Amit, for the question. So it has not impacted us. We are hearing that, but we have been able to achieve our forecast. So it has not been a material event for us.

Amit HazanGoldman Sachs — Analyst

OK. And I know kind of you’re small and growing very fast, but do you have a sense of where we are in the BPH market overall in terms of just underlying market conditions as a percent of kind of where we were in 2019, the health of the BPH market, if you will, and how it’s recovering. And maybe inside of that question, would just love to hear if you saw any change in trend during the quarter, whether procedures that same kind of high level. I know for you, they improve a lot because you’re growing.

But overall procedures, do you get a sense that your customers saw improvement at all during the quarter and exiting into 3Q at a high level for the BPH segment?

Kevin WatersChief Financial Officer

Yeah. Good question, Amit. This is Kevin. And look, we definitely believe that 2019 is the last, I would say, macro year that we can look at resective surgical numbers and consider that a normal operating environment.

We would suggest that 2020 and 2021 were impacted by COVID. Therefore, frankly, we’re not paying much attention to the procedures in those years. And when I think about the macro environment, we’re in a bit of a unique position that, as you mentioned, we’re still at relatively low volumes. I mean our current average utilization is around five and a half procedures per account per month.

And if you look at the customers we’re targeting, on average, even in 2019, those customers were doing approximately 17 procedures a month. So we’re still very focused on increasing utilization with the accounts we penetrated, which shields us a bit from some of the macro factors. And frankly, it’s not terribly relevant to our growth in the near term if the market is growing 10% or decreasing 10%. But I would definitely agree with you that 2020 and 2021 have been, on the macro level, impacted, but that hasn’t really impacted our ability to grow.

Amit HazanGoldman Sachs — Analyst

Great. Just one last quick one for me is on the system side. Can you share how many systems that you sold were new accounts versus evals and if there were any retirements in the quarter?

Kevin WatersChief Financial Officer

Yeah. So no retirements. And we’re now through the eval and demo pool. So moving forward, every new sale is a greenfield sale.

And we may periodically put a rental out with a customer, but right now, our model is pretty much we’re going to sell and not offer a demo program.

Amit HazanGoldman Sachs — Analyst

OK. Thank you very much.

Operator

Our next question comes from Matthew Mishan with KeyBanc. Your line is open.

Matthew MishanKeyBanc Capital Markets — Analyst

Hey, good afternoon, and thank you for taking the questions. Just first, it does seem like you’re maintaining price as inflation goes, especially around the systems. Why would gross margin decline in the second half versus the first half of the year guidance?

Kevin WatersChief Financial Officer

Yes, it’s a good question. Our guidance — by the way, welcome, Matt, it’s your first call with us. Glad you’re on board. So if you look at our guidance, the high end of the margin range does imply approximately 50% gross margins in the back half of the year.

And you’re recognizing that we just came off the second quarter where we recorded 51%. I’d point out a few things. The first thing is that we are still at relatively modest revenue level. And gross margin percentages, they’re going to fluctuate, and they can fluctuate fairly significantly on pretty low dollar volume.

Just to put that in context, a $300,000 cost equates to a full 2 percentage points on margins. So that relatively modest revenue with a high degree of fixed costs tends to have gross margin metrics that will be variable here in the near term but trending in the right direction. That would be point one. Point two is we are increasing staffing levels in our operations group in anticipation of future growth.

These are in areas like supply chain and production. This does create some additional expense. However, I would point out, there’s nothing unusual. There’s nothing infrequent in our margins that’s implied in our second half guidance.

And at least supply chain and production, this does create some additional expense. However, I would point out, there’s nothing unusual. There’s nothing infrequent in our margins that’s implied in our second half guidance. And we still do believe that at scale, this business does have a potential for significant margin expansion over the long term.

But there’s going to be some variability in the near term. There’s nothing unusual again in the second half. It’s just a multitude of factors.

Matthew MishanKeyBanc Capital Markets — Analyst

OK. Excellent. And then just — it does seem like you’re controlling almost the pace at which you’re installing these systems, pace at which expanding your sales force. Just what makes you comfortable with the sales rep or a doctor or a system that you’re placing this with that you’re going to get the outcome from that new placement you expect?

Reza ZadnoChief Executive Officer

Yeah. So this is Reza. Definitely, we are very disciplined in targeting our accounts. We are — In the U.S., those high-volume hospitals that are doing on average more than 200 resective procedures per year, we are targeting those.

And even before talking to the administrators in the hospital, we make sure we have a physician champion. And because of this disciplined approach, we have not seen pushback and we have had high success rate in placing our robots. And we are aware that we have an extra capital equipment and this disciplined approach has allowed us to be successful. And that is the reason that you’re talking.

Matthew MishanKeyBanc Capital Markets — Analyst

Thank you very much.

Operator

Our next question comes from Neil Chatterji with B. Riley. Your line is open.

Neil ChatterjiB. Riley Financial — Analyst

Hey, guys, thanks for taking the questions. Just maybe circling back on just the commercial team adds for the second half. Just wondering if you could just talk about kind of the expected like maybe quarterly cadence of that, if you expect that to be weighted more toward third quarter or fourth quarter. And then if you could just maybe remind us on kind of the expected productivity ramp.

Is that before you start to see meaningful impact of that three to six months? Or if you could just add some color there.

Kevin WatersChief Financial Officer

Yeah. By the way, welcome as well, Neil, I appreciate you having covering the company now. In terms of cadence, I’ll just talk about our opex spend of $110 million. So that does imply about a $60 million spend in the back half of the year.

And that expense cadence is relevant to how we’re going to build the sales team where the fourth quarter should be larger than the third quarter. And sequentially, Q3 should be up about $2 million to $3 million from Q2. So that does suggest that the adds will be primarily mid to late Q3 by the time we have folks on board and that does manifest itself in opex expense guidance. That was on opex.

What was your second question? Do you mind repeating?

Neil ChatterjiB. Riley Financial — Analyst

I mean, I think that was pretty much —

Kevin WatersChief Financial Officer

You asked about the productivity, sorry. Generally, it’s three to six months for a rep to become fully productive. And again, that depends if you’re going into new territories, which some of these reps will be doing. Or will be looking at perhaps splitting larger territories, which we may also have to do as we continue to grow.

But on average, it’s a three- to six-month ramp.

Neil ChatterjiB. Riley Financial — Analyst

Got it. And if I could just have a follow-up question here. Just kind of circling back on the international front, you talked about it last quarter with the Asia Pacific regulatory approvals for Korea and Japan. Just kind of curious if there’s any updates there in terms of adoption in Korea and kind of the reimbursement pathway in Japan.

And then secondly, if you could talk about your strategy for China and any expectations for the market there.

Kevin WatersChief Financial Officer

Yeah. So just in terms of — I’ll take you to those separately. So in Korea, as mentioned on the last call, we expected very modest contribution in 2022, really no greater than $1 million is how I phrased that last quarter. We did sell another robot in Korea in the second quarter, so that’s in the number there.

So again, continued penetration, but relatively modest revenue contributions moving forward. Japan, we’re continuing to work through the reimbursement pathway there. We do not anticipate any Japan revenue in 2022. The next time we’ll probably give a meaningful update on Japan would be when we introduce 2023 guidance.

And then flipping to China. We have started the regulatory process there, but that could be a fairly lengthy process. We are not expecting any meaningful contribution in China in the short term.

Neil ChatterjiB. Riley Financial — Analyst

Great. That’s all for me. Thanks.

Operator

There’s no further questions at this time. I’d like to turn the call back over to Reza.

Reza ZadnoChief Executive Officer

Yes. Thanks, everyone, for attending our earnings call. We look forward to seeing you in the future investment meetings. Have a nice day.

Operator

[Operator signoff]

Duration: 0 minutes

Call participants:

Matt BacsoInvestor Relations

Reza ZadnoChief Executive Officer

Kevin WatersChief Financial Officer

Joshua JenningsCowen and Company — Analyst

Craig BijouBank of America Merrill Lynch — Analyst

Amit HazanGoldman Sachs — Analyst

Matthew MishanKeyBanc Capital Markets — Analyst

Neil ChatterjiB. Riley Financial — Analyst

More PRCT analysis

All earnings call transcripts

This article is a transcript of this conference call produced for The Motley Fool. While we strive for our Foolish Best, there may be errors, omissions, or inaccuracies in this transcript. As with all our articles, The Motley Fool does not assume any responsibility for your use of this content, and we strongly encourage you to do your own research, including listening to the call yourself and reading the company’s SEC filings. Please see our Terms and Conditions for additional details, including our Obligatory Capitalized Disclaimers of Liability.

The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

You May Also Like

About the Author: Over 50 Finance