ShockWave Medical, Inc. (NASDAQ:SWAV) Q1 2023 Earnings Call Transcript

ShockWave Medical, Inc. (NASDAQ:SWAV) Q1 2023 Earnings Call Transcript May 8, 2023

ShockWave Medical, Inc. beats earnings expectations. Reported EPS is $1.03, expectations were $0.81.

Operator: Good afternoon. And welcome to Shockwave’s First Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. We will be facilitating a question-and-answer session towards the end of today’s call. As a reminder, this call is being recorded for replay purposes. I would now like to turn the call over to Debbie Kaster, Vice President of Investor Relations of Shockwave for a few introductory comments. Please go ahead.

Debbie Kaster: Thank you all for participating in today’s call. Joining me today from Shockwave Medical are Doug Godshall, President and Chief Executive Officer; Isaac Zacharias, President and Chief Commercial Officer; and Trinh Phung, Vice President of Finance, who is standing in for Dan Puckett, while he is out of the country on a much deserved family vacation. Earlier today, Shockwave released financial results for the quarter ended March 31, 2023. A copy of the press release is available on Shockwave’s website. Before we begin, I would 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 other than statements of historical fact are forward-looking statements. All forward-looking statements, including, without limitation, statements relating to our sales and operating trends, business and hiring prospects, financial and revenue expectations, reimbursement proposal, future product development and approval, and integration of Neovasc and its technologies into our business are based upon our current estimates and various assumptions. These statements involve material risks and uncertainties, including the impact of macroeconomic conditions and global events such as the COVID-19 pandemic that could cause actual results or events to material differ — 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 annual report on Form 10-K on file with the SEC and available on EDGAR and in our other reports filed periodically with the SEC. Shockwave 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. This conference call contains times sensitive information and is accurate only as of the live broadcast today May 8, 2023. And with that, I will turn the call over to Doug.

Doug Godshall: Thanks, Debbie. Good afternoon, everyone. And thank you for taking the time to join us to review Shockwave results for the first quarter of 2023. The year started out well following the strong end to 2022. First quarter revenues of $161.1 million represented a 72% increase from the first quarter of 2022. All areas of the business contributed to our growth in the quarter with U.S. coronary, U.S. peripheral and International each delivering solid sequential double-digit growth in the quarter compared to the first quarter of 2022. Later in the call, Isaac will provide additional details from the commercial side of our business, but first I want to highlight some recent accomplishments. Last month, we announced the full U.S. commercial launch of our L6 Peripheral IVL Catheter on the heels of the limited launch of the product.

As a reminder, L6 was developed specifically to expand the capabilities of our peripheral portfolio and in particular to address difficult-to-crack classification and larger vessels such as the iliacs. The customer response to its performance and initial demand for L6 has exceeded our expectations and it appears to offer broader utility than we had anticipated. L6 launch also comes following a very successful launch and transition to M5+, last year, which continues to perform well in above-the-knee applications and increasingly is being used in below-the-knee vessels. C2+, our next-generation coronary product, began a full launch in International markets during the quarter and will be showcased next week at EuroPCR in Paris. C2+ offers up to 120 pulses, a 50% increase from C2 and early feedback has also been very positive on this product.

We have seen C2+ being used in long calcified segments within all ranges of calcified morphologies and complex lesion types. Our team has reported that over 70% of the cases done with C2+ have used more than 80 pulses, which indicates that the additional pulses are being used quite regularly. We are optimistic that this will lead to increased adoption of coronary IVL. We plan to launch C2+ in the U.S. early in the fourth quarter of 2023. We also added a new future growth platform last quarter by acquiring Neovasc and their Reducer System. The transaction just closed a few weeks ago and our team is quickly getting integrated into the commercial, R&D and COSIRA-II trial activities. Our General Manager of the Reducer program led the transaction and has deep experience in leading high performing teams in the cardiovascular arena and our clinical group is leaning in aggressively to help the legacy Neovasc team accelerate trial enrollment.

We are not yet ready to update our revenue or enrollment forecasts, but our commercial focus for now is to understand what will be required to create a market for the Reducer, so we are ready when we have data from COSIRA-II, much as we used our early International launch of C2 to prepare for the broader global and U.S. launches. I will say that the feedback we have received from European customers who use this device commercially has been consistently very positive. And as a result, we are more bullish now than we were when we announced the transaction. More to come. EuroPCR will not only serve as the public launch meeting for C2+, it will be a venue for multiple IVL and reducer presentations. And we will also be celebrating the five-year anniversary of the launch of coronary IVL.

We have come a very long way in a relatively short period of time. We will be sponsoring several symposia and training villages at PCR where we plan to further educate physicians on IVL in addition to covering refractory angina and how our newly acquired Reducer product plays a role for these no option patients. And while many of us will still be busy in Paris, the Society for Cardiovascular Angiography and Interventions or SCAI conference we will be kicking off in Phoenix. However, for us at SCAI will be the presentation of our CAD III post-approval study from the CAD PCI registry, which will reflect the real-world safety and effectiveness of coronary IVL. Lastly, on the scientific side, we had great attendance at our CRT symposium back in February, where the main IVL focus was the impact of calcified nodules on two-year clinical outcomes after IVL-assisted coronary stenting.

As our data matures, it continues to demonstrate that IVL is equally effective across the full spectrum of calcified lesions, whether circumferential, eccentric or nodular. And as we continue to generate compelling data that supports a broader use of IVL, our R&D team keeps paving the way for future growth with our expanding pipeline. We have discussed our intention to launch two new products per year and we have also talked about our plan to have seven different devices by 2026. We plan to lay out our product roadmap in a bit more detail later in the year at our investor innovation event, which we will be holding on October 23rd in San Francisco during TCT. And finally, on reimbursement, CMS issued its proposed fiscal 2024 Inpatient Prospective Payment System or IPPS document for hospital inpatient procedures in April.

The proposed rule included three new DRGs specific to IVL. Two of the new DRGs would pertain to coronary IVL cases involving the insertion of a stent with and without comorbidities, and the third new DRG would cover all coronary IVL cases that do not include a stent. The proposed dollar values associated with these new DRGs seem entirely appropriate given the resource intensity of treating the complex — the extremely complex calcified anatomies that comprise the universe of patients IVL addresses every day. We look forward to the final inpatient rule likely later this summer, which will then become effective October 1, 2023. Our strong first quarter performance suggests that we will deliver results in a higher range than our prior guidance.

We now anticipate topline revenue in the range of $700 million to $720 million for the full year of 2023, representing growth of 43% to 47% from 2022. This guidance does not contemplate any revenue contribution from the Reducer, which we expect will be less than $5 million for the balance of 2023. With that, I will turn the call over to Isaac to provide more color on the commercial front. As Debbie noted, Dan is on a long planned and well-earned vacation with his family and we are delighted to have Trinh with us today to discuss the details of our financial results after Isaac. Isaac?

Isaac Zacharias: Thank you, Doug. The team posted another strong quarter across the U.S. coronary, U.S. peripheral and our International business. U.S. peripheral revenue was up 12% from last quarter and once again almost doubled from a year ago. Growth was driven by solid usage across three peripheral products and all vessel beds. In the U.S., we have fully transitioned to M5+, have steadily increased below-the-knee business with S4 and increasingly M5+ and are off to a very encouraging early start to the L6 launch. Our launch strategy for L6 is consistent with what has worked for our other product launches. We expect to launch accounts in a very controlled, deliberate manner to help ensure that customers understand when and where to use L6.

We also plan to use the L6 launch period to reinforce appropriate use of our other products. L6 is designed specifically to treat larger peripheral vessels of the iliac and common femoral arteries. Our engineers were able to achieve delivery of a more uniform high energy profile to these large vessel lesions by developing a compact emitter array that is distinct from our other products. In addition to the improved energy profile, the larger diameter balloons are better able to facilitate energy delivery and dilate up to the target vessel diameter. The results in clinical practice are surprising us and our customers. What we are hearing most often is how impressed physicians are with the angiographic results after L6, noting in many cases that the artery looks as good as if it we are stented.

We are pleased with the clinical utility and are seeing strong utilization across the sizes. About 60% of our six cases are coming from the new sizes offered, 9 millimeters, 10 millimeters and 12 millimeters, suggesting that we may see some incremental penetration into procedures that M5+ could not optimally address. In addition to a strong clinical value proposition, L6 carries a strong economic value proposition for hospitals. First, IVL is clinically indicated for use in iliac arteries, whereas this is not the case for many of the atherectomy devices. Second, reimbursement is not consistent for atherectomy. In contrast, IVL carries additional reimbursement in iliac arteries that adequately covers hospital cost to acquire L6. U.S. coronary revenue grew a solid 11% sequentially from Q4 and 57% compared to the prior year.

Average daily sales increased 10% sequentially from Q4 and 54% from a year ago, driven primarily by increased penetration into our existing accounts. As anticipated, new account additions continue to decline as we only added about 60 new accounts in the first quarter. The strong growth in our U.S. coronary business in Q1 is a sign that the key activities we initiated in the second half of last year are succeeding. We have been able to increase the penetration of coronary IVL in our accounts, with nearly 99% of Q1 2023 U.S. coronary revenue coming from accounts that were launched before 2023. I will take just a minute to remind you of the activities that we believe have worked to drive deeper penetration of coronary IVL. First, we added the — we ended the quarter with 90 territories and about 1.9 clinical specialists per territory.

We plan to continue optimizing our structure, adding territories and increasing the clinical specialist per territory throughout this year. Together, this strategy enables us to spend more time with physicians to help train them and then reinforce when they should be appropriately using IVL. The time our team spends in the hospitals drives increased penetration for both coronary and peripheral. On the International side, we posted record revenue that was almost double our year-ago performance with strong results in all of our International markets. Sales of coronary and peripheral products, both grew over 80% from a year ago and we had a solid start for our newly-launched C2+ catheter. Peripheral momentum is growing internationally as we have increased our marketing resources substantially.

We now have very focused efforts that are supported by KOLs to foster peer-to-peer education. Similar to L6 and the other launches you have seen us execute, our C2+ launch follows our strategy of a methodical launch targeting high volume accounts, going deeper and spending time educating each account. It is early into the launch, but the team is very encouraged about the feedback they are getting so far. Geographically, we saw particularly strong growth for our coronary businesses in Germany and Japan. In Germany, the change in January to reimburse coronary IVL procedures at higher paying DRGs combined with the launch of C2+ have been a game-changer in the first few months. As you know, German hospitals are very focused on economics and IVL was margin negative in most cases prior to January of this year.

Despite being on the market for nearly five years and being represented by a strong direct sales team, coronary IVL penetration in Germany is only about 1%, which is far lower than any other Western European country. We look forward to continued growth in Germany as we expand our team to better service and educate physicians on the use of IVL. I expect that our penetration in Germany will go from the lowest to the highest amongst Western European countries. Our launch in Japan is going very well. We are already seeing solid use of IVL in our launched accounts with strong penetration in high-volume centers propelled by enthusiastic physician support. We plan to continue building that team and adding sales reps, field marketing professionals and additional support functions to further accelerate adoption in Japan.

We are encouraged by the early success our teams are achieving this year in Germany and Japan, markets where reimbursement for IVL is adequate and economic considerations are well addressed. We believe this is a positive indicator for potential increases in penetration in the U.S. as the long-term reimbursement picture for coronary IVL is beginning to come into focus over the course of this year. We have seen the first of three proposed rules for U.S. reimbursement in 2024 readout with the IPPS addressing the hospital inpatient setting. This summer, we hope CMS chooses to address coronary IVL in the outpatient setting in 2024 and we remain bullish about the long-term picture when they do. Until then, TPT covers the hospital’s device cost.

We also know that a new CPT code for coronary IVL will enable physicians to receive incremental payment for the first time for any of our therapies. This summer, we will see what incremental payment CMS will propose for those physicians. We have worked to create an environment where the incentives for the patient, physician and hospital are all aligned. The goal for the patient is to have IVL treatment for their calcified PCI, because it’s very safe and helps ensure a better result. The physician shares this goal, particularly when they are receiving incremental payment for the additional work of using IVL. The hospital wants the patients to get the best therapy and is further motivated when the procedures have positive economics. We have early evidence of what IVL penetration can be when these incentives are all aligned from the early and very encouraging adoption rates we have seen thus far in Japan.

With that, I will turn the call to Trinh to review the financials.

Trinh Phung: Thank you, Isaac. Good afternoon, everyone. Shockwave Medical’s revenue for the first quarter ended March 31, 2023 was $161.1 million, a 72% increase from $93.6 million in the first quarter of 2022. U.S. revenue was $131.6 million in the first quarter of 2023, growing 68% from $78.5 million in the first quarter of 2022. Our coronary product contributed $90.9 million to U.S. revenue in the quarter. U.S. revenue from our peripheral products was $40.5 million in the first quarter of 2023. The growth in U.S. revenue reflects increased utilization at existing accounts, new account adoption of IVL and continued sales force expansion. International revenue was $29.4 million in the first quarter of 2023, representing a 95% increase from $15.1 million in the first quarter of 2022.

Our coronary product contributed $23 million to International revenue in the first quarter of 2023. International revenue from our peripheral products was $5.6 million in the first quarter of 2023. The increase in International revenue over the prior year period reflects continued geographic expansion, including China and Japan, growth in customer demand and the growth of our direct sales force in Europe. Looking at product lines, our peripheral products, Shockwave M5, Shockwave M5+, Shockwave S4 and Shockwave L6 accounted for $46.1 million of total revenue in the first quarter of 2023, compared to $22.9 million in the first quarter of 2022, a 102% increase. Our coronary products, Shockwave C2 and Shockwave C2+ accounted for $113.9 million of total revenue in the first quarter of 2023, compared to $70.3 million in the first quarter of 2022, representing a 62% increase.

In addition, the sales of generators contributed $1.1 million in revenue in the first quarter of 2023, compared to $0.4 million in the first quarter of 2022. Gross profit for the first quarter of 2023 was $140 million, compared to $80.7 million in the first quarter of 2022. Gross margin for the first quarter of 2023 was 87%, as compared to 86% in the first quarter of 2022. The improvement in gross margin was primarily driven by product mix, as well as continued improvements in productivity and process efficiencies. Total operating expenses for the first quarter of 2023 were $100.2 million, a 53% increase from $65.4 million in the first quarter of 2022. Sales and marketing expenses for the first quarter of 2023 were $54 million, compared to $36 million in the first quarter of 2022.

The increase was primarily driven by sales force expansion. R&D expenses for the first quarter of 2023 were $27 million, compared to $17 million in the first quarter of 2022. The increase was primarily driven by headcount growth. General and administrative expenses for the first quarter of 2023 were $19.2 million, compared to $12.4 million in the first quarter of 2022. The increase was primarily driven by higher headcount to support the growth of the business. Net income for the first quarter of 2023 was $39.1 million, compared to a net income of $14.5 million in the first quarter of 2022. Basic net income per share for the period was $1.07, diluted net income per share for the period was $1.03. We ended the first quarter of 2023 with $416.9 million in cash, cash equivalents and short-term investments.

At this point, I would like to turn the call back to Doug for closing comments.

Doug Godshall: Thank you, Trinh and Isaac. We are encouraged that our vision of sustained high end growth in all categories and geographies was achieved again last quarter and we see little reason for that to stop anytime soon. Well done by our global team and we look forward to reporting on their continued achievements in upcoming quarters. With that, we can open the call for questions.

Q&A Session

Operator: Our first question comes from Adam Maeder with Piper Sandler. Please proceed with your question.

Adam Maeder: Hi. Good afternoon, Doug and team, and thank you for taking the questions. Congrats on a great start to the year. Doug, I apologize for asking this upfront, but feel compelled to ask. Is there anything more that you can say or anything you can say on the media reports about deal interest from Boston Scientific? Were you approached and any comment on the status of those conversations?

Doug Godshall: Yeah. It’s our policy not to comment on speculation. So we will continue to not comment, but I appreciate the question.

Adam Maeder: Okay. Fair enough, Doug. Worth a shot there. Maybe I can ask the about the guidance. So $700 million to $720 million, a healthy guidance raise of $40 million over the previous guide. You would beat Q1, I think, by $14 million. So maybe just talk about what gives you the confidence to raise by that amount at this juncture in the year? And then if you could also just kind of walk us through a little bit about the construction of the guidance in terms of coronary versus peripheral U.S., OUS, et cetera? And then I had a follow-up. Thanks.

Doug Godshall: Yeah. And Isaac and I will tag team on this. The — I know there was angst in the fourth quarter when there was some unusual procedural softness in October. And we felt pretty confident that, that was an aberration, not a trend, and this year, it’s proving that we were right to believe that and the year has started out from a procedure basis quite well globally. And we are also very encouraged that the investments we make — have been making and we will continue to make through this year, particularly in the U.S. on penetration, are already starting to show dividends, whether that’s the increase in educational programs or expansion of our clinical specialist team where the increased utilization both in coronary and peripheral are taking shape nicely and we believe that that’s going to continue through the year.

And then we are assuming some modest impact of the IPPS in the fourth quarter of this year on coronary. Internationally, as Isaac indicated, Japan is off to a very encouraging start. Germany with the benefits of improved payment is also proving out. And the smaller but improving traction that we are seeing on peripheral internationally is encouraging, although, the contribution is meaningfully less than the others, just because it’s starting from a smaller base.

Adam Maeder: Okay. Perfect. That’s great color. I don’t know if Isaac has anything to add. Otherwise, I can move on to the follow-up.

Isaac Zacharias: Yeah. I would just add that the — we really like what we are seeing in the first quarter from the L6 launch early stages, C2+ early stages. And then to the other part of your question, I think, from a composition standpoint, it’s the mix geographically and by product is going to be reasonably consistent in our updated guide, but we won’t break it out.

Adam Maeder: Okay. That’s helpful color, guys. Thank you for that. And maybe just one quick one on reimbursement, actually asking about the outpatient rule for calendar 2024 and the potential — the transition under pass-through payment next year. You gave very helpful remarks on the last earnings call and talked about confidence in a smooth transition, we will call it. Just curious if you had any updated views or thoughts or if anything’s kind of changed since that last update we got? Thanks so much for taking the questions and congrats on the great start.

Doug Godshall: Thanks. No change because we don’t have news to report at this juncture, that won’t be until the proposed rule comes out this summer. I would say it is — it was a pleasant surprise to see CMS’ proposed rule for IPPS to generate new DRGs and that wouldn’t have happened if we didn’t have the NTAP because they wouldn’t have been able to identify IVL-only cases on the inpatient basis. But I think the — I think there is a potential read through that one can take that CMS did what they do, they looked at the math and the math said that they needed to structure new DRGs. That’s a lot more work for them than would be required in the — to slot us into the 5194 APC that we have suggested and they once again have a code that they can track with the transitional pass-through.

So if they look at the costs associated with IVL outpatient procedures and they do the math, just like they did the math for inpatient, we continue to be highly confident that they will land in 5194. Timing is still in their hands, but given that they moved early and aggressively on inpatient, we think first half of next year, either January or July assumes the more likely outcome.

Adam Maeder: Thanks for the color.

Operator: Our next question comes from Bill Plovanic with Canaccord Genuity. Please proceed with your question.

Bill Plovanic: Great. Thanks. You guys — congratulations you make it tough to ask questions, because you give us so much information. But…

Doug Godshall: You already — you have, okay, you don’t have to. There you go.

Bill Plovanic: Oh! No. We have to pre-sell side analysts. That’s our job. My questions are really more into Japan and China. And just I don’t — maybe you said something on China and I missed it on that answer, but kind of curious how is China coming back for you and the respond — rebound there. And then on China, I think, you had so much success in the U.S. so early, which I think surprised a lot of people on the coronary device. Trying to understand, can you compare and contrast maybe the infrastructure and scale with the commercial organization in Japan today? And kind of how should we expect that to scale up over the next year or two and kind of maybe relative to where were you when you launched coronary in the U.S. and maybe that will help us get a better feel for how coronary can launch in Japan? Thanks.

Doug Godshall: Sure. Thanks for the questions, Bill. So, China, yeah, the — as others reported COVID — when they opened up and COVID swept through just about everywhere in four weeks. It was done. So there was a very soft January in China between that and the New Year. And but we have seen kind of paces and they track our — we track cases with the JV. What we are seeing on the case level is really nice steady uptick in cases being done with coronary by week. And the same is true of peripheral, but peripherals — coronary is like everywhere outside the U.S., so relatively large chunk of the business is coronary compared to peripheral. So we are pleased with the way China has kind of started the year. February, March, April things are things are going well.

They have got provincial listings in place which took a long time to kind of cycle through and then getting product on the shelf and training and the cases will keep coming. So really pleased with what we are seeing in China this year. On Japan, the launch has started very well. It’s kind of similar to how we have launched elsewhere in terms of trying to get the accounts trained well, making sure that they can do cases and understand how the product works and when it’s most appropriate. The physician excitement is really high. I think, as we go through the year, we will see a lot more publications and podium presence in Japan with Shockwave, which will help build momentum. From a team standpoint, we are — we have a much smaller team there than we had in the U.S. when we launched, and the dynamic of that is in the U.S. we had been selling peripheral IVL for three-plus years by the time we launched coronary and many of the physicians who were buying or using peripheral IVL or interventional cardiologists who are doing it either for peripheral interventions or for large bore access.

So the familiarity with the product was very high compared to what it is in China. The generator base and the installed base was very high compared to what it was in — than it is in Japan and the team in Japan is relatively smaller than the team in the U.S. So I think those are the structural elements that will make the launch in Japan slower than the U.S., but it’s still going to be, I think, a very good launch and a steady ramp-up. And with the reimbursement in place for both physician fees and hospital reimbursement for purchasing the device from day one, I think, Japan will start kicking up pretty quickly, more slowly than the U.S., but over time, call it, six months, 12 months, 18 months, there should be a nice really solid momentum built there.

Bill Plovanic: Great. And then if I could — thanks for that. If I could ask a Neovasc. Just, I think, Doug, what you said the strategy really is kind of maintain the support you had internationally, I mean, given the guidance of $5 million, I think, they are running maybe $10 million a year annualized. So it sounds like you will kind of support what’s going on, but not invest in that, it will be more of a focus on the pivotal trial and kind of driving that to completion and getting data and then really taking that data and driving it. Is that — did I hear that correctly?

Doug Godshall: So they weren’t running at $10 million. I think there was an analyst who had them running at $10 million and once we dug in, it was well north of — well south of $5 million run rate. We are allocating sort of as a career opportunity, a couple of our very strong commercial folks under the program to help both support existing customers, as well as most importantly determine what’s the right way to sell this product, how do we do the early market development in Europe, much as we did in the — in with C2 when we launched in Europe, learn from that. And as our data matures from COSIRA-II, which is a very sophisticated trial and we think we will have global impact both in terms of confirming for potential customers, how well the device uses, but also confirm for payers, that reimbursement is appropriate.

We think that had that — the data from that trial is what will enable us to really put sort of drive revenue in a more meaningful way. So we are in market development, market creation, procedure creation and champion development mode today in limited cases in certain countries like there is reimbursement in the U.K., there are some reimbursement in Germany. Going into countries where there is no reimbursement is probably not going to be very productive use of our time and so we are not going to sort of try to push water uphill. And then as we structured on the card on the data, then we will have a very good appreciation for how to effectively commercialize in the U.S. and as we generate reimbursement in other countries to do so, internationally.

And you can add more.

Isaac Zacharias: No. I think that’s right. Just the team — our team is getting our arms around the commercial footprint, the Neovasc created and it’s a relatively large footprint geographically. So we need to go back through and see that Doug point — as Doug said, where do we think it makes sense to invest in marketing and selling this product and building centers of excellence today. And then where it doesn’t make sense today, but it — as we get more data and turnover COSIRA-II data, obviously, a lot of geographies will makes sense in the future. But I just think we need to rationalize the activity that was being done and we are in process of doing that.

Bill Plovanic: Excellent. Thank you.

Operator: Our next question comes from Travis Steed with Bank of America. Please proceed with your question.

Travis Steed: Hey. Congrats on a nice quarter. I wanted to go back to the guide raise versus the Q1 beat, $40 million beat versus street guidance going up $40 million. So a much bigger raise. And maybe — is that something you are seeing in April? How the procedure environment in Q1 progressed? I don’t know if things were just getting better over the course of Q1 and things are even better in April. Just kind of curious if you could comment on the general procedure environment on PCI volumes over the course of Q1?

Doug Godshall: Yeah. It was — the nice thing about Q1 is it was not — procedure volume was — outside of China, procedure volume was healthy and steady through the quarter. It’s not like March rescued the quarter. So it was a good steady cadence. We are not seeing that falter here at all heading into the second quarter. So we feel confident in the underlying procedure and we feel confident that the meaningful disruptions caused by COVID and staffing shortages, like, we think those are behind us. Staffing will be a continued challenge, but it’s going to be — it’s sort of in — that’s in the comps already and I think the comps on staffing are probably worse than they are going to be going forward as hospitals have largely sorted through the issues and seem to be able to have figured out how to manage their staffing more effectively than they could with the uncertainty around COVID.

So we are — as we sort of walk through new product launches, L6 and C2+, increased staffing on our end as we continue to add sort of high caliber clinical specialist territory managers in the U.S., continued performance, which is very encouraging in Japan and Germany and China, we sort of have multiple tailwinds that make us really quite confident in the prospects for the rest of the year, which made us comfortable with this level of a guide.

Travis Steed: That’s helpful. Thanks, Doug. And then a quick follow-up on the reimbursement — the inpatient reimbursement codes. Maybe help us understand how the — how that impacts the business in terms of revenue and potential there? And then I will ask the op margin question as well in terms of, Q1 obviously a strong 25% almost op margin versus the 22% to 23% where the street was kind of at for the full year. So I think things are progressing really well there, just making sure we should think about flowing through for the rest of year as well.

Doug Godshall: The one caution on the balance of the year, we only had a small sort of deal cost of Neovasc embedded in Q1 and so we remain comfortable with the sort of $30 million for the ensuing three quarters, Q2, Q3 and Q4. And so that is a drag on our margin that wasn’t really present in the first quarter. So we are anticipating being a bit lower than we were Q1 as you sort of work that in. And in terms of the balance of the year, then going forward, we are — we feel good about how our researches are flowing other than the sort of the one-time or I guess the bogey of Neovasc.

Isaac Zacharias: And then on the inpatient reimbursement impact on — I think you asked about the inpatient proposed rule and how that would influence our guide. It’s positive, we are not going to break it out. But I think it didn’t hurt our confidence that the rest of the year is going to be strong. And I think it’s an opportunity for us to go talk and message about that with our customers and we do that in conjunction with the C2+ launch kind of coming in the third quarter. So it’s really a positive development. It will give us a nice little thing to talk about in addition to C2+ and then we will see where the proposed rule is in July for the physician payment and what CMS decides to do with the outpatient APC designation.

Doug Godshall: But as we have seen in the past when and we saw this with the above-the-knee reimbursement last year, when this goes into effect on October 1st, we will have had a few months for foreshadowing, but it’s not like hospitals respond the next day and double their volume. So it’s a positive, but it’s not an immediate change in the slope of the curve.

Travis Steed: Yeah. Makes sense. Thanks for the questions.

Operator: Our next question comes from Larry Biegelsen with Wells Fargo. Please proceed with your question.

Larry Biegelsen: Good afternoon and thanks for taking the questions. And echo my congratulations on a good start to the year here. So, Doug, we know you won’t comment on rumors, but I’d love to hear how you think about maximizing shareholder value and balancing an immediate reward today versus your potential future earnings power?

Doug Godshall: Yeah. So we love our business. It’s really more than anything I love the way customers respond to our product and the people that work here. So our job is to try to create great technologies that fundamentally improve the outcomes for patients and make these procedures more satisfying and fun for our customers. So that’s our — we think if we do that, then the shareholders will be rewarded. If there ever came a day when somebody felt like they want to make an offer that our Board should consider, we have a very professional Board, they will do their jobs. But we are very focused on the task at hand of trying to create us as a stronger company as we can.

Larry Biegelsen: That’s helpful. And just for my follow-up, what are the positives and negatives of being a single product company? Are there opportunities at least, mainly a single-product company, I know you have Neovasc now. Are there opportunities you can’t achieve because you don’t have a larger presence in the cath lab or you don’t have greater geographic reach? Thanks for taking the questions.

Doug Godshall: Well, we are in 68 countries. I think it’s 68 countries now. So we are pretty — there aren’t many left that we are dying to get into, so we feel like we are — when we find a…

Isaac Zacharias: The ones that are left, you would die if you work…

Doug Godshall: So we feel pretty good about our geographic reach. And what we have witnessed from our global sales team is, I think, there has been tremendous benefit from the focus, like, every day we wake up and we have to find a way to be successful with the devices we have and to make them better so that we continue to feed the sales team and take advantage of the significant unmet need that still is out there. We are just really scratching the surface, whether it’s peripheral and coronary, U.S. or International. We discovered Neovasc as we were out looking for other potential great ideas and we think we really got lucky. Frankly that we found one that was under resourced by nature of the sort of financial constraints that faced Neovasc.

But there were some really great people on the team and when you talk to customers — I have been in Europe a couple of times over the past couple months. And I am so much more excited than I was when we bought it, because when you talk to these guys, they consistently say this device really works and they see a dramatic improvement in the outcomes for their patients with angina for whom they have tried things for years and years and nothing works. So both the products we have today, the products that we have in development internally at Shockwave and now with the addition of Neovasc gives us really high confidence in sustained growth for many years to come. So we are — we don’t see our current situation as challenged by any means as long as we execute.

Isaac Zacharias: Yeah. I would just punctuate that clarity with a, we are able to grow the business still at decent growth rates, while investing in global marketing, sales resources, investing in facilities, not just here in California, but in Costa Rica and investing a lot of money in R&D and still delivering enough EBITDA to be able to make us a strong healthy company that can go be acquisitive when we want to. So it really doesn’t feel like we are hampered in any way to us.

Larry Biegelsen: All right. Thanks for taking the questions, guys.

Doug Godshall: Yeah. Thanks, Larry.

Operator: Our next question comes from Michael Polark with Wolfe Research. Please proceed with your question.

Michael Polark: Hey. Good afternoon. Thank you for taking the questions. I have two both on reimbursement inpatient and then I want to ask about the CPT code. So on inpatient, the last call, a lot of great detail from Rob and Co. on just the pathway here. And the message on inpatient was a look for PCI device selection doesn’t drive payment. And as I look at this proposal, it would appear to me as a dumb person on the outside that device selection prospectively may drive payment now for PCI, specifically your product. And so, I am just looking to better understand how massive of a potential shift this is, if this is finalized. I mean, is it too much of a stretch to call this a game-changing proposal in inpatient? Your perspective on that would be great and kind of also looking for how much risk do you perceive here in the comment period around this proposal of these new DRGs getting finalized?

Doug Godshall: So, yeah, our view has always been that, because outpatient procedures are associated with specific technology that that is where customers, they focus on outpatient reimbursement because they know if you use atherectomy, it’s one payment, if you use stents, it’s another payment and so there is a technology linkage to the level of payment. And since that never previously existed for inpatient, we all get thrown into the same bucket and it’s all — the payment is all determined by the complexity and complications that the patient endures. But that may not be true assuming this IPPS rule comes through later this year, in which case it’s both the patient condition and whether or not they — IVL is used on them.

So, we will see, but we may have to amend our view, because now in the sole case of IVL, it might matter what device you use on inpatient and in which case then there would be a technology linkage at least in our case for those inpatient payment levels and their — it certainly isn’t going to be harmful to be able to combine physician payment once CPG comes through, inpatient uplift and payment, and being on par on the outpatient side.

Michael Polark: Helpful. And then the follow-up on the CPT proposal. Can you just level set where does the baseline payments set and what might this proposal look like? Thank you so much.

Doug Godshall: Yeah. So we — right now physicians — it varies obviously by country and payer, et cetera, but think of it as about $500 to get it to do a PCI and another $75-ish to do atherectomy…

Isaac Zacharias: In the U.S.

Doug Godshall: Yeah. In the U.S., yeah. And Shockwave presently is still $500, you don’t get incremental payment. After the CPT panel last year voted in favor of a Category I CPT code for IVL, the next step in the process that the RUC committee then goes and surveys physicians to determine what the RVUs are when they sort of — basically how much work do they do when they do a Shockwave case and that will feed back into the system and determine what physicians will get paid incremental to that stent procedure. And we will know what is proposed here in the next few months, sort of July timeframe, we should have both the proposed rule for outpatient and the proposed rule for CPT, both of which would affect 2024. And we would be speculating if we said what we thought — where we thought we would the physician payment would land.

Michael Polark: Thank you.

Doug Godshall: Yeah. Very happy we made it through reimbursement with Rob — without Rob.

Operator: Our next question comes from Cecilia Furlong with Morgan Stanley. Please proceed with your question.

Cecilia Furlong: Hey. Good afternoon and thanks for taking the questions. I wanted to focus on Germany. Some of the strength that you talked about seeing there post the reimbursement update, but just your outlook really for increasing the sales force there, your presence there? And then also your comments on penetration, where it is today, very low relative to Western European countries, how you think about that ramping over time and where you ultimately look at penetration following over the next several years?

Doug Godshall: Yeah. Sure. Thanks for the question, Cecilia. Let’s see, we will probably double our sales force in Germany this year and that’s already underway. And that’s really to higher the — to handle the higher volume and demand we expect on coronary with the DRD change. So that’s in process now. We have got a number of programs established and going to using some of the things we learned in the U.S., particularly in the peripheral reimbursement uplift on how to go reeducate hospitals and on the change in reimbursement, because right now in Germany, it’s a IVL is — it hasn’t been reimbursed sufficiently for five years and you have to undo that perception. So that’s part of the work the team is worked — it will do this year, next year.

And so when you look at the penetration, Germany is about 330,000 PCIs and we were about 1% penetrated as we exited last year, despite having a really good strong direct sales force in the country. So I think if you look at that compared to where we are in Western Europe and in the U.S., and I think, they can be — they could be our second or third highest penetrated country eventually. That would be with Japan and the U.S., I would expect kind of be the three highest penetrated countries based on the economics in place. The economics that will be in place are already are in place and the fact that we have direct sales teams there. They execute very well. So we — I think over the next two years, three years, Germany has got a lot of upside and it’s — we are looking forward to seeing how much it is.

Cecilia Furlong: Great. And if I could follow-up as well. Just on BTK and some of your comments on just the interplay really between S4 and M5+ now, what you have seen recently? And then just any updates too for S4 specifically in potentially of not being from an APC standpoint? And thanks for taking the questions.

Doug Godshall: Yeah. We — I will work backwards. We can — CMS continues to collect data for — through our BTK C codes that we already have in place. As a reminder, the BTK procedures are — pay more than the ATK procedures. So and straight angioplasty below-the-knee pays $10,000 and an IVL case or atherectomy above-the-knee pay $10,000. So the payment levels are all sort of $5,000 higher than they are above-the-knee. And so we are — right now we are reimbursed the same above-the-knee and below-the-knee, whereas atherectomy is paid higher below-the-knee. So our hope eventually is to land in that higher APC level, although the current payment below-the-knee is not cited nearly as often by customers as to why they would not use Shockwave as it was above-the-knee.

Above-the-knee is a more economically sensitive vessel bed. So payment is perfectly adequate below-the-knee. We would be happy if it was higher, and hopefully, over time as Medicare, CMS accumulates more data, they will move us there. We don’t — we are not anticipating that, that will be happening this year and TBD about next year. The — what might help that is that M5+ is getting used at an increasing rate below-the-knee. The longer treatment lengths, faster pulses, longer catheter shaft are all being very well-received by our customers. So we have a relevant increase in utilization of the 3.5 millimeter and the 4 millimeter outer diameter lengths for our — of our M5+ SKU matrix that indicates that we are starting to see a nice complement to the S4 device.

So we are — and since that currently is at a higher price, that could augur long term to the benefit of the levels as CMS looks at the overall cost of the procedure. But it does seem highly complementary to ask for at this juncture and as we move towards our Investor Day later this year, you will see that below-the-knee is a meaningful focus for us on a couple of our upcoming product launches in the next two years.

Cecilia Furlong: Great. Thank you.

Doug Godshall: Thank you.

Operator: Our next question comes from Imron Zafar with Deutsche Bank. Please proceed with your question.

Imron Zafar: Hi. Good afternoon, guys. Thank you so much for taking my question and congratulations on a great quarter. I wanted to first ask about gross margin, obviously, another very strong first quarter. So when you look out over the next two years to three years, can you just talk about the sustainability of these levels, just talking about the moving parts, geographic mix, direct versus distributor? And then Costa Rica coming on Board at some point next few quarters, can you just talk about your ability to maintain the sort of high-80s gross margin longer term? Thanks.

Doug Godshall: Yeah. We are — you highlighted a couple of the puts and takes as China grows, that’s great for the topline, unhelpful on the gross margin side. But Japan, where we are direct and we are not paying certain distributor transfer price, that’s a nice counterbalance to China in terms of the international contribution to gross margin and same with Germany. U.S. is the strongest contributor to gross margin, given reimbursement pricing advantages to the U.S. system and we envision U.S. will continue its really healthy growth rate into the future. Product mix, we don’t envision any meaningful negative or positive contribution from the product mix, often when we launch a new product such as L6. As we are working out the kinks, it is higher cost, as we figure out how to optimize fixtures and processes and the like, and we are in the process of doing that right now with L6.

But, overtime, that will resemble where we are with other products in terms of gross margin and then we will move that to Costa Rica once we sort of worked through the optimization process. Costa Rica, the facility — our facility won’t be contributing until the back half of next year, which is when we start shipping product from there. And I wouldn’t model a meaningful change to our gross margin from Costa Rica, although there is potential upside given the better labor and overhead that we will see out of that facility.

Imron Zafar: Okay. Thank you. And then just one quick one on the pipeline, any updates on when we might see some initial human data from the mitral and/or aortic IVL catheters?

Doug Godshall: We will — when we put our roadmap out in October at our October 23rd event, we should give you a sense of when we are going to be in the clinic at least with aortic. Mitral, it’s in the clinic right now, off-label when people do a case here or there using our peripheral catheter. So we are still exploring what the right way to — if there’s a way for Shockwave to participate in mitral.

Imron Zafar: Great. Thank you so much.

Operator: Our next question comes from Mike Matson with Needham. Please proceed with your question.

Mike Matson: Yeah. Good afternoon. Thanks for taking my questions. I wanted to ask another one on the below-the-knee opportunity. Some of the feedback that we have gotten is that the S4 catheter wallet can get below-the-knee. It’s a little on large side. So you mentioned you have got some things in your pipeline there, but I was just wondering if you are planning on like excess — extra small catheter, something that can go deeper into the ankle region and when we could maybe see that, if you can even make the filament small enough to fit down there?

Doug Godshall: We always trying to find ways to make our systems sort of more deliverable, we will hear on S4 more often, much more often is they wish it was longer, which is why they are starting to play M5+ below-the-knee. So we — I think when you — as we layout our BTK portfolio, because it is really going to be a portfolio of multiple products to treat the variety of vessels and diseases below-the-knee. I think we are quite encouraged that what has been a nice business, but underpenetrated more than any other vessel there, so we truly think BTK is going to be a really nice contributor starting in 2024.

Mike Matson: Okay. Got it. And then I just wanted to ask one on the tax rate. I don’t know if you are willing to give us some sort of guidance for the year, but it did come in significantly below what I have been modeling, which is kind of the 25% range, don’t know where you are at in terms of starting to pay sort of full tax rate, but I thought it might be this year, but?

Doug Godshall: I guess, I was so worried, Trinh, wasn’t going to get to answer the question. So I am so glad you asked.

Trinh Phung: Yeah. It’s still safe to model 25%. We are still burning our NOLs, so from a cash outflow, it will be less. But this quarter in particular was low, because we had some discrete items differences between book and tax that’s causing the rate, but it’s — from a modeling perspective 25% is what we expect.

Mike Matson: Okay. Got it. Thank you.

Doug Godshall: All right. I think that’s a wrap. Thanks everybody for your time and attention and thank you Mike particularly for asking Trinh a question. Much appreciated. And we all miss Dan, but Trinh crushed it. So thanks very much. Have a good day.

Operator: This concludes today’s conference. Thank you for your participation. You may disconnect your lines at this time.