ShockWave Medical, Inc. (NASDAQ:SWAV) Q4 2023 Earnings Call Transcript

ShockWave Medical, Inc. (NASDAQ:SWAV) Q4 2023 Earnings Call Transcript February 15, 2024

ShockWave Medical, Inc. beats earnings expectations. Reported EPS is $1.16, expectations were $0.92. ShockWave Medical, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good afternoon and welcome to ShockWave’s Fourth Quarter and Full Year 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 at ShockWave for a few introductory comments.

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 Renee Gaeta, Chief Financial Officer. Earlier today, ShockWave released financial results for the quarter and year ended December 31st, 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, clinical trials, reimbursement proposals, and future product development and approvals are based upon our current estimates and various assumptions. These statements involve material risks and uncertainties, including the impact of global business, political, and macroeconomic conditions that could cause actual results or events to materially differ from those anticipated or implied by these forward-looking statements. Accordingly, you should not place undue reliance on these statements. For a list and description of the risks and uncertainties associated with our business, please refer to the Risk Factors section of our 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.

On today’s call, we will refer to both GAAP financial measures and adjusted EBITDA, a non-GAAP financial measure. Please refer to today’s press release for a reconciliation of net income to adjusted EBITDA and additional disclosures regarding this non-GAAP financial measure. 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 time-sensitive information and is accurate only as of the live broadcast today, February 15th, 2024. And with that, I’ll 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’s results for the fourth quarter and the full year of 2023, which proved to be another banner one for the company. During the year, we launched C2 in Japan, we converted to direct sales forces in Spain, Portugal, Italy, and Canada. We launched two new products, L6 for peripheral vessels and C2+ for the coronaries. We were granted DRG codes specific to coronary IVL in the inpatient hospital setting, which pay on average about $9,000 more than codes for PCIs without IVL. We acquired and integrated Neovasc and the Reducer product, which is the first device that addresses refractory angina and often debilitating condition that impacts a large patient population that has no good treatment options, and we raised $750 million in a convertible debt offering.

We achieved record revenue of $203 million in the fourth quarter, which was 41% — which was a 41% increase from a year ago and a 9% sequential increase from the third quarter of 2023. Our revenue for the full year of 2023 was $730.2 million, a 49% increase from 2022 revenue. We witnessed excellent performance in all areas of the business with US peripheral and coronary businesses growing 47% and 41%, respectively, and our international IVL business growing 75% compared to 2022. Really stellar performance. The team continues to execute at a high level, and we now have over 1,500 global employees. Our products are approved in 70 countries, and we are pleased that we now have EU MDR certification for M5+, S4, and C2+ catheters and our Generator.

The MDR process was a long journey and required a major effort by the team. Our US coronary business continues to shine, and we have a couple of meaningful reimbursement tailwinds that will support continued adoption. The new hospital inpatient DRGs for coronary went into effect in the fourth quarter of last year and additionally, physicians are now being paid when they use coronary IVL thanks to the CPT code that became effective on January 1st of this year. As we have witnessed in the past, reimbursement takes time to influence customer behavior, but we anticipate that the combination of these new payments will have a positive impact on our US coronary business and will help lower the economic friction that has historically been the biggest constraint on increased utilization of IVL.

We anticipate that physicians will increasingly use C2+ whenever they feel it’s clinically appropriate, versus feeling pressured to only use it selectively or after exhausting all other options. We believe an IVL first strategy is optimal for patients and is now even better economically for customers. Also on the coronary topic, we are continuing the launch of C2+, which has 50% more pulses than its predecessor, C2. Isaac will talk a bit more about this later in the call, but early reception from our customers has been very positive. On the US peripheral side, the prior authorization issue appears to have stabilized as our customers are learning how to navigate Aetna’s increased scrutiny on peripheral procedures and we have not seen any other payers follow Aetna’s practices.

Meanwhile, multiple medical societies have come together to form a working group, and they have been applying pressure on Aetna and hopes of getting them to reconsider their policy. There also has been considerable attention paid to Medicare Advantage recently. At the Federal level, CMS recently announced new rules, which will make it harder to pursue prolonged prior authorization practices. There also has been some predictive recent movement among commercial payers specific to ShockWave, as HUMANA, the second largest Medicare Advantage payer issued a positive coverage decision for IVL for their Medicare Advantage plans effective January 1st, 2024. Staying on the topic of US peripheral reimbursement, we are pleased to see that CMS improved hospital reimbursement by assigning peripheral IVL to new MS DRGs. These new DRGs increased inpatient hospital payment by $4,000 to $10,000 over previous levels.

Most peripheral interventions are performed in an outpatient setting. However, a majority of the hospital base below the knee procedures are for the more severe chronic limb-threatening ischemia or CLTI, which makes them more likely to be performed on an inpatient basis than other procedures. This reimbursement uplift nicely complements the upcoming advances in our below-the-knee product offering that starts later this year. While on the topic of new products, we will be focusing back on peripheral in the second half of this year with two launches. First, we will introduce an upgraded version of L6, which will go from one pulse per second to two. We witnessed a very positive response from our customers when we made this same upgrade going from M5 to M5+.

Shortly after the L6 rollout, we plan to launch the E8 peripheral catheter. E8 has an 8-centimeter long treatment zone, which is twice as long as our current S4 offering and is specifically designed to treat longer diffuse lesions that are common and below the knee cases. We look forward to seeing our customers response to E8. We think they’re going to love it. Rounding out our future BTK offering, we anticipate the approval of our JAVELIN peripheral catheter in the latter part of the year and look forward to starting the limited market release of that product prior to an expected full market release in early 2025. That makes three significant new peripheral launches within the next year. And finally, on the operations front. Our facility in Costa Rica has gone from first shovel in the ground in June of 2022 to a validated clean room and C2+ line in December of 2023.

Amazing progress, frankly. We’ll be hosting regulatory audits starting this month and anticipate shipping finished product into inventory in the third quarter of this year. 2023 was a great year for ShockWave, and we are even more excited about what lies ahead in 2024. We expect revenue between $910 million to $930 million for the full year of 2024, representing growth of 25% to 27% over 2023. Before I turn the call over to Isaac to provide more color on the commercial front, I want to take a minute to thank our outgoing CFO, Dan Puckett, for the tremendous job he has done in his eight years at ShockWave. During his time here, he was instrumental in our growth from a small pre-revenue private company to a public company with over $700 million in revenue.

Dan is not only a fantastic CFO, but he is a joy to work with. He’s been the biggest cheerleader for all of us, always supportive and inspiring to everyone around him and he will be sorely missed. We wish Dan well in his retirement and are pleased to introduce our new CFO, Renee Gaeta, who is jumping right in today, and we’ll present the financials a bit later in the call. And if he gets anything wrong, it’s all Dan’s fault. With that, I’ll turn the call over to Isaac.

Isaac Zacharias: Thank you, Doug. Our record results in both the fourth quarter and the full year of 2023 reflect outstanding contributions from our businesses and teams around the globe. Q4 2023 was strong for our US coronary business. Revenue grew 40% compared to Q4 of 2022, 11% sequentially from Q3 of 2023, and 15% sequentially on an average daily sales basis. The C2+ launch is proceeding well. We launched over 1,000 accounts and the product has been very well-received. What is particularly appreciated is the utility of more pulses and longer diffuse lesions, eccentric lesions and calcified nodules. We expect continued momentum in the coronary business as our sales team focuses on the C2+ launch and on communicating both the favorable reimbursement changes and additional physician fees for using coronary IVL.

Revenue from our US peripheral business in Q4 2023 was up 19% from a year ago, flat sequentially compared to Q3 and up 3% sequentially on an average daily sales basis. As Doug mentioned, we are seeing a stabilization of the prior authorization dynamic as providers are getting better at navigating the additional steps required for some patients. We continue to expect modest growth in the US peripheral business in the first half of 2024 as we maintained a strong focus on the US coronary business. We did anticipate accelerated US peripheral growth in the second half of 2024 with the L6 and E8 product launches. Turning to our international business. We had another record quarter of IVL sales as revenue was up 67% from a year ago, and 14% sequentially compared to Q3.

We are now direct in all five major European markets, Germany, the UK, Spain, Italy, and France. Sales in Germany doubled during 2023 due to the improved coronary reimbursement. We are starting to see increased usage in some of the smaller German accounts, which can now afford IVL. Germany is the largest market in Europe, and we think there is tremendous upside for coronary penetration from the current level of just over 2%. We had our first full quarter of direct sales in Italy and are very pleased with the execution by that team. It feels good to see such strong and seamless execution from the direct selling teams in Europe. We continue to drive penetration with the focus of the ShockWave’s sales team and the support of our marketing and physician education programs.

In Japan, we completed our first year of coronary sales. We exceeded our goals for the number of accounts launched, the penetration in the launched accounts and revenue. We have initiated efforts to develop clinical data that will support using IVL in conjunction with atherectomy and drug-coated balloons. We are working closely with [Indiscernible], the Interventional Cardiology Society in Japan to ensure that IVL is available and appropriately used throughout Japan. In China, we are still experiencing the impact of the ongoing anticorruption campaign, which is slowing ideal adoption at new centers. On the positive side, adoption within centers that had IVL on the pricing list before the anticorruption campaign started is growing nicely. That said, we expect very little revenue from China in the first half of 2024.

Finally, the European Reducer team posted a very nice quarter. The teams in Germany and France are being rebuilt and along with the established UK team continued to generate revenue while testing different market development strategies and sales models. We are very pleased with the integration of Neovasc and are starting 2024 with strong teams in place to both accelerate enrollment in the CR2 trial and build the international reducer business. With that, I will turn the call to Renee to review the financials.

Renee Gaeta: Thank you, Isaac and good afternoon everyone. I am thrilled to have joined the ShockWave team and look forward to working with all of you. ShockWave Medical’s revenue for the fourth quarter ended December 31st, 2023, was $203 million. a 41% increase from $144 million in the fourth quarter of 2022. US revenue was $158.1 million in the fourth quarter of 2023, an increase of 34% from $118.3 million in the fourth quarter of 2022. Coronary products contributed $115.2 million to US revenue in the fourth quarter of 2023, an increase of 40% from $82.1 million in the fourth quarter of 2022. US revenue from our peripheral products was $42.8 million in the fourth quarter of 2023, an increase of 19% from $36 million in the fourth quarter of 2022.

The growth in US revenue during the quarter was driven primarily by increased utilization at existing accounts, supported by our continued sales force expansion. International revenue was $44.8 million in the fourth quarter of 2023, representing a 74% increase from $25.7 million in the fourth quarter of 2022. Coronary products contributed $37.7 million to international revenue in the fourth quarter of 2023, an 83% increase from $20.6 million in the fourth quarter of 2022. International revenue from our peripheral products was $5.3 million in the fourth quarter of 2023, an increase of 19% from $4.5 million in the fourth quarter of 2022. Our Reducer product contributed $1.8 million to international revenue in the fourth quarter of 2023. The increase in international revenue over the prior year period was driven by a continued geographic expansion, particularly in Japan, the increased productivity of our direct selling teams in Europe and the momentum from our C2+ launch.

Looking at product lines, our peripheral products, ShockWave M5, ShockWave M5+, ShockWave S4, and ShockWave L6 accounted for $48.1 million of total revenue in the fourth quarter of 2023 compared to $40.5 million in the fourth quarter of 2022, a 19% increase. Our coronary products, ShockWave C2 and ShockWave C2+ accounted for $152.9 million of total revenue in the fourth quarter of 2023 compared to $102.7 million in the fourth quarter of 2022, representing a 49% increase. Revenue from our Reducer product accounted for $1.8 million of total revenue in the fourth quarter of 2023. Gross profit for the fourth quarter of 2023 was $177.7 million compared to $126.5 million in the fourth quarter of 2022. Gross margin was 88% for the fourth quarter of 2023, consistent with gross margin of 88% for the fourth quarter of 2022.

Total operating expenses for the fourth quarter of 2023 were $134.4 million, a 60% increase from $84.1 million in the fourth quarter of 2022. Sales and marketing expenses for the fourth quarter of 2023 were $67.2 million compared to $43.4 million in the fourth quarter of 2022. The increase was primarily driven by sales force expansion. R&D expenses in the fourth quarter of 2023 were $42.3 million compared to $23.7 million in the fourth quarter of 2022. The increase was primarily driven by headcount growth, higher clinical-related expenses, including Reducer and the facility expansion to support R&D. General and administrative expenses for the fourth quarter of 2023 were $24.9 million compared to $17 million in the fourth quarter of 2022. The increase was primarily driven by higher headcount to support the growth of the business.

Operating margin was 21% for the fourth quarter of 2023. Net income in the fourth quarter of 2023 was $44.3 million compared to net income of $140.9 million in the fourth quarter of 2022. In the fourth quarter of 2022, we released a valuation allowance, which resulted in a tax benefit of $99 million in that quarter. Basic net income per share for the period was $1.20, diluted net income per share for the period was $1.16. Adjusted EBITDA was $68.2 million for the fourth quarter of 2023, a 20% increase compared to adjusted EBITDA of $56.6 million in the fourth quarter of 2022. Finally, I’d like to briefly recap some highlights from our full year 2023 results. Total revenue for the full year 2023 was $730.2 million, an increase of 49% compared to full year 2022 revenue of $489.7 million.

US revenue for the full year 2023 was $581.5 million, representing a 43% increase over 2022 revenue of $407.4 million. International revenue was $148.7 million for the full year of 2023, compared to $82.3 million in 2022, representing an 81% increase. Gross margin for the full year 2023 was 87%, consistent with 87% for the full year 2022. Total operating expenses were $475.7 million in 2023, an increase of 58% compared to operating expenses of $300.6 million in 2022. Operating margin was 22% for the full year 2023. Total net income for the full year 2023 was $147.3 million compared to $216 million for the full year 2022. Net income in 2022 included the $99 million tax benefit from the aforementioned release of our valuation allowance. Basic net income per share was $4.01 for the full year 2023.

Diluted net income per share was $3.85 for the full year 2023. Adjusted EBITDA was $242.7 million for the full year 2023, a 40% increase from adjusted EBITDA of $173.9 million for the full year 2022. Looking forward to 2024, we expect to continue to make significant investments to support and sustain our growth and anticipate full year 2024 operating margin expansion of up to 100 basis points from the full year 2023. Similar to the pattern we saw in 2023, we do expect a step-down in Q1 operating margin from the prior Q4, reflecting compensation and benefits costs, which reset at the beginning of the year as well as the timing and increased costs related to our global sales meeting held in March. We ended the fourth quarter of 2023 with $990.6 million in cash, cash equivalents, and short-term investments.

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

Doug Godshall: Thank you, Rene and thank you all for joining us today. 2023 was another great year at ShockWave. The team continues to execute at the highest level as we achieve our mission to help treat underserved patient populations around the globe with our innovative solutions, and we’re excited to continue this work in 2024. With that, I’d like to open the call to questions.

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Q&A Session

Operator: Thank you. Ladies and gentlemen, at this time, we will be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Adam Maeder with Piper Sandler. Please proceed with your question.

Adam Maeder: Hi, good afternoon. Nice quarter and congrats on a fantastic year and welcome, Renee, on the new role. I wanted to start on the guidance construction, the topline, $910 million to $930 million. Maybe just talk about what’s embedded for some of the different pieces of the business? Coronary versus Peripheral versus Reducer? And if I heard correctly, you said modest US peripheral growth in the first half of 2024, then accelerating in the back half with new product launches. Hoping you could flesh that out some. I’m assuming that’s assuming some continued headwinds from Aetna, but wanted to, I guess, kind of understand what’s baked in to the guide for Aetna prior launch [ph] as well as China Anticorruption any potential impact from the step-down in outpatient reimbursement on the coronary side in the back half of the year? I’m sorry for the long-weighted question.

Doug Godshall: Yes. So, and we’ll probably tag team on this. We are anticipating modest growth on peripheral particularly in the first couple of quarters while we concentrate on coronary, and then as we start launching L6 and E8 and turn our focus back to peripheral, we’ll start seeing a step up in peripheral growth. The year will be another really strong year we anticipate for US coronary contribution as a percent of the business, we anticipate US coronary will be actually a larger percent of the total business than it was end of — throughout the 2023. We’re, we obviously had a very strong international performance last year. We anticipate another strong year, although we have the China deficit. So, ex-China, International is going to do very well, but we’ll be losing over $10 million in somewhere between $10 million and $20 million in revenue that we would have — that we had last year in China that we’re not going to get this year.

So, we’re anticipating sort of very low single-digit revenue out of China. So, ex-China, another strong contribution year from the international business.

Isaac Zacharias: Last point, Adam, you asked about was on the outpatient for coronary U.S. in the second half, the outpatient payment? We don’t anticipate. I mean we’re aware of the situation, obviously. We still expect baseline is that the TPT will set to expire July 1st, and it will expire July 1st. We still anticipate the up leveling to $51.94 will occur Jan 1 of 2025. But what we’ve seen typically with reimbursement in the US is it takes time to move behavior and change behavior patterns and what — so we’ve not been on this kind of good run in coronary, and we have a really strong coronary business and momentum right now with the inpatient reimbursement continue to be a tailwind. The physician fee continue to be a tailwind. The C2+ launch is a tailwind, and we just don’t anticipate that having the TPT expire in the middle of the year. will be much of a headwind, TBD, but that’s kind of what we’ve seen in our — that’s what we’ve baked into our guidance.

Adam Maeder: Yes, that’s good color, guys. Thank you for that. And for the follow-up, we’ll stick with the guidance topic and switch over to margins. If I heard correctly, you’re expecting up to 100 basis points of operating margin expansion for full year 2024 over 2023 levels. That’s a little bit below kind of where The Street is pre call. Maybe I would just love to hear a little bit more about kind of what’s embedded in that assumption? Should we be orienting models to kind of 50 basis points kind of the midpoint of that range? Or should we start at 100 basis points kind of coming out of the Q4 call here. And yes, I just would love to hear a little bit more about the philosophy on the leverage piece. Thanks so much.

Doug Godshall: Yes. So, we — as usual, we’re going to continue investing in aggressively in our pipeline, both on a sort of hardcore product development side. And increasingly, the clinical trial expenses, which whether it’s the trial for Reducer, the C2 study or the various trials such as DUO that we’re running now or Empower, we initiated multiple trials next year and they’re becoming more expensive last year. And this year, we’ll spend even more on those trials. So, big step-up in clinical spend. We’ll continue to augment our global sales footprint, but the US team will not be growing at the same rate that it has historically. We’ve — we’re not done building out that team, but the rate of change will be lower. So, the — so you’ll probably see a little leverage on sales, sort of not incremental leverage on R&D.

We shouldn’t see much deleveraging on R&D, but that will probably be static relative to the topline. We’re still spending money right now. We’re still having to expense Costa Rica and that does not convert into inventory until later in the year. And so we’re still having to absorb Costa Rica costs, which are not insignificant.

Adam Maeder: I got it. And just one clarification, Doug, no change to the 500 basis points operating margin expansion over 2023 levels that you outlined? At The Innovation Day last year. I just wanted to confirm that’s still the case?

Doug Godshall: Yes. We’ve been — we’ve articulated previously that it’s going to be 2025-2026. We’re pleased that if this plan delivers as expected, we’re very pleased with a up to 100 basis point improvement. If you want to model 50, I’m perfectly okay with that. And we’ll obviously try to do better, but we’re targeting topline growth as our objective, not — we think the margin improvement is really an output of the business versus the specific objective of the business.

Adam Maeder: Thanks for the color.

Operator: Our next question comes from the line of Bill Plovanic with Canaccord. Please proceed with your question.

Bill Plovanic: Hey, great. Thanks for taking my question. Just a couple of things here. You gave us a little granularity on what you’re seeing from Aetna? And just what do you think in terms of when this comes back. Is this just like a three, six, nine-month delay? Or does this take patients out of the funnel? Or does it come back at some point in time? How should we think about just Aetna going forward?

Doug Godshall: Yes, I’m going to answer this and bring in Rob Fletcher as well to add color. What’s unknowable for us is a patient is an Aetna ShockWave patient that got treated today, somebody who would have been treated four months ago — two months ago, one month ago, don’t know. It’s impossible for us to have that level of granularity and maybe Rob can talk a bit more about sort of what he’s seeing more broadly on — from our team and from societies on this prior off?

Robert Fletcher: Yes, that’s right. Hi Bill. I think what typically happens after a change in practice from one of the payers that are out there. What you see is at the provider level, at the hospital level, there’s often a reaction to that. They have to do more documentation or they have to take additional measures or steps or allow for more time to go through a prior authorization process. So, typically, what we see is over time after some initial sort of temporal disruption, people figure out how to start working within this and then they plan for it and then it kind of becomes back to a steady state. It’s kind of a new normal, but you wind up with more of a steady-state type of effect. And I think that’s what we’re seeing and hearing now from customers is that, that has really sort of stabilize.

People have figured out how to work within that. Meanwhile, we do see action being taken from the medical societies, for example, who did over the course of this period come together. Jointly, there was multiple medical societies and did issue an additional letter to Aetna that covered a bunch of different things, including this prior authorization practice. So, you are starting to see some pushback. And I expect that Aetna will take that under consideration under many other things. But for the time being, I think it’s — I’d describe it as what appears to be more a stable situation at a new normal.

Bill Plovanic: Great. And then as a follow-up, I don’t want to leave Renee out on our first conference call. Welcome, Renee. Is your other income was significant in the quarter, well above? Can you kind of call out any one-time there for us?

Renee Gaeta: Wouldn’t necessarily be onetime, but certainly, interest income is within that number and then, of course, our interest expense out on the convertible debt. So, that number is going to be nice, given interest rates currently. And thank you for the question.

Bill Plovanic: So, $15.3 million, is that something we should model in going forward?

Renee Gaeta: $15.3 million might be a little high. There’s probably some FX in there. Yes. So, it’s slightly high, but there’s — just because of the FX for the period, but it is largely interest income.

Bill Plovanic: Great. Thank you.

Operator: Our next question comes from the line of Patrick Wood with Morgan Stanley. Please proceed with your question.

Patrick Wood: Amazing. Thank you. Maybe just to hop up on that point. The amount of cash on the balance sheet. I mean you’re approaching $1 billion, so it’s nearly as much as is in my checking account. And so I got to ask like what do you like outdated thoughts? I know there was like a willingness to be sort of strategically footed around M&A. So, obviously, it’s like nearly an eighth of your market cap. How are you thinking about capital allocation?