ShockWave Medical, Inc. (NASDAQ:SWAV) Q4 2022 Earnings Call Transcript

ShockWave Medical, Inc. (NASDAQ:SWAV) Q4 2022 Earnings Call Transcript February 16, 2023

Operator: Good afternoon and welcome to ShockWave’s Fourth Quarter and Full Year 2022 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 Dan Puckett, Chief Financial Officer. Earlier today, ShockWave released financial results for the quarter and year ended December 31, 2022. 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 forward-looking statements during this call within the meaning of Federal Securities laws, which are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Any statements contained in this call that relate to expectations or predictions of future events, results or performance are forward-looking statements.

All forward-looking statements including, without limitation, statements relating to our sales and operating trends, business and hiring prospects, financial and revenue expectations, future product development and approvals and the closing of our acquisition of Neovasc, 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 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 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 time-sensitive information and is accurate only as of the live broadcast today, February 16, 2023. 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 full year 2022. Our ShockWave team delivered another strong quarter and an outstanding year with many important achievements. To highlight just a few of our key accomplishments in 2022, we had two new products approved in the U.S., demonstrated superiority in one-year follow-up in the PAD III randomized trial, added regulatory shipping approvals in 12 new countries, including Japan and China, launched over 500 coronary accounts in the U.S., had several wins in reimbursement across the globe, and broke ground on a new manufacturing facility in Costa Rica. We achieved record quarterly revenue of $144 million in the fourth quarter of 2022, which was more than a 70% increase from the fourth quarter of 2021.

This brought our revenue for the year to $490 million, more than doubling our revenues from 2021. What we found most encouraging about these results was the growth and contribution across all product lines and geographies. Our fourth quarter 2022 revenue versus fourth quarter 2021 revenue was up over 60% for U.S. coronary, was up over 90% for U.S. peripheral and up over 70% for our international business, rather remarkable across the board. Later in the call, Isaac will share some additional insights from the commercial side of the business, and then Dan will provide some details around our financial results. But I’d like to start with a few updates on recent activity here at ShockWave. We are pleased to have been granted FDA approval for our C2+ coronary product in mid-December, which was much sooner than we expected as our regulatory team continues their trend of efficient approvals.

As a reminder, C2+ adds 50% more pulses going from 80 to 120. The experience in the European limited launch gives us high confidence in the performance of C2+, and we plan to launch in the U.S. in the second half of this year. This is the first in a series of new coronary products that we plan to launch with the expectation that each new product will improve customer experience, expand the IVL utility and by extension, further increase coronary penetration. We’re obviously pleased that the reimbursement for coronary IVL in Germany was increased on January 1 of this year. Germany has the largest number of PCIs in all European nations at approximately $330,000 per year, yet penetration of coronary IVL has been appreciably lower than in other large European markets, largely because of funding gap for IPL procedures.

We believe the increases in reimbursement will meaningfully reduce the principal barrier to IVL utilization in Germany. We are presently working on to double the size of our German team in order to support anticipated market expansion. We’ve been receiving great feedback on our L6 peripheral catheter, which is currently in limited launch in the U.S. As you may remember, this catheter was purpose-built to address resistant dense calcium in large vessels. The limited launch has been going very well and has given us great insights. Isaac will provide a bit more color later in the call. We hosted multiple well-attended events during the fourth quarter, including at both Veeva and . We also shared updates from our PAD III observational study at both of these conferences.

We look forward to sharing more IVL data at CRT next week, where there are six sessions highlighting IVL, including further discussions on nodular calcium, as well as the presentation on our EMPOWER female study design. It should be another great showcase for IVL. As you may have seen, late in January, the Society of Cardiovascular Angiography and Interventions or SCAI, published updated guidelines, which included coronary IVL as a treatment option in all U.S. cath labs, including ASCs, regardless of surgical backup status. Previous guidelines restricted recommended treatment to facilities with on-site surgical backup. We believe this is a great endorsement of the safety of IVL. Our C2 launch in Japan commenced in earnest in January with appropriate reimbursement now in place, we have confidence that we can launch C2 very effectively.

Isaac will provide a bit more color later in the call. And while the launch is just getting started, we are generally encouraged thus far. Lastly, earlier in January, we announced that we entered into a definitive agreement to acquire Neovasc and our enthusiasm for the Reducer Systems potential has grown post announcement, largely because of the clinical community responded even more positively than we had anticipated. This unique product has the potential to elegantly address a very large population of patients who currently do not have a treatment option for their debilitating refractory angina. The acquisition of Neovasc, which is set to close by the end of this quarter is a solid step in ShockWave’s strategic mission to leverage the talents of our world-class team to develop and commercialize a steady cadence of novel technologies for underserved patient populations.

Before I turn the call to Isaac, I will reiterate, as we shared in our call last month that we anticipate delivering top line revenue in the range of $660 million to $680 million for the full year 2023, representing growth of 35% to 39% from 2022. With that, I’ll turn the call over to Isaac and then Dan will share more details on the broader business and financial results. Isaac?

Isaac Zacharias: Thank you, Doug. We had another strong quarter across the U.S. coronary, U.S. peripheral and international segments. Globally, staffing issues affected procedural volumes in some centers to various degrees throughout the quarter. As some of our peers have noted, we expect the staffing challenges to continue improving throughout 2023. U.S. peripheral revenue in the quarter was 10% above the prior quarter and almost doubled the U.S. peripheral revenue from a year ago. The launch of our M5+ catheter, organic growth, new accounts and appropriate reimbursement all contributed to the solid revenue increase. M5+ continues to be very well received by our customers, and we are seeing increased usage in accounts once they adopt M5 +.

We are very pleased with the results of the limited launch of our L6 catheter in the U.S. During the fourth quarter, our focus was to understand the capabilities of the catheter and to collect feedback on which clinical scenarios are best suited for L6. Physicians have indicated that they find it most useful in large and common femoral arteries. And since the emitters on L6 are spaced closer together than the emitters on M5+, physicians have noted that it more efficiently cracks large eccentric lesions. It is too early to predict how much L6 will be used in cases that were previously not done with IVL, but in the LMR, nearly 60% of the cases were treated with the 9, 10 and 12 millimeter L6. This suggests that many procedures were likely cases that would not have been done with the 8-millimeter M5+.

We intend to move to a full launch of L6 in the U.S. later in the first quarter. Our U.S. coronary business grew nicely during the fourth quarter of 2022 as average daily sales increased 11% compared to the third quarter of 2022 and 65% compared to the prior year. Growth was almost entirely from sales into existing accounts as we added fewer than 90 accounts in the fourth quarter. During 2023, we plan to focus on driving coronary adoption through optimizing the structure of our sales organization, physician education and engagement, the anticipated launch of C2+ in the second half of the year and continued publications of clinical data to support the use of IVL. I’m confident that we will continue to be successful in increasing IVL penetration based on the increased utilization we saw in 2022 from the accounts we launched in 2021.

Turning to our U.S. sales force, ended the year with just about 90 territories and about 1.8 clinical specialists per territory. As noted on our last call, our hiring cadence is on pace to end 2023 with between 110 and 120 territories and over two clinical specialists per territory. We plan to add more territories in the first half of 2023 compared to the second half. Our international business generated nearly $26 million in revenue in the fourth quarter, representing 76% growth from the prior year. We continue to have strong momentum in France and the U.K., which have now been selling direct for over a year, together they grew over 30% in Q4 versus prior year. China was also a strong contributor in the fourth quarter. We expect the momentum in China to continue as we gain provincial listings and subsequent account approvals throughout 2023.

That said, the fourth quarter of 2022 and the first quarter of 2023 have been negatively impacted by the surge of COVID that occurred in China. Our international team is now comprised of more than 70 people, which is up from 40 at the end of 2021. We are selling at over 60 countries and are direct in seven of those countries. We have generated a strong return on our investments in international markets and we expect to continue that investment in 2023 and beyond. In the second quarter of this year, we plan to convert from distributors to direct sales in Spain, Portugal and Canada. In each of these countries, we expect to achieve significant revenue growth through both penetration and increased margin on direct sales versus sales through distributors.

By the end of 2023, we plan to have direct selling organizations in 11 countries including the U.S. I look forward to providing more detail on the early experience in Japan next quarter. We are very pleased with how the launch of C2 has started and are confident that Japan will be a strong growth driver. Finally, we conducted a limited launch of C2+ in Europe in the fourth quarter and are very pleased with the results. The customer feedback has been positive and the product is performing as expected. Customers reported that the additional pulses in C2+ enabled them to treat longer lesions, bifurcated lesions and lesions with nodular and eccentric calcium more effectively than with C2. Further, because of the additional pulses, customers reported using C2+ in cases that they otherwise would not have used C2, primarily because they would have been reluctant to use two C2 catheters due to the cost.

We are increasingly confident that C2+ will not only improve customer satisfaction with IVL, but also increase the adoption of IVL. We anticipate moving to a full market release in most international markets early this year. And as we do with C2, we will incorporate what we learned from our C2+ experience in Europe to shape our U.S. launch strategy. With that, I will turn the call over to Dan to review the financials.

Dan Puckett: Thank you, Isaac. Good afternoon everyone. ShockWave Medical’s revenue for the fourth quarter ended December 31, 2022 was $144 million, a 71% increase from $84.2 million in the fourth quarter of 2021. U.S. revenue was $118.3 million in the fourth quarter of 2022, an increase of 70% from $69.6 million in the fourth quarter of 2021. Coronary products contributed $82.1 million to U.S. revenue in the fourth quarter of 2022, a 62% increase from $50.7 million in the fourth quarter of 2021. The peripheral products accounted for $36 million of U.S. revenue, an increase of 94% from $18.6 million in the fourth quarter of 2021. Generators accounted for $0.2 million of U.S. revenue in the quarter. The growth in U.S. revenue was driven by increased utilization at existing accounts, new account adoption of IVL and continued sales force expansion.

International revenue was $25.7 million in the fourth quarter of 2022, representing a 76% increase from $14.6 million in the fourth quarter of 2021. International revenue from coronary products was $20.6 million in the fourth quarter of 2022, a 78% increase from $11.6 million in the fourth quarter of 2021. International revenue from peripheral products was $4.5 million in the fourth quarter of 2022, a 61% increase from $2.8 million in the fourth quarter of 2021. Generators accounted for $0.6 million in the international revenue in the fourth quarter of 2022. The increase in international revenue over the prior year period reflects continued geographic expansion, including China, growth in customer demand and growth of our direct sales force in Europe.

The increase in international revenue was partially impacted by unfavorable foreign exchange rates. Looking at product lines, our peripheral products accounted for $40.5 million of our total revenue in the fourth quarter of 2022 compared to $21.4 million in the fourth quarter of 2021, an 89% increase. Our coronary products accounted for $102.7 million of total revenue in the fourth quarter of 2022 compared to $62.3 million in the fourth quarter of 2021, representing a 65% increase. In addition, the sales of generators contributed $0.8 million in revenue for the fourth quarter of 2022, which is an increase of 58% compared to the fourth quarter of 2021. Gross profit for the fourth quarter of 2022 was $126.5 million compared to $71.5 million in the fourth quarter of 2021.

Gross margin for the fourth quarter of 2022 was 88% as compared to 85% in the fourth quarter of 2021. Improvement in gross margin was partly driven by product mix as well as continued improvement in productivity and process efficiencies. Total operating expenses for the fourth quarter of 2022 were $84.1 million, a 46% increase from $57.5 million in the fourth quarter of 2021. Sales and marketing expenses for the fourth quarter of 2022 were $43.4 million compared to $33.2 million in the fourth quarter of 2021. The increase was primarily driven by sales force expansion. R&D expenses for the fourth quarter of 2022 were $23.7 million compared to $14.7 million in the fourth quarter of 2021. The increase was primarily driven by headcount growth. General and administrative expenses for the fourth quarter of 2022 were $17 million compared to $9.6 million in the fourth quarter of 2021.

The increase was primarily driven by higher headcount to support the growth of the business. Net income for the fourth quarter of 2022 was $140.9 million compared to net income of $12.9 million in the fourth quarter of 2021. We recognized a $99 million income tax benefit in the quarter upon the release of a substantial portion of the valuation allowance related to our deferred tax assets. Basic net income per share for the period was $3.89, diluted net income per share for the period was $3.71. We ended the fourth quarter of 2022 with $304.5 million in cash, cash equivalents and short-term investments. Finally, I’d like to briefly recap some highlights from our full year 2020 results. Total revenue for the full year of 2022 was $489.7 million an increase of 107% compared to full year 2021 revenue of $237.1 million.

U.S. revenue for the full year 2022 is $407.4 million, representing a 119% increase over 2021 revenue of $186.3 million. International revenue was $82.3 million for the full year 2022 compared to $50.8 million in 2021, representing a 62% increase. Gross margin for the full year of 2022 was 87% compared to 83% in 2021. Total operating expenses were $300.6 million in 2022, an increase of 53% compared to operating expenses of $196.6 million in 2021. Total net income for the full year 2022 was $216 million compared to a net loss of $9.1 million in 2021. At this point, I’d like to turn the call back to Doug for closing comments.

Doug Godshall: Thank you all for joining us for the call today. As I look back at 2022 and what this team has accomplished, the list is quite impressive. We have some exciting things coming in the year ahead. And at the same time, our team remains focused on our core and continuing to expand the treatment of arterial calcification with our products. Thank you for your time and your continued support. And with that, we can take your questions.

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Q&A Session

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

Travis Steed: Hi, thanks for the question. Doug, I did want to ask about PCI volumes in Q1 or anything to call out in Q1 if the PCI volumes were back to normal, any of the trends to call out? And if the Street was kind of thinking about Q1 down a couple of million versus Q4, if that’s the right way to think about it? And I had a follow-up on margins after that?

Dan Puckett: Yes. As we talked — as we spoke about earlier this quarter, there was a sort of a lull in the October, November time frame that started to recover in December, I’d say, on balance, that that recovery appears to have been sustained. So we’re — I don’t know to be able to explain what happened other than sort of variable staffing seems to be one of the biggest contributors or staffing outages in the beginning of the fourth quarter, but it doesn’t — the lull in October does not seem to have carried forward into the first quarter.

Travis Steed: Okay. That’s helpful. I guess you’re not going to comment on — the Street numbers for Q1, I assume, but if you are, that would be helpful. And then the follow-up would be on margins. If you think about like, excluding the dev dilution, I just think about op margins for the base business. If 2023 is a year that you can get margin expansion or if margins are flat or down in the base business given some of the investments you’re making?

Doug Godshall: I’ll answer your first question that I didn’t answer the first time on Street. Not everybody has updated their numbers for Q1. So it’s hard to react. I think after this call, folks will be updating the numbers. We’re — we continue to see efficiency in our base business. Obviously, we’re bringing in Neovasc here in the not-too-distant future. So that will obviously not be accretive to operating margin as well we anticipate spending in the $30 million range to run that business this year. But we’re certainly pleased with what we saw in terms of the core IVL business, both gross and operating margin exiting 2022.

Travis Steed: Okay. All right. Sounds good. Thanks for the questions and follow-up.

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

Adam Maeder: Great. Good afternoon, and thank you for taking the questions. I actually wanted to start on reimbursement where there’s been some investor focus and specifically U.S. coronary with the NTAP expiring in October 1, ’23. And then the transitional pass-through payment expiry in June 1, ’24, I believe. Maybe just walk through how you’re thinking about those potential impacts on your business, if any? And with the transitional pass-through, I know you’re in the process of trying to up map your code before the TPT expires. So maybe just talk fast-forward there and level of confidence that you’ll ultimately be successful and also have a smooth transition with no reimbursement air pocket? And then I have a follow-up. Thanks.