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Edited Transcript of SWAV.OQ earnings conference call or presentation 12-May-20 8:30pm GMT

Q1 2020 Shockwave Medical Inc Earnings Call

FREMONT Jun 21, 2020 (Thomson StreetEvents) -- Edited Transcript of Shockwave Medical Inc earnings conference call or presentation Tuesday, May 12, 2020 at 8:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Daniel Puckett

ShockWave Medical, Inc. - CFO & Secretary

* Douglas E. Godshall

ShockWave Medical, Inc. - President, CEO & Director

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Conference Call Participants

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* Adam Carl Maeder

Piper Sandler & Co., Research Division - VP & Senior Research Analyst

* Cecilia E. Furlong

Canaccord Genuity Corp., Research Division - Associate

* David Ryan Lewis

Morgan Stanley, Research Division - MD

* Kevin Michael Farshchi

Wells Fargo Securities, LLC, Research Division - Associate Analyst

* Kyle Andrew Pezzi

BofA Merrill Lynch, Research Division - Analyst

* Debbie Kaster

Gilmartin Group LLC - MD

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Presentation

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Operator [1]

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Good afternoon, and welcome to ShockWave's First Quarter 2020 Earnings Conference Call. (Operator Instructions) As a reminder, this call is being recorded for replay purposes. I would now like to turn the call over to Debbie Kaster from the Gilmartin Group for a few introductory comments.

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Debbie Kaster, Gilmartin Group LLC - MD [2]

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Thank you all for participating in today's call. Joining me are Doug Godshall, President and Chief Executive Officer of ShockWave Medical; and Dan Puckett, Chief Financial Officer of ShockWave Medical.

Earlier today, ShockWave released financial results for the quarter ended March 31, 2020. A copy of the press release is available on the company's website. Before we begin, I'd like to remind you that management will make statements during this call that include forward-looking statements within the meaning of federal securities laws, which are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995.

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 and future product development and approval are based upon our current estimates and various assumptions. These statements involve material risks and uncertainties, including the impact of 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 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 time-sensitive information and is accurate only as of the live broadcast today, May 12, 2020.

And with that, I'll turn the call over to Doug.

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Douglas E. Godshall, ShockWave Medical, Inc. - President, CEO & Director [3]

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Thanks, Debbie. Good afternoon, everyone, and thank you for joining us today. I hope that all of you and those around you are healthy and are successfully navigating this challenging time. We greatly appreciate your interest in ShockWave.

Before we begin the discussion of our results, I would like to offer a few comments on the COVID-19 pandemic. We've been closely monitoring the situation, not only for the potential impact to our business, but for how it may affect our employees, physician customers, patients and the global community around us. And I want to acknowledge and thank the health care workers, so many of whom we consider our friends, who have been on the front line fighting for us all. The past couple of months have been far from normal, but the ShockWave team has demonstrated the creativity, flexibility and dedication to continue moving us forward safely with minimal disruption, which will enable us to serve our customers and their patients well into the future.

Following my update, I will turn the call over to Dan to discuss our financial results in more detail. I will then close and we will open the call for your questions.

To start, I will review our recent highlights. We reported $15.2 million in revenue for the first quarter, which was up 109% over the $7.3 million we reported in revenue in the first quarter of 2019, and we ended the quarter with $170 million in cash.

We completed enrollment in CAD III, our U.S. pivotal trial for the coronary indication in March. In early April, we completed enrollment in CAD IV, our coronary pivotal study in Japan. We made good progress expanding our U.S. field team and ended the quarter with 78 individuals in the field, up from 61 on December 31. We launched C2 in India at the India live meeting in February and received a very positive response, which is encouraging, given that there are over 0.5 million coronary interventions in India annually.

Now I would like to provide some perspectives on market dynamics. We started the first quarter at a very encouraging pace that would have landed us above pre-COVID Street consensus on both revenue and gross margin. COVID was beginning to impact procedure volumes in early March, and they slowed precipitously in almost every geography after March 13.

While some of our cases did continue, the majority were delayed or canceled. The IVL cases that were still being performed, albeit, at a reduced rate, where TAVR access and critical limb ischemia in the U.S. and urgent coronary cases internationally. The peak procedure volume for ShockWave in the U.S. appears to have been in late February. And by the second week of April, the volume bottomed out at roughly 60% below the February peak. In the second half of April and into early May, we have witnessed a modest volume return of PAD cases, but it has been extremely localized with some geographies becoming quite busy and others seeming to have no intention of restarting until late May at the earliest.

Fortunately, the conversation about ramping up elective procedures has universally gone from if to when, and we now are seeing cases scheduled for the second half of May, which is a noticeable improvement. Ultimately, our customers believe the vast majority of the patients they had planned to treat pre COVID will still receive the treatment they needed. But we anticipate it will be a few months before they can methodically work through the backlog, rebuild the pipeline of new patients and ultimately return to what one would call normal.

The early evidence in centers are beginning to restart suggest that large-bore access and critical limb ischemia, or CLI, cases return most quickly in the U.S., followed by more standard claudication cases. The fact that CLI will be top of mind for our customers is good news for our S4 below-the-knee device, which is still early in its rollout.

In addition to below-the-knee and larger bore cases, we also believe that common femoral cases are likely to pick up a bit faster since common femoral disease is often more severe, and the standard of care is surgical endarterectomy, which requires hospitalization and suffers from a reasonably high complication rate.

Generally, the ability of IVL to reduce complications, mitigate runaway costs, reduce the need for inpatient treatment and shortened length of stay is likely to be highly valued as physicians prioritize what procedures to do and decide what devices to use for those procedures.

Internationally, the impact on procedures was very similar to what we saw in the U.S. with some significant disparities as we look country to country, not unlike what we are seeing between states in the U.S. As in the U.S., the lowest procedure week appears to have been the second week of April with a modest increase week-over-week thereafter. We believe the return of procedures will also resemble the U.S. and be slow for the first couple of months as mechanisms for managing patients are sorted out, but then it will become busier, leading into and through what is ordinarily the slow summer months.

Like our U.S. PAD business, our coronary application often enables cardiologists to treat complex, calcified patients via a percutaneous outpatient approach instead of undergoing surgery and remaining in the hospital to recover. So stepping back a bit, we grew 109% in the first quarter despite the considerable COVID headwinds in March. And while the winds grew even stronger in April, we are starting to see them subside somewhat globally. And we feel that the myriad benefits of IVL that positioned us so well just 8 weeks ago are still present and will augur to our advantage as the patients return. Safe, simple and effective is a great combination in any era.

Operationally, we have continued to hire but very selectively since mid-March. And we put many new hires on hold until we had a better sense of how long and deep the procedure reductions would be and by extension, how meaningfully COVID would impact our business. As mentioned previously, at the end of March, we had 78 professionals in the field in the U.S. versus 61 at the end of 2019, which is a bit ahead of where we expected to be. We continue hiring additional field personnel, when we identify candidates to meet our very high standards, and we are still planning to end the year with more than 110 people in the field in the U.S. Our team has continued to support our customers, albeit from a polite distance, and it is great to see the strength of the relationships our team has with the clinicians. This will be critical to facilitate access to hospitals as new policies are implemented. The downtime also enabled us to conduct extensive training programs across our various applications and to train more thoroughly on our growing library of publications.

Trapping dozens of Type A sales professionals in their homes for 2 months and having them train and plan every day has not been pretty. But our team is rested, better prepared and eager to get back to serving our customers.

One of the most impressive things I've witnessed recently is the dedication and commitment shown by our operations, quality and R&D teams. They can't do their work from home. And while most of the country was hunkered down on Zoom, these groups didn't skip a beat.

Our R&D team advanced our pipeline projects at the pre COVID rate. And on the manufacturing side, we were able to cut overtime and yet output actually increased in April. The extra inventory we have built gives us a helpful cushion if demand returns rapidly or should our new clean room take longer to permit and build than we are expecting.

Turning now to clinical and regulatory. We were very fortunate to be able to make considerable progress with our key trials this year. Starting with CAD III, our U.S. coronary IDE. As of the end of the quarter, we had enrolled 384 patients, and we only needed 372 evaluable patients to satisfy the prespecified statistical plan in our protocol. The FDA agreed that we could submit with at least 372 patients, and we are now working with sites to follow-up on the last handful of patients, monitor the data and prepare the final module of the PMA.

Based on our current work plan, we continue to anticipate a third quarter submission and a 6-month review by FDA, which would lead to U.S. approval in the first quarter of 2021.

CAD IV, our trial in Japan, also completed enrollment. And to the credit of our investigators, they were able to enroll through the COVID escalation. We will be working with our sites and PMDA to stay on track with our submission and approval time lines, which continues to suggest a mid-2022 approval in Japan.

On the peripheral study side, the Pad III trial, both registry and randomized arms, were initiated in order to help demonstrate the utility of IVL and to develop the market for the device. The registry arm of Pad III has enrolled over 1,200 patients. We now have a considerable cohort of patients in the study treated above-the-knee with our M5 device. So we have elected to narrow the focus and will now only be including patients treated with the S4 going forward.

The randomized arm of Pad III was just starting to come back online following a DCB debacle, but then COVID arrived and the trial was disrupted again. We have taken advantage of this opportunity to reassess how to approach the study and determine whether a different strategy is warranted given the considerable resources it requires and the challenges of managing studies during COVID. The goal of PAD III was to statistically validate what we see in the clinic every day: that IVL delivers excellent lumen gain with minimal dissections and reduces the need for stents. We believe the outcomes from this study will be helpful to our commercial team. So we discussed the idea of stopping the trial with our principal investigators and collectively decided to do so after the final prescheduled cases are completed this week.

We will begin the process of data lock and then map out when the results of the trial will be presented, likely early next year. We are pleased to have enrolled over 300 patients in a rigorous, randomized, controlled study and appreciate the effort of the investigators.

As we look to move through the next phase and our customers return to treat the patients, it is important to note that through these challenging months, we have held steadfast. And we'll continue to maintain our focus on our organizational priorities to provide a safe, productive environment for our employees; to optimally serve our customers and their patients; to continue to generate clinical data to demonstrate the unique benefits of IVL; to prepare for a near and long-term growth by thoughtfully investing in expanded capacity and enhanced capabilities; and to advance the next wave of innovations to further expand the addressable markets for IVL. With that, I will turn the call to Dan.

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Daniel Puckett, ShockWave Medical, Inc. - CFO & Secretary [4]

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Thank you, Doug. Good afternoon, everyone. ShockWave Medical's revenue for the 3 months ended March 31, 2020, was $15.2 million, a 109% increase from the $7.3 million in the same period of the prior year. U.S. revenue was $7.8 million in the first quarter of 2020, representing 114% increase from the same period of last year. This increase was driven by continued sales force expansion into new territories and increased adoption of our products. International revenue was $7.4 million, growing 104% from the same period of last year. Our international growth was driven by continued penetration in our established markets, combined with geographic expansion.

Looking at our product lines, our peripheral products M5 and S4 accounted for $9.1 million of the total revenue in the first quarter of this year compared to $4.4 million in the same period of 2019, a 105% increase.

Our coronary product, C2, accounted for $5.8 million of the total revenue in the first quarter of this year compared to $2.7 million in the same period of last year, representing 117% increase. All of our C2 revenue is currently international.

In addition, the sales of generators in sterile sleeves contributed $300,000 in revenue in the first quarter of 2020 compared to $200,000 in the same quarter last year.

Gross profit for the first quarter of 2020 was $9.5 million compared to $4.2 million in the first quarter of 2019. Gross margin for the first quarter of 2020 was 63% as compared to 58% in the same period of last year.

Contributors to gross margin improvement included continued improvements in production processes to drive efficiencies and greater absorption of fixed costs from increased production.

Total operating expenses for the period were $28.5 million, a 74% increase from $16.4 million in the same quarter last year. R&D expenses were $11.9 million compared to $7.5 million in the same period of last year. The increase is primarily driven by clinical study costs for CAD III IDE and CAD IV Japan and increases for R&D headcount and programs.

Sales and marketing expenses were $10.4 million in the first quarter of this year compared to $5.9 million in the same period of prior year. The increase was driven by sales force expansion in the U.S. and internationally.

General and administrative expenses for the first quarter of 2020 were $6.2 million compared to $3 million of the same period last year. The increase was primarily due to expenses associated with being a public company and legal costs related to the IPRs. There are obviously many expenses that we will not realize as travel, trade shows and some trials are delayed or canceled. And these reductions in spending in some areas have given us the ability to continue investing in other areas, such as inventory build and product development, while, most importantly, maintaining our valuable workforce and our financial security. While we are not able to precisely predict the impact of COVID-19 on our business in the near term, we do know demand is being affected in the second quarter, and therefore, anticipate margins will come down in the quarter due to continued fixed costs allocated over decreased product revenue. We then expect a gradual recovery through the third and into the fourth quarter of 2020.

Net loss for the first quarter of 2020 was $18.8 million compared to a net loss of $12.8 million in the same period of last year.

Net loss per share for the period was $0.59.

During the quarter, we spent $4.7 million in capital expenditures, including $4 million for the buildout of our new facility next door to our existing facility in Santa Clara, which we leased in the fourth quarter of 2019 to facilitate the expansion of production lab space in our existing building and we ended the quarter with $170.4 million in cash, cash equivalents and short-term investments. As we announced last month, given the uncertainty around the global environment and economy, we've withdrawn our revenue guidance for 2020 fiscal year, and we'll revisit the topic when appropriate. We are confident in the proactive measures we have taken as a company to address the pandemic and its impact on our health, our business and our overall well-being, including restricting travel and requiring all but exempt employees to work from home. We will continue to monitor the external environment to ensure we manage the business in a fiscally prudent manner, and we have identified multiple levers that we can pull to slow down our spending should the procedure ramp be slower than we expect.

Our employees and technology are our 2 most important assets, and our strong cash position is an asset we are extremely fortunate to have and one that we do not take for granted.

We are running our business during this unprecedented time with a keen eye on all 3 of these essential pillars as we continue to build for the future.

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

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Douglas E. Godshall, ShockWave Medical, Inc. - President, CEO & Director [5]

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Thanks, Dan. We know these are uncertain times for us. And I want to assure you that we are dedicated to doing our part to support the health and wellness of our team, our customers and their patients as we continue our effort to transform the treatment of complex calcified cardiovascular disease.

Like everyone else, we've spent the past 3 months geographically separated and spending way too much time looking at one of those faces on our computer screen. And yet our team has come together and have demonstrated that they can execute in service of our customers despite considerable adversity.

I'm fortunate and proud to be associated with such an impressive group and such a remarkable technology. Thank you all again for your support and for taking the time to join us today. Take care of yourselves and be well. With that, I'd like to open the line to questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions)

Our first question comes from David Lewis with Morgan Stanley.

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David Ryan Lewis, Morgan Stanley, Research Division - MD [2]

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Congrats on a kind of solid quarter given the environment. Just a couple for me, Doug and Dan. Just starting off, Doug, you talked about sort of which procedure subsets or which vessel beds are more durable than others. I wonder if you think about access and SFA more broadly, do you think both those vessel beds came it back to some sense of normalcy by fourth quarter?

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Douglas E. Godshall, ShockWave Medical, Inc. - President, CEO & Director [3]

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Yes. Thanks, David. I think the access will go -- will come faster because it's being driven by EVAR, TVAR and TAVR, all of which will rate fairly high as physicians are trying to figure out which patients to prioritize and which patients are choosing to get treated. SFA standard claudication we think, will be sort of as you think about all the vessels we treat, that will probably be the one that takes a little bit longer because it's leg pain it's not leg salvage. Interestingly, when vessel, I didn't really talk about much in -- well, at all in our script was not just iliac for access, but iliac symptomatic. That remained surprisingly durable, has remained surprisingly durable as a percentage of our cases. So probably because we're -- it's the inflow for the legs. And if you've got to treat it, you got to treat it. So we think in order of sort of sequencing, it will be access cases, critical limb ischemia, then common femoral and iliac and then the laggard will be SFA.

It will feel more normal in the sort of late third quarter into the fourth quarter, we think, unless there's a severe double dip or something like that, that we're not anticipating. But it's -- but will SFA be all the way back to where it was at its peak in terms of total procedures? Not likely until the fourth quarter and -- but hopefully, in the fourth quarter, it is.

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David Ryan Lewis, Morgan Stanley, Research Division - MD [4]

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Okay. Very clear. And just 2 quick ones for me as well. So one, you mentioned some pricing commentary, Doug. It's interesting, a lot of med tech companies aren't talking about the impact of COVID on pricing. So any specific reason why we should be thinking about pricing for your business? Or was that just abundance of caution? And does Pad III still get you those -- given that's being stopped, does it still gets you what you intended at Pad III? And then just a nonrelated question on coronary, you kind of indicated you still hired the same number of reps by the end of the year, at 110. So should we think about the coronary launch, not talking about the quantification, but just qualitatively, whatever the coronary launch was supposed to do in 2021, do you still think you can sort of deliver that type of number? Or is it impacted at all by the pacing of rep hiring this year?

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Douglas E. Godshall, ShockWave Medical, Inc. - President, CEO & Director [5]

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Yes. I think -- we're not seeing any effect on pricing. But there are a lot of things that have changed in the world on a daily, weekly basis that we hadn't anticipated. So just out of an abundance of caution, we -- there are things that could change in the future that we're not anticipating. And certainly, our pricing has been remarkably stable since our launch. Our price in the U.S. has not budged an inch and we don't anticipate it will. And internationally, pricing is just a little more varied because you got the distributor margins and the like. So we are not expecting any impact on price as a result of COVID. We treat patients generally for whom other options are not great. We can do it safer, more effectively and more simply than other options, particularly in cases like large-bore access and coronaries and the like. So no expectation for pricing change. In terms of rep hiring, we were looking at sort of a normal distribution this year centered around the middle of the year in terms of hiring, ramping up in the first quarter with a bolus of hires in the second, third and then tailing off in the fourth. I would say it's going to skew now. It will skew third, fourth. We did better than expected in the first quarter. So we got a head start. We are sort of every week or so, we look at where we believe cases are coming back online and where we're stretched a little thin. And we agree, okay, let's go target a clinical specialist in that area or a territory manager in that area. So our -- we're filling our roster just a little bit more selectively versus having a big training tech class of 10, 15 people at a time. We have not altered our expectations for next year. We are fortunate. We've attracted some incredibly talented folks, and we'll get them a little bit later. So they'll have to catch up faster, but we fully expect we'll have full capability in time for the coronary launch. And we are already hearing that coronaries are starting to come back a bit, talking to my friends who are currently selling coronary devices. They're seeing a rebirth after the sort of strange pause from STEMI. We're expecting to come back online here in coming months in Europe for coronaries, and we expect it will be full back online and more like it has been traditionally once we get approved next year.

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Operator [6]

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Our next question will come from Robert Hopkins with Bank of America.

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Kyle Andrew Pezzi, BofA Merrill Lynch, Research Division - Analyst [7]

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This is Kyle Pezzi on for Bob. I just have 2 quick questions. I just wanted to get a sense, I may have missed this earlier, but has the rollout of BTK been impacted at all by COVID? And just wanted to get some broader viewpoints on how we should think about how you're conducting your market development efforts more broadly in light of COVID, and how much you think the current environment will set you back as you grow into 2021 and beyond?

And then just have 1 quick follow-up after that.

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Douglas E. Godshall, ShockWave Medical, Inc. - President, CEO & Director [8]

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Sure. Yes. The -- well, certainly we all, as an industry, have been impacted by the challenges faced by our customers, first and foremost, and their ability to manage their facilities and do their -- do cases when they can, et cetera. And our ability to, therefore, access the accounts has been challenged just like everybody else has been, which doesn't help when you're in the middle of launching a product like we are with S4. So we've supported tactfully, carefully, when invited. We have still covered cases through COVID, but obviously, at a greatly reduced rate. So it certainly has not -- it's not been an accelerant to our launch by a stretch. What it did -- has done is it's given us an opportunity to share best practices for the territory managers who had been particularly successful at launching S4, and we've had opportunity for the sales and marketing leadership to conduct even deeper level dives on critical limb ischemia and S4 and the opportunities to -- and ways to share the benefits of that technology with our customers. So as we reemerge from the shutdown collectively as a society, I think we are better positioned now, frankly, for the S4 continued rollout than we were before because we've taken advantage of the downtime.

In terms of market development beyond S4, it's hard to get new customers opened and get through VAC committees when VAC committees aren't meeting. So it has slowed some of our new customer acquisition expectations as I'm sure it has with everybody. But we are hearing that VAC committees are starting to reemerge, and we're starting to get onto agendas for VAC committees. And we aren't hearing that there's, at least at this juncture, that there's a change of approach from the committees. And we think that our lead with large-bore access will continue to augur well to our benefit. And frankly, probably will be even more appealing, because if you now have an option of doing an alternative access and keeping a patient in the hospital for a couple of days or you ShockWave pre-TAVR, it's even more obvious now that for hospital, patient, physician, getting the patient in and out with a Sapien or what have you, is a whole lot more attractive than hanging around the hospital for a couple of days. So that applies to, frankly, our application in almost every anatomy.

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Kyle Andrew Pezzi, BofA Merrill Lynch, Research Division - Analyst [9]

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Got it. That's helpful. And then just 1 quick follow-up. Obviously, a lot has changed in the last few months. And on the Q4 call, you had talked a little bit about reimbursement. Just wanted to get the latest update there. I know that's a couple of years away, but just want to make sure we've got your latest views on that. And if anything's changed as a result of Pad III or anything like that? I know it's obviously a couple of years away, but I just want to get your views.

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Douglas E. Godshall, ShockWave Medical, Inc. - President, CEO & Director [10]

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Yes. So we're, as best we can, maintaining contact with the societies that are -- have been tasked with coming up with a new basket of the lower extremity codes. And they, like everybody else, have been in a bit of a pause. It is our -- it continues to be our expectation that there will be a new set of codes, CPT codes proposed for later this year. They were asked last year to come up with the codes, and they've been debating amongst the 4 societies as to what that basket should look like. It seems likely that they'll do that in the June time frame, although I don't have certainty that they would do that, but that would put them in line for the fall CPT meetings. As best I can tell, listening to the societies, they don't think it will lead to a new approved set of codes next October of 2021, which is why we suggested, we think whatever the new basket of codes are, it's most likely to go into effect at the end of 2022, which would be for the fiscal year 2023. And again, I can't give any assurance that we will be in that basket. It's encouraging that a growing number of members of all of the societies seem quite favorably predisposed towards ShockWave and want to be able to use it more and think that if payment were a little bit better, they could -- it would benefit them and their patients and their centers. So we seem to have a lot of support, which, again, no guarantees. But thus far, the societies seem to be engaged and trying as best they can remotely to come up with a consensus proposal to give to AMA for the CPT process.

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Operator [11]

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Our next question will come from Larry Biegelsen with Wells Fargo.

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Kevin Michael Farshchi, Wells Fargo Securities, LLC, Research Division - Associate Analyst [12]

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This is Kevin on for Larry. First, just have 1 on the clinical front, and then I had a follow-up on the P&L. So Doug, on coronary, you mentioned you're on track to submit in Q3. You obviously completed enrollment and announced that. My question is, when do you expect you will release the data of that trial? And then I'll hold for the follow-up.

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Douglas E. Godshall, ShockWave Medical, Inc. - President, CEO & Director [13]

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Yes. So assuming there is something that resembles TCT this year, whether that's a live meeting we go to and sitting in halls and listen to presentations or it's a remote meeting like so many are becoming, our target is to have the data presented at TCT this fall.

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Kevin Michael Farshchi, Wells Fargo Securities, LLC, Research Division - Associate Analyst [14]

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Okay. Perfect. And then on the P&L front, obviously, in light of the reduced revenues, any thoughts specifically on gross margin and operating expenses in Q2 and the second half of 2020. On the OpEx front, it looks like those levels came up sequentially in the quarter, largely due to the hires. And then secondly, as you think about your cash position in the coming quarters, do you feel like you have enough to weather the storm and reach profitability with what you have today?

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Douglas E. Godshall, ShockWave Medical, Inc. - President, CEO & Director [15]

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I'll -- maybe I'll tag team with Dan on this as best as we can. So on gross margin near term, given the meaningful slowdown in procedures, which will translate into, obviously, a slowdown in revenues in the current time frame, as we described, that will not have a positive impact on our gross margin. So it'll come down.

In terms of our -- and Dan, I'll let you walk through OpEx a bit. In terms of our expectation on the cash position, fortunately, we had tremendous support last year, both in the IPO and our follow-on financing, and we didn't appreciate how timely that follow-on offering was, but obviously, in hindsight, we were really lucky to be in a position to raise the extra money last year and find ourselves with, at the end of March, $170 million in cash. And a lot of future spend on things like new clinical trials that we're thinking about doing next year and trade shows and other items that are desirable to spend money on. We think they're the right thing to spend money on. But if for some reason, we are in a position where, hey, we should slow down our spend to preserve cash a little bit. We've got over a dozen different sort of discretionary spend items that we've identified that if we had to, hey, we could slow down, push off spend a little bit, slow down some hires in areas outside of like the sales team where we could be a little bit more conservative on cash and then further extend our runway. So we're -- we feel fortunate to be in such a strong cash position at this juncture and think it will last well into the future. And Dan on [operating expenditures].

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Daniel Puckett, ShockWave Medical, Inc. - CFO & Secretary [16]

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Sure. I'll add on -- and to Doug's point on Q2 on the gross margin. We got some costs and other cost of goods sold that don't get put on the balance sheet and they'll flow through and that will impact the margin, as alluded to earlier, somewhat in Q2. And then we expect things to improve and drive more favorably as the year goes on. On OpEx, as I alluded to on the script, we've got some costs that have naturally fallen out, given the slowdown, travel trade shows and conferences. And so those are going to not be reoccurring for the most part in the near term. We've got some natural hedges. So on OpEx, I wouldn't expect a lot of growth on the OpEx for the rest of the year. We're still going to be adding salespeople as appropriate, building out the commercial funding, our critical programs. I mean we're still maintaining our critical functions and initiatives. And so we're not backing off there, but we've got some natural hedges, but I would not expect the OpEx to step up considerably as the year goes on, given some of the natural hedges we've got.

Hopefully that helps.

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Operator [17]

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Our next question will come from Cecilia Furlong with Canaccord Genuity.

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Cecilia E. Furlong, Canaccord Genuity Corp., Research Division - Associate [18]

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I wanted to ask, I guess, first off, just what you're seeing in centers through COVID using IVL to facilitate transfemoral TAVR access. Just what this has done to drive awareness of IVL generally, and how you view this positioning coming out of this on the other side?

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Douglas E. Godshall, ShockWave Medical, Inc. - President, CEO & Director [19]

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Yes. The -- certainly for the sort of immediate time frame that we've been living through for the past 8 weeks or so, TAVR access in the U.S. has been a very large percentage of our cases relative to the norm. It's not half of our cases by any stretch, but it's an important core procedure base. Because you're still doing TAVR on the sort of emergent elective kind of a patient, where you really need to get the TAVR done. You really don't want to keep the patient in the hospital overnight, so you ShockWave to open up the iliac. It's that same logic that has enabled that large-bore TAVR access to be our lead sales pitch or strategy for getting hospitals interested in ShockWave. If they're doing TAVR, almost everybody, once they think about it realizes there's no downside to using ShockWave, and there's a lot of upside to using ShockWave pre-TAVR. We would expect, and certainly, we've been working with our sales team to think about how do we further accelerate and that TAVR access strategy, so that everyone who's doing TAVR is using ShockWave when appropriate for those cases. We've recently brought on a couple of really strong sales leaders from one of the larger companies that sells a TAVR device. And they're thinking hard about, okay, how would I how can we take advantage of our very recent experience in that TAVR space to help further accelerate Shockwave nationally in TAVR accounts. So we anticipate it will still be the one of the main first-line appeals to the VAC committees and hospitals that we can reduce applications, reduce length of stay, improve outcomes for patients getting TAVRs or EVARs or TVARs. And so it's critical in the U.S.; it is still early stage internationally. But internationally, there's an obviousness that this would be advantageous to the patient just like it's obvious to the U.S. customers.

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Cecilia E. Furlong, Canaccord Genuity Corp., Research Division - Associate [20]

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Great. And then if I could also ask just what the 2.5 millimeter S4. What you saw pre COVID just in terms of making people more comfortable and driving volume and then coming out on the other side as well? Just kind of how you build off of this with CLI and just ramp to the back of the year?

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Douglas E. Godshall, ShockWave Medical, Inc. - President, CEO & Director [21]

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Yes. And by the way, life post-Jason, nice to hear you directly Cecilia. So the -- I mean, it would have been possible, but challenging to continue picking up new accounts with S4 without the 2.5. It's so obviously a -- provides comfort to the physician to have the smaller device. They -- it's probably just as safe to use the 3-millimeter. But in their minds, it's not as safe because that's how they've been trained. So if we only launch the 3, the 3.5 and the 4.0, it would have ultimately been successful, but arguably maybe less successful than having the 2.5. Just -- it's a little bit of pushing water uphill if you're treating a 2 to 2.5 millimeter vessel. It's hard to convince yourself, you should use a bigger balloon when you've had bad experiences using bigger balloons on those vessels with higher pressure balloons. So it enabled us to sort of continue the rollout. And it's not like there was a step function change because it got approved -- or we approved its launch once we had finished the limited launch. That all happened in the fall. So it was only staggered off by maybe 6 weeks from the rest of the launch, 4 to 6 weeks. So there wasn't a long runway pre 2.5 millimeter. I think having the full 4 sizes will be -- will enable us as critical limb ischemia cases come back online, probably a little sooner than the SFA, as I said earlier, it's -- we're going to be glad to have the 2.5, let's just say that.

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Operator [22]

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Today's final question will come from Adam Maeder with Piper Sandler.

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Adam Carl Maeder, Piper Sandler & Co., Research Division - VP & Senior Research Analyst [23]

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Congrats on the solid start to the year. And maybe to start, just a bigger picture question on BTK now that you're about, I think, [6 months] to launch here in the U.S. How do you think about the longer-term opportunity and the commercial ramp of below-the-knee versus coronary and above-the-knee? And just curious if you could maybe force those 3 applications in terms of potential uptake?

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Douglas E. Godshall, ShockWave Medical, Inc. - President, CEO & Director [24]

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Sure. So coronary, we don't have in the U.S., but it will be -- we certainly believe that it will be the most rapid uptake, certainly has been internationally. There's just an obviousness when you -- once you have our C2 device in your hands, you find all sorts of patients who you were previously either sending to surgery or treating suboptimally with underdeployed stents or trying to manage these complex patients with tools that aren't really designed to treat the different vessels we can treat in coronaries. So that will be the fastest, we believe. And that's why we're looking to staff up those substantially to prepare for that launch early next year.

Second would be the large-bore access. Again, it's just obvious.

Third, surprisingly, to me at least, because I hadn't predicted it is symptomatic iliacs. There's just nothing really good to treat those vessels other than a covered stent and a high-pressure balloon inside of a covered stent to try to avoid rupture, major dissection, potential disaster for patient and physician and the sort of elegant safety of ShockWave really resonates in the iliacs. And then I'd say, it's sort of common femoral and below-the-knee. Again, 2 vessels where not great options for a lot of these patients with a lot of calcium in both of those. Below-the-knee, the cases are a little bit longer, and there are fewer cases than, say, in the iliacs.

So that's maybe one of the reasons why iliacs has been so encouraging for us. But the safety below-the-knee, the ability to avoid dissection, the ability to treat bifurcated lesions, avoid embolic debris, are all so clearly spot on for that below-the-knee target that we certainly expect that, that is going to be a real vital part of our business going forward. And again, in this era, as patients coming back are coming back because they really need a procedure done because they're at risk of having their foot amputated. We're eager to get back out and sort of get the launch back up rolling because we were, as you pointed out, we were well in -- we were getting well into it, and then we sort of got stunted by COVID as everybody did.

So we're -- the diversity of vessels, even though it's M5 and S4, it's 2 products, but it's so many different applications. And that sort of the richness of those different applications we expect will play off of each other very nicely as we continue to roll out. And we're -- what we're not going to do is we're not going to say, okay, you must sell -- 50% of your business has to be S4 and 50% of your business has to be M5 in part because it's going to vary a bit by territory. Do you have a lot of below-the-knee business going in your territory? Then you'll be able to take advantage of it if you're maybe a big TAVR territory, you're probably going to buy us a little bit more towards TAVR until you have that fully penetrated, et cetera. So it's nice to have a bit of a portfolio of products and a portfolio of applications of those products.

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Adam Carl Maeder, Piper Sandler & Co., Research Division - VP & Senior Research Analyst [25]

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Okay. I appreciate all that color, Doug. And then for just a follow-up. On CAD III, it sounds like TCT is the likely venue there. But just on the data itself, how should investors think about any potential clinical data risk with that study? I know we've seen other coronary data sets that look strong, and the OUS coronary business has obviously done very well. So is it fair to assume that you view the data risk to be very low? And then just what do you think the data needs to show to drive strong adoption with U.S. clinicians?

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Douglas E. Godshall, ShockWave Medical, Inc. - President, CEO & Director [26]

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Sure. So the -- our expectation is that given the consistency of what we see both commercially as well as our CAD I and CADII studies and dozens of publications that others have done using our device. I think we will demonstrate that our device is very safe in the coronaries. What we've -- remarkably in CAD I and CAD II, we only had Non-Q-wave MIs as our MACE. And Non-Q-wave MIs, you get those sometimes just by temporarily shutting off a side branch. And then the side branch comes back on after you deploy a stent. So they are transient, by definition. And not something that a clinician would ordinarily pick up on outside of a trial. So very minor complications. With more patients in our study, obviously, pushing 400, it seems likely that you'll have some other phenomenon just because you're -- anytime you wire somebody's coronary arteries, you're going to have a risk of some events. But we would expect if we are comfortably below a 10% MACE rate as we have been in CAD I and CAD II, that, that would be the kind of results that our physicians would be hoping to see. If we have any events outside of Non-Q waves, if they're a very small number, then I think that's what physicians would expect. And given the widespread awareness of IVL in the coronaries, and that's what I perceive to be a fairly high pent-up demand. I think as long as we cross those -- that sort of very safe threshold as we have in the past. It's already sort of well understood for the -- as its potential benefit for a wide array of patients who are either not getting atherectomy, can't get atherectomy, have left main disease where you don't know what to do as a physician, et cetera. I think we'll be in very good shape with those kind of results. The sort of residual stenosis result, which sort of an afterthought in our trial, sort of less than 50% residual is -- that's not a factor that anybody is going to look at because once you put a stent in, you're going to cross that threshold. So we're going to be measured by safety, and we certainly expect that we will demonstrate that safety.

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Operator [27]

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Ladies and gentlemen, thank you for participating in today's question-and-answer session. I would now like to turn the call back over to management for any further remarks.

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Douglas E. Godshall, ShockWave Medical, Inc. - President, CEO & Director [28]

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Thank you, operator, and thanks, everybody, for taking the time. I know these are trying times and we've had a lot of distractions over the past couple of months. I can't tell you how much I appreciate the support of our investors. But most importantly, the support of our customers and our employees. We're in a really fortunate place as a team with a lot of work yet to do and a lot of patients that we need to take care of. So thanks again, and we'll speak to everybody soon.

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Operator [29]

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Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.