ShockWave Medical, Inc. (NASDAQ:SWAV) Q3 2023 Earnings Call Transcript November 6, 2023
ShockWave Medical, Inc. beats earnings expectations. Reported EPS is $0.92, expectations were $0.81.
Operator: Good afternoon and welcome to Shockwave’s Third Quarter 2023 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, 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 its financial results for the quarter ended September 30, 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 facts are forward-looking statements.
All forward-looking statements, including, without limitation, statements related to our sales and operating trends, business and hiring prospects, financial and revenue expectations, reimbursement proposals, future product development and approvals in the integration of Neovasc and its technologies into our business are based upon our current estimates and various assumptions. These statements involve material risks and uncertainties, including the impact of macroeconomic conditions and global events, such as the COVID-19 pandemic that could cause actual results or events to materially differ from those interpreted 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, November 6, 2023. And with that, I will turn the call over to Doug.
Doug Godshall: Thanks, Debbie. Good afternoon, everyone and thank you for taking the time to join us to review Shockwave’s results for the third quarter of 2023. Our comments will be fairly brief today since we just had our Innovation Day a couple of weeks ago. Third quarter revenue of $186 million represented a 42% increase from the third quarter of 2022. We had a strong quarter led by our global coronary franchise. Revenue from our coronary products grew almost 50% from a year ago, while revenue from our peripheral products grew roughly 30% from the third quarter of 2022. Our global coronary results in the quarter exceeded our expectations. Isaac will be covering details regarding the U.S. launch of the new coronary device C2+, but we are increasingly enthusiastic about the impact that device will have in the U.S. We had very strong coronary results in our international markets, and that is partially attributable to the momentum that C2+ has created.
We think this is a harbinger of what to expect in the U.S. We have seen an encouraging response to this product during the limited launch phase and we are consistently hearing about the benefits of being able to treat long, diffuse and eccentric lesions that C2 would have been too limited to treat, a really solid new product. Revenue from our U.S. peripheral business in the third quarter was up 31% from a year ago, solid growth though lower than we had expected as we didn’t witness the usual procedure rebound that we have seen historically in September. One recent phenomenon that coincidentally started in September is an increased level of preauthorization pressure from private payers, particularly Aetna, which delays procedures. This is particularly the case for patients being treated for claudication or leg pain.
We have been seeing this in the field and heard it often at TCT and Veeva. Fortunately, our launches of E8 and JAVELIN are on the near-term horizon and the below-the-knee segment is primarily comprised of critical limb ischemia patients, who have a more acute clinical need, so they should be less subject to prior authorization pressure if the payers continue their policies that long. As we said at the Innovation Day, we are confident in the long-term growth of our U.S. peripheral business, driven by meaningful new product launches every year and access to an expanded number of procedures that are performed in the OBL once a new CPT code is established. Regarding international business, it should be evident from our results that the team has done a great job identifying areas where Shockwave is underutilized.
Our strategy of going direct is paying off well and complements the strong momentum we are seeing in Japan and Germany, as we have discussed previously. We have reviewed the reducer at some length recently and the interest level and response to TCT once again reinforced how sizable this opportunity is going to be for us. We had over 100 physicians at 10-day Reducer symposium, which is a great sign for a product that is only in clinical trials in the U.S. We have continued our efforts to enhance the performance of the Reducer program and after a talent infusion into the clinical team we are now working to upgrade performance in the European commercial operation. The team in the UK is executing very well and we are restructuring the French and German teams to ensure we can deliver Shockwave like support of our customers in those countries.
We have a new leader in Germany, who will rebuild the sales team and will do the same in France. Touching quickly on some of our clinical trial activity, our Shock India trial has enrolled over 1,000 patients in 18 months across over 50 sites in India. This represents the largest real-world coronary IVL evidence to-date. 30-day data was just presented at TCT last month and again demonstrated consistent safety and effectiveness in the real world as we have seen in our pre-market studies despite being more complex patients and lesions. Our BTK 2 trial is enrolling briskly, and we anticipate completing our 250-patient enrollment this quarter. And lastly, EMPOWER, which is examining the impact of PCI outcomes and the use of IVL in female patients with calcified coronary artery disease is enrolling ahead of schedule.
As a reminder, we are targeting total enrollment of 400 subjects across 50 global sites by mid-2025. And finally, on reimbursement. Just last week as part of the calendar year 2024 Physician Fee Schedule final rule, CMS confirmed a Category 1 CPT add-on code for procedures involving coronary intravascular lithotripsy which will become effective January 1, 2024. This means that physicians will now be paid approximately $140 when they perform IVL in addition to the remuneration they received for performing PCIs. This represents a 20% to 30% increase in physician reimbursement. Isaac will cover China in more detail, but we did see an impact to our business in the third quarter due to the anticorruption campaign and we expect that to continue over the next few quarters.
Overall, we are pleased with the performance of our business and despite a reduced forecast for China which assumes roughly $10 million less revenue in the second half of this year compared to our prior forecast and a slightly more cautious view of near-term peripheral growth in the U.S., we still anticipate top line revenue in the range of $725 million to $730 million for the full year of 2023, representing growth of 48% to 49% from 2022. Regarding 2024, we will provide formal guidance on our fourth quarter call, but we remain comfortable with the current consensus of $920 million. With that, I will turn the call over to Isaac to provide more color on the commercial front. Isaac?
Isaac Zacharias: Thank you, Doug. I am pleased with the team’s efforts and results in Q3. Revenue from our U.S. peripheral business in Q3 was up 31% from a year ago and slightly down from Q2 of this year due to Q3 seasonality and the new insurance hurdles Doug mentioned. We completed the launch of L6 in the quarter and expect that the number of new centers adopting L6 will increase slowly going forward. Q3 was strong for our U.S. coronary business. Revenue grew 34% compared to Q3 of 2022 and 5% sequentially from Q2 of this year. Overall, 99% of this revenue was from existing accounts. We shifted focus of the U.S. team in September from the L6 to the C2+ launch. We initiated the limited market release of our new C2+ product and are very pleased with the early results.
There is a lot of excitement around the product and the feedback we have received in the U.S. about C2+ nears what our international customers told us. Of note, they appreciate the extra 40 pulses and have commented that the outcomes in longer diffuse lesions, eccentric lesions and calcified nodules have improved from good to great. These are lesion types that some customers were reluctant to use C2 on because they weren’t confident that they could be effectively treated with only 80 pulses. As a reminder, the three new DRGs for inpatient PCI went into effect on October 1. As we have said in the past, when reimbursement for IVL procedures has increased, the impact to our growth is steady and gradual. It is not a light switch. We expect to see tailwinds from this change throughout next year and into 2025.
We are on schedule to grow the sales force in the U.S. to over 110 territories by the end of this year and we will have about two clinical specialists per territory. On the international side, we are pleased to report revenue that was 88% higher than Q3 of 2022 and up 11% sequentially from Q2 of this year. As Doug said earlier, the performance of our international coronary business exceeded our expectations. This was a result of the strength in the five large European markets of Germany, UK, Italy, Spain and France. I will highlight our coronary business in Germany, which continues to expand rapidly, thanks to the increased reimbursement that started in January. The German team delivered coronary growth of nearly 200% in Q3 compared to Q3 of 2022 and over 20% sequentially versus Q2 despite seasonality.
This sustained performance demonstrates the long tailwind we see for revenue growth when reimbursement increases. We began selling direct in Italy in October. And looking ahead to Q4 and 2024, we expect that the focus of our sales team in Italy will help drive more penetration, which is what we’ve seen in other markets as we transition from a strong distributor to a strong direct sales team. We appreciate the long partnership we have had with our Italian distributor, Innova, and note that their performance in both coronary and peripheral IVL was excellent. They are a top tier distribution partner. I’d be remiss not to mention how pleased I am with our Canadian sales team, which went live in Q2. They are small, but mighty and are delivering great growth in the Great White North bay.
The strength of our international coronary business in Q3 is a testament to the positive response our customers have to C2+ and gives us confidence that the U.S. launch will be a strong tailwind for coronary growth next year. In Japan, we had another great quarter. Penetration in our launched accounts continues to exceed our expectations, and our team is doing a great job ramping up physician training and peer-to-peer educational programs. We launched 200 accounts this year through Q3 and anticipate launching another 100 accounts in Q4. Again, excellent performance in the first 3 quarters of the Japan launch. Finally, as Doug noted on China, we are in close touch with our JV partner, Genesis MedTech and continue to monitor how the current element anticorruption campaign will impact our business.
The ongoing dynamic for adopting newer procedures and newer technology is one of caution. Obviously, IVL falls into the category of newer technology with new costs to the hospitals and patients. Most customers and hospitals are postponing the adoption of new technology during this time, and we expect that to continue as the anticorruption campaign continues. In short, products and procedures long established in China do not seem to be impacted nearly as much as new procedures, technology or capital equipment. This has resulted in a sharp decline in the number of new accounts adopting IVL. This is meaningful since we are in the early stages of getting the product on provincial listings and then listed within each hospital in the province. We expect new site launches will start up again, when the anticorruption campaign completes its work in each province and hospital.
As a result, the JV purchased approximately 20% less in Q3 than we had previously forecasted. And as Doug said, we are now forecasting meaningfully reduced sales to the JV in Q4. With that, I will turn the call to Dan to review the financials.
Dan Puckett: Thank you, Isaac. Good afternoon, everyone. Shockwave Medical’s revenue for the third quarter ended September 30, 2023, was $186 million, a 42% increase from $131.3 million in the third quarter of 2022. U.S. revenue was $146.9 million in the third quarter of 2023, an increase of 33% from $110.5 million in the third quarter of 2022. Coronary products contributed $103.6 million to U.S. revenue in the third quarter of 2023 and an increase of 34% from $77.3 million in the third quarter of 2022. U.S. revenue from our peripheral products was $43.1 million in the third quarter of 2023 and an increase of 31% from $32.9 million in the third quarter of 2022. U.S. generated revenue was $0.2 million in the third quarter of 2023.
The growth of U.S. revenue during the quarter reflects increased utilization at existing accounts, new account adoption of IVL and continued sales force expansion. International revenue was $39.1 million in the third quarter of 2023, representing an 88% increase from $20.8 million in the third quarter of 2022. Coronary products contributed $32.7 million to international revenue in the third quarter of 2023, an increase of 108% from $15.7 million in the third quarter of 2022. International revenue from our peripheral products was $4.8 million in the third quarter of 2023, an increase of 17% from $4.1 million in the third quarter of 2022. Revenue from our Reducer product, which we acquired through the Neovasc acquisition that closed in April of this year, contributed $1.3 million to international revenue in the third quarter of 2023.
Generators contributed $0.3 million to international revenue in the third quarter of 2023. The increase in international revenue over the prior year period reflects continued geographic expansion, particularly Japan, the increased productivity of the direct selling team in Europe and the momentum of our C2+ launch. Looking at product lines, our peripheral products, Shockwave M5, Shockwave M5+, Shockwave S4 and Shockwave L6 accounted for $47.8 million of the total revenue in the third quarter of 2023 compared to $37 million in the third quarter of 2022, a 29% increase. Our coronary products, Shockwave C2 and Shockwave C2+ accounted for $136.3 million of total revenue in the third quarter of 2023 compared to $93 million in the third quarter of 2022, representing a 47% increase.
Revenue from our Reducer product accounted for $1.3 million of total revenue in the third quarter of 2023, the sales of generators contributed $0.6 million in revenue in the third quarter of 2023. Gross profit for the third quarter of 2023 was $161.5 million compared to $113.5 million in the third quarter of 2022. Gross margin was 87% for the third quarter of 2023 compared to gross margin of 86% for the third quarter of 2022. Total operating expenses for the third quarter of 2023 were $117.9 million, a 54% increase from $76.7 million in the third quarter of 2022. Sales and marketing expenses for the third quarter of 2023 were $56.9 million compared to $42.1 million in the third quarter of 2022. The increase was primarily driven by sales force expansion.
R&D expenses for the third quarter of 2023, $39.5 million compared to $20.2 million in the third quarter of 2022. The increase was primarily driven by headcount growth, higher clinical-related expenses, including Reducer and facility expansion to support R&D. General and administrative expenses for the third quarter of 2023 were $21.5 million compared to $14.4 million in the third quarter of 2022. The increase was primarily driven by higher headcount to support the growth of the business. Net income for the third quarter of 2023 was $35 million, which was consistent with net income in the third quarter of 2022. Basic net income per share for the period was $0.95. Diluted net income per share for the period was $0.92. In response to investors recently asking that we provide a clearer picture of our operating strength and profitability, we will be providing adjusted EBITDA.
For Q3 2023, our adjusted EBITDA was $65 million, an increase of 31% compared to an adjusted EBITDA of $49.8 million in the third quarter of 2022. We expect to continue to make significant investments to support and sustain our growth and anticipate full year 2023 overall operating margin in the range of 20% to 22%. We ended the third quarter of 2023 with $917.3 million in cash, cash equivalents and short-term investments, which is inclusive of net proceeds of $634.4 million from our convertible debt offering in August. At this point, I’d like to turn the call back to Doug for closing comments.
Doug Godshall: Thank you, Dan, and thank you all for joining us today. We had a great quarter at Shockwave as we continue to execute and grow our business, while at the same time, paving an exciting path for our future. With that, I’ll open the call for questions.
To continue reading the Q&A session, please click here.