Cardiovascular Systems, Inc.

Hello, everyone, and welcome to the Cardiovascular Systems Inc. Fiscal 2023 First Quarter Earnings Conference Call. My name is Seb, and I'll be the operator for your call today. There will be an opportunity for Q&A. You can register your question by pressing star 1 on your telephone keypad or press star 2 to withdraw your question. I will now hand the floor to Jack Nielsen, Vice President of Investor Relations. Please go ahead.

Thank you. good morning and welcome to our fiscal 23 first quarter conference call with me today are scott ward csi chairman president chief executive officer and jeff points chief financial officer earlier this morning we issued a press release announcing first quarter financial results you may find a copy of this release on the investor relations section of our corporate website here you may also find an earnings supplement that includes additional details on our performance and outlook during today's call we will make forward-looking statements These forward-looking statements are covered under the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 and include statements regarding CSI's future financial and operating results or other statements that are not historical facts. Actual results could differ materially from those stated or implied by our forward-looking statements due to certain risks and uncertainties, including those described in our most recent Form 10-K and subsequent quarterly reports on Form 10-Q. In particular, the COVID-19 pandemic has created risks and uncertainties for our business, results and operations, financial condition, and prospects, which we will discuss on this call. CSI disclaims any duty to update or revise our forward-looking statements as a result of new information, future events, developments, or otherwise. We will also refer to non-GAAP measures because we believe they provide useful information for our investors. Today's press release contains a reconciliation table to GAAP results. I will now turn the call over to Scott Ward.

Thank you, Jack. Good morning, everyone, and thank you for joining us today. Hopefully you've had an opportunity to review the press release that we issued earlier this morning. We are really pleased with the state of our business and our performance in Q1. Q1 revenues of $59.7 million increased 2% and we're right in line with our forecast and ahead of consensus. Worldwide coronary revenue increased 8% to $20.9 million. led by strong growth in our support devices and international expansion. We continue to make great progress in our efforts to broaden and diversify our product pipeline. The launch of the ScoreFlex scoring balloon is going really well, generating over 1.7 million in sales during Q1, which helped drive an increase in coronary ISD revenue of 70% to 4.5 million. International revenue, which is mostly coronary, grew 40% over the prior year, with strong growth in each of our key markets, including Japan, Europe, Asia Pacific, and Canada. In addition, we launched OAS in five new countries during the first quarter, and we are now commercial in 34 countries outside of the U.S., where we have over 1,000 physicians trained to use orbital atherectomy. Worldwide peripheral revenue was about flat at 38.8 million. While we believe the situation in hospitals is gradually improving, sporadic staffing shortages continue to impact peripheral procedural volumes, particularly for lower acuity patients with intermittent claudication. Our strategy to leverage the presence of our sales force and accelerate our revenue per procedure through the sale of ISDs has been very successful. Importantly, our peripheral revenue per procedure continued to expand and we delivered $142 per procedure in Q1. We remain on track to achieve $200 of incremental revenue from peripheral ISDs by fiscal year end. In October, we launched our 2.0 max crown for peripheral OAS. This device expands the lesions that can be treated with orbital arthrectomy and delivers exceptional luminal gain in mixed morphology lesions above the knee. We expect the 2.0 max will accelerate future growth in peripheral OAS sales. In addition to solid Q1 revenue results, leading indicators like new accounts, new customers trained, and new contracts exceeded our expectations once again in Q1. Each of these performance metrics demonstrate solid demand for our products and position us for continued momentum throughout the year. Finally, we anticipate a stable reimbursement environment for our procedures in 2023. Earlier this week, CMS released final physician fee schedule, hospital outpatient and ambulatory surgery center rules, and payment rates, all of which were in line with our expectations. On a positive note, the endovascular ambulatory payment classification will increase 4.2% for coronary arthrectomy procedures and 4.4% for peripheral arthrectomy procedures that are performed in a hospital outpatient setting. As anticipated, physician fee schedule final rates reflect decreases from the four-year clinical labor adjustment, resulting in an 8.2% decrease in arthrectomy procedures performed in office-based labs. In total, The weighted impact of CMS 2023 final rules is favorable for CSI and results in a 0.4% increase in reimbursement for our company across all sites of service. Now, Jeff Points will provide additional details regarding our first quarter financial results and our guidance. Jeff.

Thank you, Scott, and good morning, everyone. I will begin my prepared comments with a brief review of our first quarter financial results. As Scott noted, Q1 revenue of $59.7 million represented 2% revenue growth compared to last year and represented a 4.5% decrease compared to Q4. As a reminder, our fiscal first quarter is typically our lowest revenue quarter of the year due to lower procedure volumes in the July and August timeframe. This seasonality typically results in Q1 revenue that is approximately 5% to 6% lower than Q4. At a high level, Worldwide peripheral revenue declined approximately 5% sequentially, while worldwide coronary revenue declined 4% sequentially. So our Q1 revenue results were generally in line with our expectations given historical seasonality trends. I will now discuss quantitative comparisons to Q1 of last year. For additional details, please refer to the earnings supplement slide deck on our website. First quarter worldwide peripheral revenues were approximately flat at $38.8 million. In the U.S., peripheral franchise revenue decreased less than 1%. Hospital staffing shortages continue to weigh on peripheral procedure volumes and we expect some lingering impact related to staffing in the hospital site of service. The understaffing in hospitals is causing the deferral of some peripheral cases and may be accelerating the migration of cases from hospitals to the OBL site of service. Notably, OBL units increased 16%, while hospital units decreased 4% in the quarter. U.S. peripheral revenue benefited from a 58% increase in ISD revenue, which totaled 2.1 million. First quarter worldwide coronary revenue increased 8% to 20.9 million. In the U.S., coronary revenue increased 1% to 16.4 million. Coronary support product revenue increased 70% to 4.5 million, led by continued adoption of the Sapphire 1-millimeter angioplasty balloons and the recent launch of Scoreflux NC. Coronary OAS units decreased 12% compared to last year, but we believe there are signs of stabilization. Increasing physician use of treatment algorithms for vessel preparation are sorting the use of scoring balloons, IVL, and orbital atherectomy into swim lanes. And while third-party data for the period showed depressed procedure volumes for the quarter, we believe this was primarily driven by the aforementioned staffing shortages and seasonality. With these factors in mind, we anticipate that our coronary OAS revenue will rebound in Q2 as the treatment algorithms are adopted and hospital staffing continues to improve. Outside the U.S., Coronary revenue increased 41% to 4.5 million as a result of continued strain in Japan and Europe. Turning to expenses, gross profit margin was 72%. Margins were negatively impacted by MIX as we experienced an increase in ISD, international, and OBL revenues relative to seasonally lower OAS hospital volumes in Q1. Additionally, we continued to experience increased freight costs associated with inflationary pressures. Although we expect inflationary challenges to persist, we do expect gross profit margin to increase sequentially throughout the balance of the fiscal year. Operating expenses totaled $53.9 million, an increase of 3%. SG&A increased 6%, primarily due to increased marketing activity related to the resumption of in-person conference participation. R&D expenses decreased to $9.1 million. We ended the quarter with $144 million in cash and marketable securities and no long-term borrowings. In total, Q1 results were consistent with our expectations. As a result, we are reiterating our fiscal 23 financial guidance. Again, as I noted in August, our guidance assumes a gradual improvement and U.S. hospital procedure volumes over the course of the year. We believe the continued market recovery combined with improving commercial execution, competitive momentum, new product introductions, and international expansion will drive our revenue to a range of $255 to $265 million, representing 8% to 12% annual growth. We note that the macro environment remains unsettled, so uncertain market dynamics may persist that could impact our current outlook. However, at this time, we anticipate that our financial results, both on the top and bottom line, will improve sequentially each quarter as we progress throughout the fiscal year. I will now invite Scott to provide his closing remarks. Scott.

Thank you, Jeff. So, looking ahead, we are confident in our fiscal 23 revenue guidance. Our guidance assumes mid-single-digit growth in the U.S. peripheral and coronary arthrectomy 25% growth in international, and ISD growth in the mid-30% range. With improved commercial execution, competitive momentum, and the launch of the 2.0 MAX crown, we are confident that we can deliver mid-single-digit growth in domestic atherectomy revenue. The launch of ScoreFlex and the continued momentum in the sale of jade balloons is driving 66% growth in our support product revenue, And our international business delivered 40% growth in Q1. Continued success in international ISD sales and our domestic OAS business is expected to drive fiscal 23 revenue growth. And with less than eight months remaining in the fiscal year, we remain confident in our forecast. Turning to our pipeline, I'm pleased to share that we have continued to make strong progress against our key product development milestones, We are on schedule to file our 510K submissions for our coronary microcatheters in Q3, and we continue to make solid progress towards completing our Eclipse clinical trial for coronary OAS. With over 1,900 patients now enrolled, we continue to anticipate completing this study later this fiscal year with a readout of the data, most likely at TCT in calendar 24. Our thrombectomy program is progressing to plan, and our partner, Inova Vascular, remains on schedule to submit the peripheral 510K in December, enabling commercialization next summer. For the pulmonary embolism indication, Inova is beginning to prepare for the IDE, and they have initiated discussions with the FDA regarding the clinical trial design. Our drug-coated balloon program has also continued to make strong progress. Our partner, Chansu Vascular Technologies, recently completed the first in-human clinical trial for the coronary indication, and we are pleased to report that the primary endpoints for the study were achieved. This everolimus-coated drug-coated balloon performed favorably in comparison to other drug-coated balloons at this early stage of development. In addition, CVT completed patient enrollment in the peripheral trial and we expect to review those results next spring. So the DCB program also remains on track. Turning to our IVL program, the coronary and peripheral FDA pre-submissions were completed last month, and pending feedback from the FDA, we intend to initiate these clinical trials in fiscal 24. And finally, we continue to advance the development of our mechanical circulatory support program We are preparing to reenter the clinic in Q3 to perform additional human feasibility testing as we continue to prepare for the IDE submission in fiscal 24. Overall, an impressive quarter of development and regulatory process to report. As we noted at our capital market stay in August, with opportunities in thrombectomy, intravascular lithotripsy, drug-coated balloons, and mechanical circulatory support, we are striving to advance the standard of care while we expand our total addressable market from about $2.2 billion today to $18.8 billion over the next five years. We look forward to keeping you updated as we advance the development of these important growth drivers. In summary, we executed our strategy really quite well in Q1. Revenue was on plan, our competitive position remained stable, and we made meaningful progress on our pipeline projects and international expansion. I would like to thank our CSI employees for their continued dedication as we deliver exceptional support to our customers and patients. I would also like to thank all of you for your continued interest in CSI, and we will now take your questions. So, operator, if you could please repeat those instructions, I'd appreciate it. Thank you.

Thank you. As a reminder, if you would like to ask a question, please press star 1 on your telephone keypad now or press star 2 if you wish to withdraw your question. Our first question is from Chris Pasquale from Nephron Research. Please go ahead.

Thanks, and congrats on a solid quarter, guys. One question, just as we do the math around the peripheral business, it does look like ASPs were down maybe high single digits this quarter. Is that correct? And you talk about improving gross margin over the balance of the year if pricing stays negative in OAS and your mix continues to shift to these procedural support products.

Thanks, Chris. And thank you for that question. So I'm going to have Jeff points respond to that in just a moment. But yes, you're correct about the ASP reduction. And Jeff, do you want to address the rest of that?

Yeah, Chris, thanks for the question. We did see a little bit higher price erosion. That was really kind of solely in our OBL space. You know, hospital ASPs remain very, very consistent with the prior year. I think, you know, as we look kind of sequentially from Q4 to Q1, I think we've started to see the OBL ASP really kind of stabilize. The comparison I think you're looking at is year-over-year, where it was a little bit higher and kind of in that high single-digit range. But I think that has started to stabilize, and we expect that to continue to stabilize here over time.

Thanks. Just on the second part, if you could talk about the pathway to gross margin improvement. as your mix continues to shift to some of these non-OAS products. And just to follow up on the OBL piece, we are seeing another reduction there in payment rates. It seems like that setting has actually done relatively well considering some of the reimbursement pressure. What are you hearing from your accounts there in terms of how they are coping with the changing economics and how they're going to deal with that going forward?

Yeah, let me first take the first part of the question, Chris, about gross margins. We do expect that to increase sequentially. You know, as we kind of go throughout the year here, we expect our kind of our core OAS business to increase from a mixed standpoint, kind of be a bigger part of our revenue. Of course, Q1 is always kind of our slowest quarter from a seasonality standpoint. But as that grows and we have higher kind of margins in our OAS core business in the hospital, both corner and peripheral, We expect to see gross margin improvement. And I think generally just with the increase in overall volumes that goes through our facility, I think that'll help on the indirect side as well.

And Chris, I'll address the second half of that question regarding the reimbursement, the payment rates in the OBL setting. The payment rates have come out exactly where it was expected. In fact, I just returned last night from the VIVA meeting and had the opportunity there to speak with many of our customers about this. And this largely comes as no surprise to anyone. And a lot of the physicians who have either recently started office-based labs or who have been operating in office-based labs over time report that they have made adjustments in their business practices to accommodate these reductions in the physician fee schedules. Um, largely that, that relates to, you know, better management of their inventory, uh, uh, reduct cost reductions. But interestingly, for many of our customers, we focus on real high volume office based labs that also perform more complex procedures. And as a result, uh, those labs are really managing this reduction in the physician fee schedule by increasing their number of procedures. And so I think you see that in our unit increases. And you can see that, you know, our OBL business continues to grow quite impressively. Now, I don't really know that this trend is going to continue. We indicated in our comments that, you know, we may be seeing an accelerated migration. of patients from the hospital setting to the OBL. But that's just something we're going to have to watch over the coming year. Coming out of COVID, it's just really hard to predict how and where these procedure volumes are going to be taking place. So that's just something we'll have to continue to update you on throughout the course of the year.

Great. Thank you.

Our next question comes from Michael Mattson, Needham & Company. Please go ahead.

Yeah, thanks. I guess I wanted to ask about the 2.0 max crown launch. I know it's only a couple weeks into the launch here, but, you know, what kind of feedback are you getting and, you know, where are you seeing that being used? Is it really limited to kind of the mixed morphology that you mentioned where you have softer plaque mixed with calcium, or could it even be used, you know, maybe just in cases without any calcium?

Yeah, great question, Mike. Thank you. So we're very pleased with the 2.0 max crown launch. This device has actually exceeded our expectations as we did our limited market release. Where this product is going to have the greatest impact is in the above-the-knee market segment where our physicians are treating patients that have more mixed plaque, and that is where there is a combination of soft plaque and that more calcified plaque. Um, we, uh, expect to, to see this product actually begin to take market share in that segment. And, um, the other place where this is going to be utilized is where there's a larger plaque burden. So if there's a, if we have pretty heavily occluded, uh, vessels above the knee that are mixed plaque, this product has proven to work very effectively. And we had a meeting on this at Viva, actually, over the course of the past couple of days, bringing together a lot of the physicians that had participated in our limited market release. And the feedback on this was exceptional. Many of the physicians indicating that they would be converting their above-the-knee practice over to this product because it's just simple to easy to use, doesn't require any capital equipment. They're already trained on it. It's orbital atherectomy. They know how to use it. Their staff knows how to use it. OBL cath labs know how to use it. So we have high expectations for how this product can contribute to our peripheral OAS growth.

And is the pricing similar to your other peripheral crown products?

Yes, it is.

Okay. And then just as a follow-up, I wanted to ask one about the balance sheet. So it My math is right. It looks like your cash decreased by about $16 million from last quarter. Is that right? And were there any kind of one-offs in there, anything unusual, any kind of working capital increases or anything that caused that to go down maybe?

Yeah, Mike, thanks for the question. That's actually really what we expected. We always see a much larger cash kind of a cash usage in Q1. Of course, it's our year end. So all the kind of the annual payments get paid out for instead of compensation and of course, commission payments for the quarter get paid and such. But that actually is what we expected. And that'll be kind of largest cash decrease. Pretty much all of that was from operations. We really didn't have too much related to kind of the ongoing milestone payments related to the pipeline projects. It was really operational based. And I think as we kind of go throughout the year, I think you'll see that improve. You won't see as much of a cash usage from the business.

Okay, got it.

Yeah, I would just add to that, Mike, that over the course of the year, we do not expect to see that much utilization of cash for the operating business. However, as our programs continue to be successful, and that's good news, We'll continue to be making milestone payments to our partners as we bring on our thrombectomy portfolio this spring and then our drug code of balloon program as well. So, you know, we do expect to have those payments continue to reduce our cash position over the course of the year. Okay, got it. Thank you.

Our next question comes from Siraj Kalia from Oppenheimer. Please go ahead.

Morning, Scott. Can you hear me all right?

Yes, Suraj. Thank you.

Perfect. Scott, a lot of commentary in terms of guidance and ESPs, and let me package a couple of questions on those. In the summer, Scott, you had indicated that the effect of competitive trialing was abating, and I believe in your prepared remarks you mentioned something to the effect competition, you know, your competitive position was stable. I'm paraphrasing here. I'd love to get your perspective on where are you seeing utilization changing in your accounts? Is there broad-based change, or are you seeing certain pockets, and if so, why?

Thank you for that question, Suraj. The trialing of IVL balloons in our accounts has really concluded and has actually been reduced probably over the course of the past six months. Where we're seeing this stabilization occurring is in accounts that have had the opportunity to use IVL for more than six months in their practice. And what we're seeing after physicians have had the opportunity to determine how to incorporate this new technology into their practice, they're now adjusting their practice to let's say a more normalized set of treatment algorithms where OAS once again is being used to treat more severely calcified lesions, longer calcified lesions, and tight lesions where you just simply can't get a balloon to cross. Those, as you know, have really typically been our indications for use. So we're seeing kind of a return to the more normalized indications for use for our product. And that is happening, I think, like I indicated, at sites now that are moving more towards kind of a more normalized treatment algorithm that they would expect to deploy over time. So that really is what is driving it. We're just seeing the rebound and the recovery of our cases.

Fair enough, Scott, and I'll save my last two questions together and hop back in queue. So in terms of sales reps, Scott, maybe if you could compare and contrast at the beginning of 21, you know, the sales rep, productivity, number of reps, and where are we today? And my second question, Scott, you mentioned about accelerated migration to the OBL setting. would love to get your thoughts on your outlook, especially given, you know, it's almost a given IVL is also going to get reimbursement in an OBL setting. So, you know, how is the blocking and tackling from an OBL perspective? Any color there would be great. Thank you for taking my questions.

Thank you, Suraj. So our number of sales reps that we have deployed in the field really have not changed. We, over the course of Really, the past five years have sustained approximately 200 quota-bearing sales representatives in the marketplace over that time. We also support that group with a number of clinical specialists, and those clinical specialists, of course, are there to support cases and assure that we have deep clinical acumen to support our customers. That has not changed. We maintain that channel, and we expect to do that going forward. In terms of the migration to the OBL, as I indicated in response to an earlier question, we are seeing this, in particular in this past quarter, migration of these patients from the hospital setting to the OBL. I think it's too early to say that that is a trend that would continue at this pace, but as I indicated, it's something that we'll continue to watch. In terms of the approval of IVL reimbursement in the OBL setting. Of course, that is dependent upon the completion of the revision of the CPT lower extremity revascularization codes. And I do not have an update for you on that, on the progress of that process. Our understanding now is that those codes, may be revised and approved in 2025. But I think, as you know, that that has been a kind of ever-changing environment that has proven to be pretty recalcitrant.

Thank you.

Thank you.

Our next question comes from Matthew Blackman at Stifel.

Please go ahead. Good morning, everybody. Thanks for taking my questions. Scott or Jeff, just any color on how the quarter played out month to month, more so how you exited the quarter and whether you're comfortable with 2Q consensus at sort of $63, $64 million. And I got one follow-up.

Matt, thank you very much for that. As Jeff has indicated in his comments, Q1 is always a quarter that is marked by seasonality. And That's not exclusive to CSI. I mean, we see that really across many of the cardiovascular companies that are performing procedures in cath labs. So, you know, we're no different than the rest of that market. Now, if we look at how we performed, of course, our year end is in June. So July is a slower month due to seasonality and also the close of our year in the month prior. So July was a little bit slow. August, we began to see some momentum, but we were really pleased in September that to see that strong recovery and the momentum that we kind of always expect to see in September was there. So we had a real strong month in September and we're pleased with that. And we've also seen that continued momentum as we've progressed into this quarter. In terms of the guidance that you recommend, Uh, Jeff, do you want to comment on that? Yeah, you know what?

Yeah. So, I mean, you know, we, we certainly plan for sequential improvement really in kind of each of our products. So I think the consensus is that that is kind of out there, I think is appropriate, man.

Okay. I appreciate that. And then just a quick one on, on 2.0 max, can you just remind us of the incremental opportunity with the larger crown? What percent of cases you can address now that you couldn't necessarily access before? Thanks.

Thank you, Matt. Yeah, this is a fairly large market. This is obviously the market that the other competitors in the market have had the opportunity to participate in unabated for some time. And it's probably about a $200 million market above the knee. And it's a segment that we haven't participated in because of the focus of our technology on these more severely calcified lesions. So definitely a great opportunity for us. And as I said earlier, because it is orbital atherectomy, there's really no customer training that's required. There's no capital equipment. Our sales reps are clinical specialists. So we're well positioned to launch this product and have it make important contributions to our growth over the remainder of this year.

Our next question is from Jason Bedford at Raymond James.

Please go ahead. Good morning. Just a couple, maybe just to put a finer point on the OBL versus hospital breakout in peripheral. Can you just give us an idea of how much of your business in peripheral is coming from the OBL channel?

Yeah, Jason, you know, about a third of our peripheral device revenue comes from the OBL, and about two-thirds come from the hospital.

Okay. And just for context, Jeff, where was that last year?

You know, actually, the OBL was actually pretty consistent with last year, over $11 million in the OBL. So it actually increased slightly from last year. Okay.

And just the revenue mix in the quarter was a little different than we expected, meaning support and international revenue was stronger. But you reiterated your annual guidance with respect to the MIPS. I guess my question is, was there anything kind of one-timish in either the support or international number?

No, there was not. Just the continued momentum in international, and I think the support product growth was driven by the products that I described in peripheral, the launch of our Jade balloons, and in coronary, the launch of our ScoreFlex scoring balloon, both of which have really been adopted well and are really starting to gain momentum.

Okay. And then just maybe last for me, you know, The technology, you guys have been around for a while, and you're still opening a lot of new accounts. I'm just wondering, how much is left in terms of opportunity to open new accounts? I guess I'm specifically thinking of the U.S. Thanks.

Thanks, Jason. As we look at that U.S. market, I think what you have most likely observed over the course of the past few years is that Our new account progress is fairly consistent quarter to quarter. We are generally opening up about the same number of accounts, and that might be somewhat related to just the normal turnover that would occur in the marketplace. I would not anticipate that opening new accounts as a strategy becomes a really large part of our strategy because we are in so many accounts across the country. That said, though, there's always opportunity for us. And as you have fellows that are now coming out of programs and they're moving into their practices, that creates opportunities for us to train, educate them, develop them as customers. And then as they move into Community hospitals, they move into other sites of service. We can move right along with them, and then that results in us opening up new accounts. So that's kind of more the standard, and I would say the relatively stable environment that we're operating in now. So thank you for that, Jason. I appreciate that.

At this time, we have no further questions on the call, so I will hand it back to Scott.

Okay, thank you very much, and thank you, everyone, for joining today's call. We look forward to updating many of you at the Stiefel and Canaccord conferences that we'll be participating in later this month. So thanks, everyone. Have a great day. This concludes the conference call. Thank you all for dialing in.