Shockwave Medical, Inc.

Good morning and welcome to Shockwave's medical second quarter earnings conference call. At this time, all participants are in listen-only mode. We will be facilitating a question and answer session towards the end of today's call. As a reminder, this call is being recorded for replay purposes. I would now like to turn the call over to Debbie Castor, Vice President of Investor Relations at Shockwave, for a few introductory comments.

Thank you all for participating in today's call. Joining me today from Shockwave Medical are Doug Gottschall, President and Chief Executive Officer, Dan Puckett, Chief Financial Officer, and Isaac Zacharias, Chief Commercial Officer. Earlier today, Shockwave released financial results for the quarter ended June 30th, 2021. 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 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 approvals 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 material 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 factor section of our annual report on Form 10-K on file with SEC and available on EDGAR and in other reports filed periodically with 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, August 9th, 2021. And with that, I'll turn the call over to Doug.

Thanks, Debbie. Good morning, everyone, and thank you for taking the time to join us to review Shockwave's results for the second quarter of 2021. We reported $55.9 million in revenue for the second quarter of 2021, representing an increase of 444% from the second quarter of 2020 and a 75% increase from the first quarter of this year. The performance in the quarter was again led by the growing adoption of coronary IVL in the U.S., which continues to outpace our expectations. Our U.S. commercial team continued their stellar execution this past quarter. We saw excellent performance across the board, but obviously C2 carried the day. More and more sites are proving that they are fully prepared to use C2 independently after our launch process is complete, and we were encouraged to witness an increased percentage of our C2 sales resulting from reorders, as one would hope to see as a launch progresses. Sales from launched products comprised 74% of total U.S. C2 revenue for the quarter. We achieved this increase in reorder rates while we were simultaneously adding new accounts throughout the quarter. averaging 1.5 new accounts per territory per month. This steady cadence enables us to continue to provide thorough training and case support at each launched account before moving on to the next site. The initial order quantity for new site starts remained at five units on average per account. During the quarter, 44% of our accounts purchased both coronary and peripheral products, 9% purchased only coronary, and 47% purchased only peripherals. These numbers reflect both the synergy of our two businesses and also how many more accounts we still have in front of us with a C2 launch since nearly every hospital that performs PAD procedures also perform coronary procedures. We continue to compensate our team in a fashion that was designed to create a balanced sales approach between coronary and peripheral, which appears to be working given the peripheral growth we witnessed this past quarter. We're in the process of adding additional field personnel and expect to end this quarter with close to 70 US territories. We also expect to add several clinical specialist positions, which together should be the last meaningful US field expansion for this year. Since we first started selling commercially in the US in 2017, we have focused primarily on providing our customers with the safest, most consistent solution to treat patients with complex calcification. In parallel, We have spent the past several years endeavoring to improve reimbursement to complement the clinical imperative of IVL use. These efforts are now paying off, as is evidenced by the recent granting by CMS of both a transitional pass-through payment for outpatient coronary IVL, which went into effect on July 1st, as well as the new technology add-on payment, or NTAP, for inpatient coronary IVL procedures that will go into effect on October 1st in this year. We've recently added to both our U.S. international reimbursement teams, and we view reimbursement as an area that still offers meaningful upside for the company and our customers. Turning to international, we are now commercial in 58 countries, and our team came through once again with great execution and drove growth in virtually all our markets on both an annual and quarterly basis. While historically our international sales have been very coronary-centric, Our peripheral franchise contributed nicely this past quarter, which suggests our market development efforts in the international pad space are starting to bear fruit. So all in all, great progress internationally, particularly considering the ebbs and flows of COVID. As the usage of IVL has expanded across the globe, we have learned more about our markets, and in the process, it has become increasingly evident that the opportunity for IVL is even larger than we had previously estimated. Therefore, we felt it was time to do a refresh on our estimate of the total addressable market, or TAM, for IVL. Since going public, we have consistently estimated our TAM to be approximately $6 billion. At that time, however, IVL was not approved or launched in most geographies where we operate today, so we lacked visibility to procedure volumes in many countries. Additionally, some markets have experienced significant procedure growth in the last few years. Based on these new inputs, we have increased our estimate of the TAM for IVL to roughly $8.5 billion, based on projections for procedures in 2022. I'm going to quickly run through some of the components of that number that have seen the biggest changes. It's worth noting that our estimate for percentage of calcifications has remained consistent across all vessel beds, consistent with our prior estimates. starting with peripheral and SFA procedures, where we now have improved visibility to international procedure volumes. Our updated estimate of total global SFA procedures is approximately 950,000, up from 700,000 at the time of our IPO. A market that our customers created with Shockwave is treatment of iliac artery to facilitate passing of large-bore catheters, such as TAVR or EVAR. As TAVR cases have grown globally, we now estimate the total large-bore catheter market has grown from 275,000 to 475,000 procedures. We're also increasing our estimate of below-the-knee procedures by 30%, moving from 300,000 to 400,000. And that still underestimates the BTK potential, since it fails to capture the significant population that does not get treated, those who undergo bypass surgery or those who undergo an amputation. And lastly, coronary cancer. Our revised estimate of the addressable market for coronary procedures has increased from 3.5 million to 6 million procedures globally. The sizable change stems from our visibility into more geographies, as well as procedure volume growth, particularly in China, where we now believe total PCI procedures will reach 1.5 million in 2022. Putting this all together, our big opportunity is actually even bigger than we initially had estimated, and we now believe IVL can address a market of over $8.5 billion. Shifting out of clinical, we had the distinction of having three manuscripts published simultaneously in JAK interventions this last quarter, creating something of an IVL journal. We also were recently informed that our abstract describing 750 patients from our PAD3 observational registry was accepted for presentation in a late-breaking session at VIVA 21 conference this fall, making it the second year in a row for us to have a late-breaker at VIVA. And finally, Our JV in China has just started a trial of C2, and we will soon be commencing a peripheral study. These studies are designed to ensure that we are prepared in the event that country-specific data is required for approval by CFDA. If CFDA does not require these data for approval, having local data should still be beneficial for our marketing efforts. During the quarter, our teams attended nine conferences where there were 10 live cases, 8 symposia, and 13 webinars to support our C2 launch. And to complement our leadership in technology and demonstrate our commitment to education, we partnered with the Optima team, led by Dr. James Spratt in the UK, and created Shockwave's Calcium Masterclass, a proprietary educational tool that we believe is the most ambitious and comprehensive resource on coronary calcification. Our R&D team has been hard at work advancing our pipeline with a blend of enhancements to our current products, which we believe will make performance even better in the hands of our customers, as well as some new approaches to the use of IVL that we expect will further expand our treatable population. We've received many inquiries about our pipeline over the past few months, and our approach will be to share details about specific products when it launches on the near-term horizon or if we are preparing to commence a clinical study for devices that require a trial for approval. We are increasingly bullish about our portfolio, but we don't think it benefits us or our shareholders or customers to share details about products that are still years away from entering the clinic. That said, the first product in what we expect will be a steady cadence of new introductions is M5+, which recently received FDA clearance for peripheral indication. M5+, has a longer catheter shaft than our M5 catheter, so physicians will be able to treat iliacs and common femoral disease via radial access. They will also be able to treat below-the-knee disease more readily using M5+, which is appealing for those larger, more proximal BTK vessels. The two features that our customers are even more excited about are the addition of an 8-millimeter diameter balloon and a faster pulse cadence going from 1 hertz to 2 hertz. The 8-millimeter diameter is something our symptomatic ILLIAC and large-bore customers have been asking for, and now they will have it. The faster pulses will cut the treatment time in half from 30 seconds per cycle to 15 seconds. which may not sound like much, but the physicians have loved it in the case we've done so far. We conducted a small, controlled study and are now starting a limited launch, which we will steadily expand, leading to a full launch in the first quarter of 2022. Operationally, we continue to make great progress on both the facilities and people side of the business. We had 528 employees at the end of the second quarter as we continue to build out our sales team, increase production capacity, and to invest in R&D. R&D team will grow significantly over the next two years as we continue to identify projects that we expect will expand the potential of IVL. We recently finalized an agreement with a contract manufacturer, and by the end of this year, they will be producing a majority of our M5 catheters. This will give us extra capacity in Santa Clara for C2 volume and should also improve our M5 margins. We continue to be very pleased with the performance of IVL across the globe. And given the outperformance of our coronary product in the U.S. this quarter, we are increasing our guidance for the year. Our updated expectation is that we will generate between $218 and $223 million in revenue for the full year of 2021. This would represent growth up to 232% from our revenue for the full year of 2020. With that, I will now turn the call to Dan.

Thank you, Doug. Good morning, everyone. Shockwave Medical's revenue for the Second quarter ended June 30, 2021, and was $55.9 million, a 144% increase from $10.3 million in the second quarter of 2020. U.S. revenue is $42.9 million in the second quarter of 2021, growing 675% from $5.5 million in the second quarter of 2020. The increase included $26.3 million from the coronary product, Shockwave C2, which was launched in the U.S. in February this year. The growth in the U.S. was also driven by recovery from the trough of the pandemic impact in 2020, as well as Salesforce expansion and increased adoption of our products. International revenue was $13 million in the second quarter of 2021, representing a 174% increase from $4.8 million in the second quarter of 2020. The growth in international revenue over the prior year reflects an impact from pandemic recovery, as well as increased adoption in existing geographies. A brief comment on COVID and our expectations. As we have stated in the past, we are not in the business of forecasting the impact of the pandemic. That said, while the Delta variant is having an impact across the globe and has flared up in pockets in the U.S., we believe that the impact on interventional procedures should be transient as it was in the beginning of the year. Looking at product lines, our peripheral products, Shockwave M5 and Shockwave S4, accounted for $18.8 million of total revenue in the second quarter of 2021 compared to $6.5 million in the second quarter of 2020, 189% increase. Our coronary product, Shockwave C2, accounted for $36.7 million of total revenue in the second quarter of 2021 compared to $3.7 million in the second quarter of 2020, representing a 905% increase. In addition, the sales of generators contributed $0.4 million in revenue in the second quarter of 2021 compared to $0.1 million in the second quarter of 2020. Gross profit for the second quarter of 2021 was $46 million compared to $6.7 million for the second quarter of 2020. Gross margin for the second quarter of 2021 was 82% as compared to 65% in the second quarter of 2020. Improvement in gross margin was partly driven by the launch of Shockwave C2 in the U.S., which has the highest selling price of all our products. In addition, we have seen continued improvement in the manufacturing productivity and process efficiencies, which have also contributed to the gross margin expansion. Total operating expenses for the second quarter of 2021 were $46.2 million, an 87% increase from $24.7 million in the second quarter of 2020. Sales and marketing expenses for the second quarter of 2020 were $25.7 million, compared to $11.2 million in the second quarter of 2020. The increase is primarily driven by Salesforce expansion in the US. R&D expenses for the second quarter of 2021 were $11.8 million compared to $8.1 million in the second quarter of 2020. The increase is primarily driven by headcount growth. General and administrative expenses for the second quarter of 2021 were $8.6 million compared to $5.4 million in the second quarter of 2020. The increase is primarily driven by higher headcount to support the growth of the business. Net loss for the second quarter of 2021 was $0.4 million, compared to a net loss of $18.1 million in the second quarter of 2020. Net loss per share for the period was one cent. While we are very encouraged that we were close to profitability this quarter, we do anticipate some variability in our operating margin in the near term as we continue to invest in our R&D programs and commercial activities. We ended the second quarter of 2021 with $174.7 million in cash, cash flow correlates, and short-term investments. At this point, I'd like to turn the call back to Doug for closing comments.

Thanks, Dan, and thank you all for joining us for the call this morning. I continue to be impressed with our team and their extraordinary execution and by the support of our investigators and customers across the globe. The ability to make a difference in so many lives is what motivates us all, and we look forward to continuing to do so well into the future. Take care, be well, and we welcome your questions.

Thank you. As a reminder, to ask a question, please press star 1 on your telephone keypad. To withdraw a question, press the pound key. Please stand well while we compile the Q&A roster. Your first question comes from Bob Hopkins from Bank of America. Your line is open.

Oh, great. And thank you and congrats on phenomenal performance. Doug, I wanted to ask about your new TAM assumptions and just wanted to make sure I understood exactly what's changing the numbers because obviously it was a big increase. So just to be clear, it sounds like it's not the percentage of cases out there that you see with calcium It sounds like it's not your ability to penetrate the market, but rather just the sheer number of interventional cases going on around the globe that's driving the increase in TAM. Do I have that correct, or am I missing something?

Yeah, no, obviously the biggest uplift was from China, which has grown substantially. But as we have commercialized into 58 different countries, we have a much better line of sight into procedure volumes, whether that's India, China, Eastern Europe, et cetera. And many of those markets are less well studied. So when we first calculated our addressable market back end of 2018 leading into our IPO in 19, we did our best to estimate how many SFA procedures and coronary procedures, et cetera, there are. So some of those markets have grown substantially. Some, we just have better visibility and realize there are more procedures going on. And just for those who are less close to how we calculate TAM than perhaps you are, Bob, we don't look at sort of how many people have coronary artery disease or how many people have peripheral artery disease. We would have a obviously a substantially larger TAM if you calculated the true potential addressable market, we chose a more sort of realizable market by taking the existing procedure volumes than what percent of those patients are calcified. And so we don't calculate based on market development of interventional procedures per se, but rather our ability to penetrate or the population that would benefit that is already being treated, perhaps suboptimally in our view because they're not using shockwave all the time. But we're encouraged, obviously, by our ability to penetrate markets around the globe, but we are fairly scratching the surface and particularly relative to our TAM estimate.

Okay. Got it. Thank you for that. And then just one quick update. on the U.S. coronary launch. It sounds like you've been controlling the amount of accounts that you're in. Can you just give a sense as to where you are with the number of accounts that you're in in terms of the number of total accounts that you see that are possible versus the number of accounts that you're in today? Just give us a little update on the pacing of the opening of accounts in coronary in the U.S. Thank you.

Sure. And Isaac's on the call too as well, so we can tag team Isaac if you want to add color. So if you recall last quarter, so we got approved in February, had six or so weeks in that first quarter, full quarter this time. And in both quarters, we averaged about one and a half accounts per territory. We started with about 60 territories, give or take. We're building that number out in terms of the number of territories, but even as we have sort of slowly added territories, the pace of new site additions has remained at about one and a half per territory per month or for the entire, I guess, time since we got approved per month. And we're nowhere near halfway through the penetration of accounts that do PCIs. There's about 1,400 or so that do PCIs. Obviously, diminishing returns once you cross through the $1,100, $1,200 range with much smaller accounts. And, Isaac, I don't know if you want to add additional color.

No, I think you captured it. And, you know, we're still doing a good job of, you know, bringing on peripheral accounts that have historically been peripheral accounts. And as they adopt Coronary, now they're, you know, kind of using all three product lines. And that's our goal, obviously, is to get as many accounts as possible using Coronary. and the peripheral products.

Good. Thank you.

Your next question comes from Adam Meir from Piper Center. Your line is open.

Hey, guys. Congrats on the quarter, and thanks for taking the questions. Wanted to start with the guidance outlook. I was hoping to just hear a little bit more about what's embedded in the guidance assumptions as we look to the back half of the year. particularly as it relates to COVID-19 trends with Delta, Q3 seasonality, and then just, you know, the end tap and pass-through payment, which are seemingly coming to fruition. So I wanted to start there and then add a follow-up. Thanks so much.

That was a good summary of the puts and takes that we've been working through as we've been modeling. Will there be seasonality in Europe and the U.S., particularly on the peripheral side. Certainly there always is. People are taking vacations. Hopefully many of you on this call are going to get to take a vacation. And last year when a lot of folks didn't get to take one, they've been waiting. So doctors will take some time off. Administrators will take some time off, et cetera. So that has us viewing the next two quarters. as one that this quarter will be affected by that sort of vacation stuff. And so it'll be more of a back end loaded because you also have the benefit of now inpatient and outpatient add-on payments. So that is a tailwind. So that's one minor headwind through the summer and then a tailwind after the summer. And so COVID is the one, as Dan mentioned, articulated awfully hard for us to predict. Obviously, there's lots of news out of Florida. I'm hoping folks there get vaccinated so they can blunt it. And yet if you combine folks who people have been vaccinated in the U.S., people who have now developed a natural immunity by having had COVID and and the pace at which Delta is coursing through the system, our best guess, and obviously it's a guess, but our best guess is that we may not be at the peak yet, but it will probably fall off rather rapidly. And certainly for everyone's sake, we hope it does. The other practical reality is that hospitals have learned how to manage patients better. Fewer are going on vents. They're staying isolated. in ICUs for less time, so they're coming in, but they're both younger than they used to be, so they don't get stuck as long in the ICU, and hospitals are able to manage them better. So unfortunately, the hospitals now have a decent amount of practice, and certainly there will be some that will suspend in interventional procedures, and so there will be pockets of slowdowns. But we think it'll be similar to the sort of January, February where it got a little dicey in certain geographies and then things bounced back fairly robustly.

That's really helpful, Doug. Thanks for the color there. And then one for Dan on the P&L, you know, strong performance this quarter. I think I heard the comment some variability going forward on OPEX margin, but Maybe just help us think through gross margin cadence, given that we saw a sizable step up. You know, how sustainable is that, you know, profile? And then, you know, just help us think about OPEX spend going forward as well, just trying to get a better sense for when we could ultimately hit profitability. Thanks so much for taking the questions.

Sure. Yeah, we're very pleased with the progress we've made on gross margins. For the rest of the year, we expect gross margin to be consistent with this quarter. We have just expanded our lab in Santa Clara, and so we're going to be hiring some people that will need to be trained, so we're not going to see a lot of uplift until we get everybody kind of trained and efficient, and that'll take the next quarter or two. Next year on gross margin, we do expect some upside from the manufacturing in Costa Rica. you know, maybe a percent or two, you know, into next year. So this year consistent, next year we should see some uplift. On the OPEX, we do expect a little bump up in Q3. We're starting, you know, we've got some R&D activities including clinical cooking. We're going to continue to invest in sales and marketing. Come Q4, we should be in the black and not look back. That's very helpful. Thank you.

Your next question comes from Bill from Canaccord. Your line's open.

Great, thanks. A couple questions here. But first, just, you know, I was wondering if you could give us some color on what your VAC timelines are looking. I'm trying to get a, you know, trying to get some granularity on the pace of new accounts per month. I think it's clicking at 1.5. It's maintained at that level. And I know the stretch goal, I believe, was two for the sales force. And I'm just curious, you always have the aspirations to go higher. What's kind of holding the reps back from getting to that two? Is it back? Is it something else? And then just as you secondly look at the utilization on your existing accounts, I would assume that the kind of outperformance, which was really high in coronary was a function of just the existing accounts doing much more cases than expected. I wonder if you had commentary on that.

Yeah, and I'll tag team with Isaac on this one too. So our thesis going into this and the thesis that Isaac and the commercial team generated was that we know a product is intuitive and fairly easy to train on, straightforward, easy to use, et cetera. But we felt that if we trained each site thoroughly, meaning as many physicians as possible touch the device and do cases during a launch period, and everyone on the staff becomes familiar with how and when to use ShockWave, that we would be able to leave that account and know that they would use B2 appropriately and not need us there badgering them to use it. And the site would then be largely independent. And, yes, we would still serve that account, but we wouldn't have to have a clinical specialist in the lab every day to remind people to use coronary. Thank you. So far, that thesis, the theory that Isaac and team had, has proven to be a very wise approach. The accounts are very receptive to have us there. Being there for a couple of weeks also enables us to cross-sell into the peripheral space, so that has had a halo effect that is encouraging to see. and then we move on to the next site. And what we didn't want to do is have our sales team, with all the enthusiasm for C2, run from account to account doing cases because then they were just going to have to go back and resell. And so we will not let them sell to more than two per month, and it's less than two. on average for a variety of reasons. Some of it is you're waiting for VAC proceeds to get through your off-selling peripheral, etc. So we're not, we're actually going to say probably on balance, encourage that it's a little bit less than two versus hitting two every month because the numbers certainly suggest that the strategy is working. So I'll pause Isaac, any other color?

I just reinforced the limit was two per month. That's a limit, not a goal. My expectation was that if you put a limit at two per month for all the reasons Doug outlined, that it would naturally be less than two per month because not everyone is going to hit the limit every month. So I think we're encouraged by the one and a half number. As Doug said, as time goes on, that will continue to get smaller. And specifically on VACs or what the timing is, I don't think we see any sort of culprit or something we think is problematic that's holding back certain accounts or other accounts. They're moving through the process. The sales team and their management has a funnel of accounts, and they're generally clicking through them pretty well. I'd say right now we don't see anything from a constraint standpoint that feels like it's holding us back or we need to unlock some other tactic.

Yeah, and I would say the transitional pass-through was helpful in the past. Knowing that it was coming in June was helpful having in July enabled sites to spool up their VAC processes where they had been – in a small subset of the accounts where they just couldn't figure out how to get through VAC without reimbursement. So TPT and in a couple of months, NTAP will enable us to continue to add accounts in some that are more economically focused hospitals.

Great. And if I could want to ask one on operating expenses, you know, the revenues were up 24 million sequentially, but your sales and marketing was up only 1.7 million. I mean, that's like 7% of that increase. And I think Dan gave us some kind of ideas on leverage, but I mean, that's a big number. And just, is that something that would continue for a while, or did you spend forward back in the first quarter and we're just kind of seeing the kind of maybe it was a guarantee or something kick in. I'm just trying to get – that's a lot of leverage. And I'm trying to kind of figure out how to think about that going forward.

This is a topic Isaac mentions often, so I'm going to let him take this one.

Yeah, hi, Bill. So last year the team, the sales team in the U.S. particularly spent spent a lot of time hiring. We more than doubled the U.S. Salesforce last year, and that was, as you know, a forward spend in anticipation of the coronary launch. In Q1, we did not have quota for the sales team on coronary because we didn't know when we would get approval. So there was some compensation associated with the coronary launch in February and March that that was kind of typically more than we would pay on a quota-based system. So this is our first quarter with what I'd say is a, you know, the majority, the vast majority of our territories have been hired and are under quota now for the corn area and the peripheral products. And as they continue, you know, gaining new accounts and then further penetrating those accounts, we expect to see continued SG&A leverage from from that as the territories. And the goal is to have as few territories as we need to service our customers and then have those territories be as kind of deep as possible within each account, and that makes them relatively very profitable territories. And the second piece on the leverage, if you bring in the international piece, You know, our German team has been stable for a while, but we've brought on now direct sales teams in the UK and France. So that right now looks like an expense for us. And as we start turning the crank on actually doing the direct sales in those countries in Q3 and particularly Q4 this year, we should start seeing some leverage, some more leverage out of the international business as well.

Great. Thanks for taking my questions.

Your next question comes from Larry Beagleson from Wells Fargo. Your line's open.

Hey, good morning, guys. Thanks for taking the question, and congrats on all the success here, guys. Doug, I wanted to follow up on Adam's question earlier on the NTAP and the pass-through payment. Do you think some centers have been holding back their usage of IVL, waiting for these enhanced reimbursements to go into effect

You know, too early to say for sure. It would appear to us that the utilization in the early adopter sort of February, March, April sites, they were using it in every instance they felt appropriate. And the more they used it, it seems the more you like it. but did not appear to have any economic constraints. They were sort of economically aware but unconstrained. As you got into, as I mentioned earlier, as you got into June, I think there were sites that were, well, I know, there were sites that were struggling with convincing their VAC committee to bring C2 on board. And so as we add sites now, it will be a blend of sites that might not have been able to come on board were it not for a transitional pass-through or ultimately NTAP as well, and sites that were just in our queue and we hadn't gotten to yet. So they weren't waiting for NTAP, they were more waiting for us. And so obviously if a site would not have been able to order Shockwave were it not for reimbursement, then by definition that's going to be an increase. We'll obviously be monitoring to see if there's an uplift at sort of same store sales, whatever their rate analog is, sort of higher reorders at earlier sites because now they feel even less constrained in use. At this juncture, it's too early to say.

Okay. And, Doug, I'm going to try to sneak two in here. One is just on the long-term opportunity. you know, moderate to severe calcification. You've said, you know, in the U.S. it's 20 to 30 percent of PCI cases. And what's your latest view on the, you know, the peak penetration for IVL? You know, would you be disappointed if it weren't, you know, a third of, you know, of the moderate to severe cases? And I'll stop there. I just wanted to ask one quick one on the pipeline after that.

Yeah. So Almost everybody, every physician we speak to feels, first of all, there's a unanimous view that calcium is becoming an increasing percentage of the patients they treat. So while we say 30% calcified, moderate, and severe combined, it I think the next time we adjust our TAM, it could very well be because we have data that shows us that the percentage is actually higher than it used to be, because certainly the physicians anecdotally feel that it is. And it makes sense, aging, diabetes are the two predictors, and those are both happening. In terms of the severe calcium, the published data suggests that that's 15%, so half of the 30, and that's also the number that most physicians land on as a that's the population that absolutely positively should get, um, some sort of calcium modification. Um, and, and only 5% pre pre shockwave, only 5% in the U S a couple of percent did in Europe. Um, and so we, uh, our ease of use, um, predictability, reliability, safety profile, all the things that resonate with our physicians also, um, um, as is happening now and we expect will happen in the future, is increasing the percentage of the patients that are getting calcium modification versus just a plain stent or a balloon and a stent. And so if 15% is at least the number that ought to get modified, your number would suggest that we would have 10% of the total PCI volume or a third of the total calcium, if that's the number you're asking. Certainly, we don't sort of go into an account and say, okay, you do 500 PCIs, therefore 15% of those, so 75 a year ought to have some sort of calcium modification. We sort of don't do that math. It is certainly evident to us that the percent of cases that are now getting treated in the U.S. is increasing. Any site that has launched C2 is now modifying patients more thoughtfully and able to treat them more clinically appropriately with shock waves. So would I be disappointed with less than 10 percent? You know, we're ambitious. So I would I certainly hope we get at least to that number, and I think Shockwave, because of its ease of use and safety, has the ability to penetrate into the less severe population as well because there's essentially no downside to using our device.

That's super helpful. Doug, just quickly on the pipeline, based on your comments up front, does that mean we're not going to get kind of this fulsome pipeline update late this year, early next year that I think you've been talking about? And just on that theme, just thoughts on additional products adding to the bag, organic versus inorganic. What are your latest thoughts? Thanks for taking the questions.

Yeah, we're still mulling whether in what form we would do a pipeline update. We've talked about the first half of next year, and that's still on our radar. What we don't want to do and don't plan to do is to put up a slide of a design that will hit the clinic in 2024, 2025, or whatever that is like just a prototype. I think that's too much selling futures. Companies get in trouble when they go there. I think our... Current products and near-term products, which we will likely early next year be more comfortable saying, here are the next things coming. Not everything, but here are the things coming in the near term. I think they're pretty exciting. And so more likely than not, we'll share at least the next installments of the application of ShockWave and and thinking the early part of next year still, what I was trying to clarify is that sort of longer-term, multi-year product portfolio cadence that some companies put out there. We don't think that's wise for us to do, nor necessarily helpful to investors.

The inorganic, I mean, the non-IVL question. Sorry, Doug. No.

So we're, you know, Isaac and I both did M&A for a living for, I think, both of us did it for five or six years. So we're not averse to finding things externally that are highly complementary. A challenge one would have in a business like ours right now is what would be stimulative to growth given the growth that we see in front of us. hard to find many things that would make sense as a sort of opportunity cost because if we spend time on something you acquire, then that's time you're not spending on building your own business and building out your technology. So we pay attention and If there's something that is just so obvious that it makes sense to us, then we'll think about doing something, but that's obviously not our main focus. Thanks, Doug.

Your next question comes from Cecilia Furlong from Morgan Stanley. Your line is open.

Good morning, and thank you for taking the questions. Doug, I wanted to start in just if you could provide a bit more detail in terms of peripheral, the trends you're seeing in accounts following initial coronary uptake and adoption, and really where you're able to gain traction where you hadn't previously. Anything you'd call out specifically relative to either ATK or BTK, just anything along those lines would be helpful.

Sure. So our compensation structure for our field team is as I said in my prepared remarks, endeavors to create a balanced selling approach where you can't, we don't get, as a territory manager, you don't get totally absorbed selling C2 and then stop paying attention to peripheral. If you do that, you will not, you won't make as much money. So they've got to sell both peripheral and coronary and they've got to sell both S4 and M5 on the peripheral side to to max out the compensation. Not that our team would ignore peripheral or that they don't like selling peripheral. It's just when you have a shiny new toy like C2 that everybody wants to talk about, there's a natural inclination to be distracted and spend less time on your peripheral business. I think the way we have structured that has ensured that that when you're in the hospital selling C2 and everyone's high-fiving you because the case went so well, you remember that there's a vascular surgeon down the hall who might have a case, a tough iliac case, and you ought to go check that out and see if you can help improve outcomes for that case. So we're quite encouraged that across the below-the-knee and above-the-knee segments that we sort of saw growth generally across the various ways that Shockwave gets used throughout the quarter. So it's not as if, wow, our popliteal business just went through the roof and that drove it. It was a widespread growth. utilization increase across the hundreds of accounts where we sell. We're cautiously optimistic that the goal of leveraging our belief that having a sales team selling both peripheral and coronary and the obvious synergies of treating iliacs for large-bore access where the same doctor does coronaries or treating coronaries for the same doctor who does below-the-knee disease, that our system is somewhat unique in med device in that we think we're stronger having one sales team sell both, whereas most companies have had to split. We don't see that any time in the future. because we do think there's a net positive to our peripheral business by virtue of being in the coronaries.

Great. Thank you. And if I could ask as well, just on Japan, could you just provide an update around your team build-out in the region ahead of approval and reimbursement, and just any additional near-term plans you have related to kind of building out that team further? And thank you.

Yeah, and I'll ask you to take this one to your You're in Sugi's team.

Sure.

Yeah, we have a handful of people now on our team in Japan as we kind of both work more as we work with the PMDA to facilitate the C2 approval as we work with the MHLW to set the path forward for reimbursement and then starting to get some senior leadership in for sales and marketing Uh, and so that's, I think it's, it's going per plan. And, and again, you know, thinking should have hope, hopeful to have PMDA approval in the first half of next year and then a six to nine month, um, cycle to get the, to get the reimbursement in place. Uh, and, and we want to be, you know, prepared. We want, you know, as much education as, as we can, um, um, and awareness to be out there for the product, and then we'll go ahead and execute on the coronary launch next year. Great.

Thank you for taking the questions.

Thank you.

Your next question comes from Rebecca Wong from SVB Learing. Your line is open.

Hi, guys. Congrats on a very strong quarter. I just have a follow-up question on your margin profile. You said gross margin in second half will be similar to Q2 in 82 and then some margin expansion in 2022. So when we think about your longer-term margin profile, as coronary IVL grows to become a larger portion of our business, is this fair to think about? that your growth margin can approach 85% or even high 80s range longer term. And then operating margin, you now expect to be profitable in Q4. Ultimately, what is the ultimate operating margin we should think about in the long term? Thank you.

So Dan and I will tag team on this. The Yeah, so we're investing this year not necessarily at the rate that we are growing our revenue line, but enough investment on the lab expansion, training, equipment, all the stuff Dan described that will keep us at, we believe, a stable gross margin through 2021. Given we're at 82 and we think we'll get a point or two step up out of – out of our contract manufacturer as we move M5 there, your sort of 84, 85 number is not out of the realm of possibility. Dan?

Yeah, no, I agree, Doug. You know, on the operating margin long term, you know, we are, you know, I'd like to say we're going to be above in the In the low 30s, I mean, high 20s is kind of where we're pretty confident in, and I'm hoping we'll even get more leverage. But that's down the road. That's with all the manufacturing efficiencies and really cooking and going direct in a lot of countries. So we expect big things, and we're working towards that.

Thank you. Thank you. And a quick follow-up on China. I know it's still early, but do you have a rough timeline? When do you expect China to contribute in revenue?

So when we signed the agreement in the first quarter of this year, we suggested that the first imported product, so we manufacture the JV imports and they sell it direct to customers, that we anticipated that that would be two to three years out. and that the locally manufactured product was more like four to five. We've not revised that timeframe, so you'd be looking at 2023, 2024 for the imported product. The team, our JV partner is certainly very aggressive, very knowledgeable, and are doing everything they can to support pull those timelines in, but to some extent you're subject to the CFTA.

All right. Perfect. Thank you.

There's no further questions this time. You may continue.

All right. Thanks. Thank you, everybody. I look forward to speaking with many of you over the coming weeks, and I do hope you get a chance to take some time and be ready for the back into the air. Thanks for your support. Speak soon.