Shockwave Medical, Inc.

Good afternoon and welcome to Shockwave's fourth quarter and full year 2022 earnings conference call. At this time, all participants are in a listen-only mode. We will be facilitating a question and answer session towards the end of today's call. As a reminder, this call is being recorded for replay purposes. I would now like to turn the call over to Debbie 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, Isaac Zacharias, President and Chief Commercial Officer, and Dan Puckett, Chief Financial Officer. Earlier today, Shockwave released financial results for the quarter and year ended December 31st, 2022. A copy of the press release is available on the Shockwave website. Before we begin, I would like to remind you that management will make forward-looking statements during this call. within the meaning of federal securities law, which are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Any statements contained in this call that relate to expectations or predictions of future events, results, or performance are forward-looking statements. All forward-looking statements, including without limitation statements relating to our sales and operating trends, business and hiring prospects, financial and revenue expectations, Future product development and approvals and the closing of our acquisition of NEOVAC are based upon our current estimates and various assumptions. These statements involve material risks and uncertainties, including the impact of macroeconomic conditions and global events, such as the COVID-19 pandemic, that could cause actual results or events to materially differ from those anticipated or implied by these forward-looking statements. Accordingly, you should not place undue reliance on these statements. For list and description of the risks and uncertainties associated with our business, please refer to the risk factor sections on our annual report and Form 10-K on file with the SEC and available on EDGAR and in our other reports filed with the SEC. Shockwave disclaims any intention or obligation except as required by law to update or revise any financial projections or forward-looking statements, whether because of new information, future events, or otherwise. This conference call contains time-sensitive information and is accurate only as of the live broadcast today, February 16, 2023. And with that, I'll turn the call over to Doug.

Thanks, Debbie. Good afternoon, everyone, and thank you for taking the time to join us to review Shockwave's results for the fourth quarter and full year 2022. Our Shockwave team delivered another strong quarter and an outstanding year with many important achievements. To highlight just a few of our key accomplishments in 2022, We had two new products approved in the US, demonstrated superiority in one-year follow-up in the PAD3 randomized trial, added regulatory shipping approvals in 12 new countries, including Japan and China, launched over 500 coronary accounts in the US, had several wins in reimbursement across the globe, and broke ground on a new manufacturing facility in Costa Rica. We achieved record quarterly revenue of $144 million in the fourth quarter of 2022, which was more than a 70% increase from the fourth quarter of 2021. This brought our revenue for the year to $490 million, more than doubling our revenues from 2021. What we found most encouraging about these results was the growth and contribution across all product lines and geographies. Our fourth quarter 2022 revenue versus fourth quarter 2021 revenue was up over 60% for U.S. coronary, was up over 90% for U.S. peripheral, and up over 70% for our international business. Rather remarkable across the board. Later in the call, Isaac will share some additional insights from the commercial side of the business, and then Dan will provide some details around our financial results. But I'd like to start with a few updates on recent activity here at Shockwave. We are pleased to have been granted FDA approval for our C2 Plus coronary product in mid-December, which was much sooner than we expected, as our regulatory team continues their trend of efficient approvals. As a reminder, C2 Plus adds 50% more pulses, going from 80 to 120. The experience in the European limited launch gives us high confidence in the performance of C2 Plus, and we plan to launch in the U.S. in the second half of this year. This is the first in a series of new coronary products that we plan to launch with the expectation that each new product will improve customer experience, expand IVL utility and, by extension, further increase coronary penetration. We are obviously pleased that reimbursement for coronary IVL in Germany was increased on January 1st of this year. Germany has the largest number of PCIs in all European nations at approximately 330,000 per year. Yet penetration of coronary IVL has been appreciably lower than in other large European markets, largely because of funding gap for IVL procedures. We believe the increases in reimbursement will meaningfully reduce the principal barrier to IVL utilization in Germany. We're presently working to double the size of our German team in order to support anticipated market expansion. We've been receiving great feedback on our L6 peripheral catheter, which is currently in limited launch in the U.S., As you may remember, this catheter was purpose-built to address resistant, dense calcium in large vessels. The limited launch has been going very well and has given us great insights. Isaac will provide a bit more color later in the call. We hosted multiple well-attended events during the fourth quarter, including at both VIVA and VEATH. We also shared updates from our PAD3 observational study at both of these conferences. We look forward to sharing more IVL data at CRT next week. where there are six sessions highlighting IVL, including further discussions on nodular calcium, as well as a presentation on our Empower female study design. It should be another great showcase for IVL. As you may have seen, late in January, the Society of Cardiovascular Angiography and Intervention, or SCIE, published updated guidelines which included coronary IVL as a treatment option in all U.S. cath labs, including ASCs, regardless of surgical backup status. Previous guidelines restricted recommended treatment to facilities with on-site surgical backup. We believe this is a great endorsement of the safety of IVL. Our C2 launch in Japan commenced in earnest in January. With appropriate reimbursement now in place, we have confidence that we can launch C2 very effectively. Isaac will provide a bit more color later in the call. And while the launch is just getting started, we are generally encouraged thus far. Lastly, earlier in January, we announced that we entered into a definitive agreement to acquire Neovask. And our enthusiasm for the reducer system's potential has grown post-announcement, largely because the clinical community responded even more positively than we had anticipated. This unique product has the potential to elegantly address a very large population of patients who currently do not have a treatment option for their debilitating refractory angina. The acquisition of Neovask, which is set to close by the end of this quarter, is a solid step in Shockwave's strategic mission to leverage the talents of our world-class team to develop and commercialize a steady cadence of novel technologies for underserved patient populations. Before I turn the call to Isaac, I will reiterate, as we shared in our call last month, That we anticipate delivering top-line revenue in the range of $660 to $680 million for the full year 2023, representing growth of 35% to 39% from 2022. With that, I'll turn the call over to Isaac, and then Dan will share more details on the broader business and financial results. Isaac?

Thank you, Doug. We had another strong quarter across the U.S. coronary, U.S. peripheral, and international segments. Globally, staffing issues affected procedural volumes in some centers to various degrees throughout the quarter. As some of our peers have noted, we expect the staffing challenges to continue improving throughout 2023. U.S. peripheral revenue in the quarter was 10% above the prior quarter and almost doubled the U.S. peripheral revenue from a year ago. The launch of our M5 Plus catheter, organic growth, new accounts, and appropriate reimbursement all contributed to the solid revenue increase. M5 Plus continues to be very well received by our customers, and we are seeing increased usage in accounts once they adopt M5 Plus. We are very pleased with the results of the limited launch of our L6 catheter in the US. During the fourth quarter, our focus was to understand the capabilities of the catheter and to collect feedback on which clinical scenarios are best suited for L6. Physicians have indicated that they find it most useful in large iliacs and common femoral arteries. And since the emitters on L6 are spaced closer together than the emitters on M5 Plus, Physicians have noted that it more efficiently cracks large eccentric lesions. It is too early to predict how much L6 will be used in cases that were previously not done with IVL, but in the LMR, nearly 60% of the cases were treated with the 9, 10, and 12-millimeter L6. This suggests that many procedures were likely cases that would not have been done with the 8-millimeter M5+. We intend to move to a full launch of L6 in the U.S. later in the first quarter. Our U.S. coronary business grew nicely during the fourth quarter of 2022 as average daily sales increased 11% compared to the third quarter of 2022 and 65% compared to the prior year. Growth was almost entirely from sales into existing accounts as we added fewer than 90 accounts in the fourth quarter. During 2023, we plan to focus on driving coronary adoption through optimizing the structure of our sales organization, physician education and engagement, the anticipated launch of C2 Plus in the second half of the year, and continued publications of clinical data to support the use of IVL. I am confident that we will continue to be successful in increasing IVL penetration based on the increased utilization we saw in 2022 from the accounts we launched in 2021. Turning to our US sales force, we ended the year with just about 90 territories and about 1.8 clinical specialists per territory. As noted on our last call, our hiring cadence is on pace to end 2023 with between 110 and 120 territories. and over two clinical specialists per territory. We plan to add more territories in the first half of 2023 compared to the second half. Our international business generated nearly 26 million in revenue in the fourth quarter, representing 76% growth from the prior year. We continue to have strong momentum in France and the UK, which have now been selling direct for over a year. Together they grew over 30% in Q4 versus prior year. China was also a strong contributor in the fourth quarter. We expect the momentum in China to continue as we gain provincial listings and subsequent account approvals throughout 2023. That said, the fourth quarter of 2022 and the first quarter of 2023 have been negatively impacted by the surge of COVID that occurred in China. Our international team is now comprised of more than 70 people, which is up from 40 at the end of 2021. We are selling in over 60 countries and are direct in seven of those countries. We have generated a strong return on our investment in international markets, and we expect to continue that investment in 2023 and beyond. In the second quarter of this year, we plan to convert from distributors to direct sales in Spain, Portugal, and Canada. In each of these countries, we expect to achieve significant revenue growth through both penetration and increased margin on direct sales versus sales through distributors. By the end of 2023, we plan to have direct selling organizations in 11 countries, including the U.S. I look forward to providing more detail on the early experience in Japan next quarter. We are very pleased with how the launch of C2 has started and are confident that Japan will be a strong growth driver. Finally, we conducted a limited launch of C2 Plus in Europe in the fourth quarter and are very pleased with the results. The customer feedback has been positive and the product is performing as expected. Customers reported that the additional pulses in C2 plus enabled them to treat longer lesions, bifurcated lesions, and lesions with nodular and eccentric calcium more effectively than with C2. Further, because of the additional pulses, customers reported using C2 plus in cases that they otherwise would not have used C2, primarily because they would have been reluctant to use two C2 catheters due to the cost. We are increasingly confident that C2 plus will not only improve customer satisfaction with IVL, but also increase the adoption of IVL. We anticipate moving to a full market release in most international markets early this year. And as we did with C2, we will incorporate what we learned from our C2 plus experience in Europe to shape our U.S. launch strategy. With that, I will turn the call over to Dan to review the financials.

Thank you, Isaac. Good afternoon, everyone. Shockwave Medical's revenue for the fourth quarter ended December 31st, 2022, was $144 million. a 71% increase from 84.2 million in the fourth quarter of 2021. U.S. revenue is 118.3 million in the fourth quarter of 2022, an increase of 70% from 69.6 million in the fourth quarter of 2021. Coronary products contributed $82.1 million to U.S. revenue in the fourth quarter of 2022, a 62% increase from 50.7 million in the fourth quarter of 2021. Perforal products accounted for $36 million of U.S. revenue, an increase of 94% from $18.6 million in the fourth quarter of 2021. Generators accounted for $0.2 million of U.S. revenue in the quarter. The growth in U.S. revenue is driven by increased utilization at existing accounts, new account adoption of IVL, and continued Salesforce expansion. International revenue was $25.7 million in the fourth quarter of 2022, representing a 76% increase from $14.6 million in the fourth quarter of 2021. International revenue from coronary products was $20.6 million in the fourth quarter of 2022, a 78% increase from $11.6 million in the fourth quarter of 2021. International revenue from peripheral products was $4.5 million in the fourth quarter of 2022, a 61% increase from $2.8 million in the fourth quarter of 2021. Generators accounted for $0.6 million in international revenue in the fourth quarter of 2022. The increase in international revenue over the prior year period reflects continued geographic expansion, including China, growth in customer demand, and growth of our direct sales force in Europe. The increase in international revenue is partially impacted by unfavorable foreign exchange rates. Looking at product lines, our peripheral products accounted for $40.5 million over total revenue in the fourth quarter of 2022, compared to 21.4 million in the fourth quarter of 2021, an 89% increase. Our coronary products accounted for $102.7 million of total revenue in the fourth quarter of 2022, compared to 62.3 million in the fourth quarter of 2021, representing a 65% increase. In addition, sales of generators contributed 0.8 million in revenue for the fourth quarter of 2022, which is an increase of 58% compared to the fourth quarter of 2021. Gross profit for the fourth quarter of 2022 was $126.5 million compared to $71.5 million in the fourth quarter of 2021. Gross margin for the fourth quarter of 2022 was 88% as compared to 85% in the fourth quarter of 2021. Improvement in gross margin was partly driven by product mix as well as continued improvement in productivity and process efficiencies. Total operating expenses for the fourth quarter of 2022 were $84.1 million. 46% increase from $57.5 million in the fourth quarter of 2021. Sales and marketing expenses for the fourth quarter of 2022 were $43.4 million compared to $33.2 million in the fourth quarter of 2021. The increase is primarily driven by Salesforce expansion. R&D expenses for the fourth quarter of 2022 were $23.7 million compared to $14.7 million in the fourth quarter of 2021. The increase is primarily driven by headcount growth. General and administrative expenses for the fourth quarter of 2022 were $17 million compared to $9.6 million in the fourth quarter of 2021. The increase is primarily driven by higher headcount to support the growth of the business. Net income for the fourth quarter of 2022 was $140.9 million compared to net income of $12.9 million in the fourth quarter of 2021. We recognized a $99 million income tax benefit in the quarter upon the release of a substantial portion of the valuation allowance related to our deferred tax assets. Basic net income per share for the period was $3.89. Diluted net income per share for the period was $3.71. We ended the fourth quarter of 2022 with $304.5 million in cash, cash equivalents, and short-term investments. Finally, I'd like to briefly recap some highlights from our full year 2022 results. Total revenue for the full year 2022 is $489.7 million, an increase of 107% compared to full year 2021 revenue of $237.1 million. U.S. revenue for the full year 2022 is $407.4 million, representing a 119% increase over 2021 revenue of $186.3 million. International revenue was $82.3 million for the full year of 2022 compared to $50.8 million in 2021, representing a 62% increase. Gross margin for the full year of 2022 was 87% compared to 83% in 2021. Total operating expenses were $300.6 million in 2022, an increase of 53% compared to operating expenses of $196.6 million in 2021. Total net income for the full year of 2022 was $216 million, compared to a net loss of $9.1 million in 2021. At this point, I'd like to turn the call back to Doug for closing comments.

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

Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate that your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star key. One moment, please, while we poll for questions. Our first question comes from Travis Steed with Bank of America. Please proceed with your question.

Thanks for the question. Doug, I did want to ask about PCI volumes in Q1 or anything to call out in Q1 if the PCI volumes were back to normal, any other trends to call out. And if the street was kind of thinking about Q1 down a couple million versus Q4, if that's the right way to think about it. And that'll fall up on margins after that.

Yeah, as we talked about earlier this quarter, there was a sort of a lull in the October-November timeframe that started to recover. In December, I'd say, on balance, that recovery appears to have been sustained. So we're, I don't know, be able to explain what happened other than sort of a variable staffing seemed to be one of the biggest contributors or staffing outages in the beginning of the fourth quarter. But it doesn't, the lull in October does not seem to have carried forward into the first quarter.

Okay, that's helpful. I guess you're not going to comment on the street numbers for Q1, I assume. But if you are, that'd be helpful. And then the follow-up would be on margins. If you think about like X, excluding the dill dilution, Just think about margins for the base business. If 2023 is a year that you can get margin expansion or margins are flat or down in the base business given some of the investments you're making.

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

Sounds good. Thanks for the questions. We'll follow up.

Our next question comes from Adam Meter with Piper Sandler. Please proceed with your question.

Great. Good afternoon, and thank you for taking the questions. I actually wanted to start on reimbursement, where there's been some investor focus, and specifically U.S. Coronary with the NTAP expiring October 1, 2023, and then the transitional pass-through payment expiring June 1, 2024, I believe. Maybe just walk through how you're thinking about those potential impacts on your business, if any. And with the transitional pass-through, I know you're in the process of trying to up-map your code before the TPT expires. So maybe just talk path forward there and level of confidence that you'll ultimately be successful and also have a smooth transition with no reimbursement air pocket. And then I had a follow-up. Thanks.

Okay, great. And... One of the reasons I'm confident is because Rob Fletcher, our Vice President of Marketing and Market Access is running the program, who also happens to be on the call. So I'll do a very brief overview and then hand it to Rob. So NTAP, as you pointed out, sunset this year. That's for inpatient procedures. It is not what drives decision making or perception of reimbursement in intervention procedures generally, both peripheral and coronary. And then TPT is sunsetting next year in the July timeframe. And we've been very focused on strategies for ensuring that we have a strong path going forward to prepare for that sunsetting. And I'll let Rob sort of provide... perspective on how we're approaching that and why we feel really good about where things will land ultimately.

Hi, everyone. Thanks, Adam, for the question.

Can you guys hear me okay?

Yep.

Great. Yeah. So, Adam, I'd like to take this opportunity to give some background into this, you know, some of the issues that you've raised here. And let's start with the transitional pass-through because I think that's what's probably most on everybody's mind. So, So obviously, all transitional pass-through programs are temporary in nature. They come to an end. And it's CMS's routine business to analyze the data collected and make a determination on how and how much to pay. So there's two main things you need to successfully transition off of a transitional pass-through program. One, you need a procedure-level code that hospitals can use to get payment after the program ends. So, a new Category 1 CPT code for coronary IVLs procedures will become effective on January 1, 2024. So, check. That's in place. Second, you need cost data that is sufficient in volume and meets the criteria for that higher APC assignment. So, uptake of coronary IVL, as you know, has been very rapid, which also means that there's a large volume of claims data with which CMS can analyze and make their determinations. We've of course analyzed Medicare's claims data following their methodology and applying their criteria. I can say that the data are compelling. We meet criteria for the higher APC, that is APC 5194, and we meet it now. I suspect that the scenario though that investors are really concerned about is the scenario where if after the TPT ends, payment falls back down to the baseline APC, thereby leaving No additional payment for coronary IVL. And this is an understandable concern because it's happened before to other technologies in med tech history. But we think this risk is very low. That's because the data is very clear and compelling. We're not teetering on the edge of the criteria. We're well past it. We've been continually refreshing the analysis as data continues to roll in from the program. The conclusion has been stable and consistent that we meet criteria for the higher APCs. So CMS makes database decisions, and they're going to do so with this TPT program as well. I can tell you that coronary IVL clearly does not fit into the baseline APC. So therefore, we really do not see this as much of a risk. So for investors, and you kind of mentioned this, Adam, I'd like to put forward that the risk really isn't in the payment going away from our view. It's more in the timing and the smoothness of the transition from TPT to a permanent APC assignment. The reason why there's some risk around this is because there's a lack of synchronization between the transitional pass-through calendar, which is quarterly, and the APC calendar, which is typically addressed on an annual basis via the CMS's rulemaking process. So the TPT program ends on June 30th, 2024, which is obviously in the middle of the year. CMS could decide to address the TPT transition in the 2024 rule or in the 2025 rule. So if CMS were to wait until the 2025 rulemaking to address the transition to an APC, then there would conceivably be a six-month gap between additional payment being available via transitional pass-through, which will be in place for the first half of 2024, and additional payment via an APC assignment that would go into effect in January 2025. So we're aware of this, of course, and Shockwave and our partners from the interventional community have therefore asked CMS to address the transition from transitional pass-through to an APC assignment in the 2024 rule. So as I mentioned a moment ago, we believe that the data is clear, compelling, it's stable, and it's voluminous. We believe that the procedure level coding is in place And frankly, there's just sort of the importance of coronary IVL and how quickly it's become a critical tool in PCI. So in the short time that it's been on the market, IVL has become the most widely used plaque modification tool in PCI. And also, as we've seen, as was mentioned earlier in the call from recent expert consensus statements from the Medical Society, it's uniquely beneficial in female patients, suggesting that IVL It could be frontline therapy for women, and it also enables patients in rural areas to receive treatment for their complex disease in nearby hospitals without having to be transferred to a faraway hospital that has on-site cardiac surgery. So we believe these issues are also important to CMS, and they're aware of these unique advancements, and we believe that CMS will consider these in their decision whether to address coronary IVL in 2024 or wait until 2025 to make an APC assignment. But I just want to point out that even if it winds up being 2025, we believe that the risk or impact to business would certainly be short-term and manageable. We're talking about six months. And as stated previously, coronary IVL has become an important therapy in PCI. And I would also mention that while that might be sort of a countercurrent from a reimbursement perspective, the sort of tailwind, would be that there would be a CPT code in place that will remunerate physicians. So there's a few factors to balance here, Adam. But, you know, I just wanted to take a moment to kind of elaborate on the situation and why Shockwave are competent in the prospects.

That's very helpful, Rob. Appreciate the fulsome response, and thanks for the color there, Doug. Maybe for the follow-up, I wanted to ask about U.S. coronary growth, where the story is really all about utilization and same-store sales growth in 23. I think there were some comments in the prepared remarks about the different levers that you're going to pull on, but I was hoping you could just kind of flesh that out a little bit more, how you plan to walk your customers up the adoption curve, drive center utilization, whether it's T2+, nodular calcium. the construction of the Salesforce, just any more color there would be much appreciated. Thank you.

Yeah, Adam, hi. I'll take that. This is Isaac. I think in the prepared remarks and what we laid out on the last call was sort of the outline of the plan that we've already enacted to help drive penetration. It's coronary penetration, but it's also peripheral penetration, really. On what we've seen from our sales data is that on the accounts that we launched in 2021 for Coronary, we see what happened to utilization of the product in those accounts throughout 2022. And ultimately, that gives us confidence that we can drive continued penetration. That and where we think the unmet need is is still quite a bit higher than our current penetration. From a territory optimization, we talked about adding territories and increasing the number of FCSs per territory. Generally, what that does is just gives you more touch points with the physicians, the nurses, the technicians, and helps us launch products while we do that. The educational programs that we're putting in place this year for our team, our sales team, and from peer-to-peer educational programs for physicians will focus on kind of more advanced techniques for IVL and lesion morphologies and how to treat those lesion morphologies more effectively with IVL. So it's really incorporating the learnings we've had since the launch and then driving new education. We have clinical publications coming out, specifically around eccentric and nodular calcium, and then that will dovetail nicely into what we're seeing on the C2 plus performance in Europe. which is you've got more pulses and it's more effective in treating nodular calcium with those pulses. So I think as we look towards the second half of the year, launch C2+, we want to hold that to the second half of the year so we can effectively launch L6 in the first half of the year. But then with the publications, the peer-to-peer training and C2+, to reinforce utilization in lesions that right now are maybe less ideal for IVL because of the 80-pulse limit.

Really helpful, Isaac. Thank you. Yep.

Our next question comes from Bill Polvinick with Canaccord Genuity. Please proceed with your question.

Great. Thanks. Good evening. I'd just like to start out with C2. A couple of questions. Just one is, you know, with C2 plus and more pulses, you know, per unit, does that, You know, would you expect to see maybe a decrease in the number of units sold for the cases that we're maybe using two, that that'll all go to one? And then just back to the sales organization in the U.S., and I think one of the comments either you or Doug or Isaac made was just in Salesforce optimization, I would assume that was in relation to just adding more TMs and SCSs. But I just wanted to make sure, you know, are you bifurcating the sales force to start focusing some on coronary and some TMs are specifically on peripheral? Or is it more just kind of the you're going to continue with one foot sales force addresses all?

Yeah, so I'll start with C2+. Isaac can talk about sales force. C2+, we see kind of 1.0 something catheters per case. There's a very today with C2. It's a premium performance product, but it's also a premium price product. Folks are quite reluctant to grab a catheter, which also means there are cases that they look at today and say, that might take two catheters. I'm not going to use C2. And the early feedback out of Europe in our limited releases is there are some percentage of cases they are doing now with C2 plus in the limited release that they otherwise would not have been using C2 on for that very reason. I know this is eccentric and it's tough. I'm not going to get halfway through the case and then have to buy a second procedure. So I can treat eccentric. I can treat longer lesions with C2 plus. and and bifurcations where I would have otherwise maybe have to burn two catheters now I can do a full case with that 50% increase in impulses so our our impression and it's an impression so far is that the de minimis sort of second catheter cases that we may lose because of the extra pulses will be greatly outweighed by the incremental cases will pick up because of the greater treatment dose, if you think about it that way, that's going to be inherent in this catheter. So I certainly don't think you're going to see any decrease in unit numbers as a result of C2+. And then Isaac can talk about Salesforce optimization. Sure.

Yeah, so good clarifying question, Bill. We are just, we talked about optimization. It's really geographic optimization, optimization of how many FCSs each territory has, and optimization of how many accounts are in each territory. And the key to that is, goal is to launch two products per year. And the more accounts, obviously, a territory has, the less time you can spend in each account, the more diluted your presence and your messaging becomes. And the more products the rep has to sell, that dilutes again. So as we bring in more products into the bag, you know, L6 this year, C2 plus next year, we got two more on the slate, or C2 plus this year, two more on the slate next year. We want to have these territories right-sized in terms of the number of hospitals so that the people servicing the territories on our team can spend adequate time at all places within the hospital that they need to be selling.

And then just clarification on Travis's question on op margins on the core business. I want to be clear. So at least stable to improving op margins in the core business, including the acquisition, is that a fair way to think about it?

Excluding the acquisition, this is Dan. Excluding the acquisition, we should be fairly stable. We're going to invest heavily in 23. Sales and marketing, like Isaac alluded to earlier, we're going direct. We've got some other initiatives in place. R&D, we've got, you know, 20-plus programs. So we're going to invest, but we're going to be fairly stable with that heavy investment even. Yeah, ex-acquisition. Yes. And then you're going to top the, you know, $30 million this year, even if it's a shorter year. You know, we got some work, and we'll refine that once that deal is closed. But, you know, you've got to factor that in on top of it.

Into level set and make 100% clear, I mean, you ended at a 29.5% operating margin in the fourth quarter. Is that the base we're building off of?

No, I'd look at kind of the blended, you know, for the year where we ended up, we should improve off the year. You know, we ended up at 25%, I think, for 22. So we should get a little improvement. I'd expect OPEX, you know, for the full year to be about the same in 23 as 22 as a percent of revenue.

Thank you.

Our next question is from Michael Pollark with Ulf Research. Please proceed with your question.

Okay, thank you. Maybe an encore opportunity for Rob here. Great update on the TPT pathway. The question on NTAP was also asked, and I'd love just a little more meat on the bone, their puts and takes around the sunset of that booster. payment, you know, um, will it matter for customers, um, and you using your products? If not, you know, why not?

Yeah. Uh, I'd be happy to answer that, but Rob will do a better job. So, uh, I'll let Rob take it.

All right. Thanks for the question. When it comes to the inpatient side, I think the important thing to understand is that, um, All of the PCI procedures map to one of four different DRGs, which are payment bands. And the determination of whether you get sort of a baseline version of the DRG or some sort of higher paying version are really all based on patient factors, like complications and comorbidities, and it's not really based on the device type per se. So in that sense, you know, I think all of the PCI devices are on a level playing field. And so I think that's the first and most important thing to understand. So that's why kind of the inpatient reimbursement side of things, as long as you're kind of in that same group at ERGs, which we are and everything else is, it's reckoning we all kind of will get paid the same. I think that's the important thing to understand. And so I'm not sure that, you know, we have, we are enjoying an NTAP presently, but just sort of the two edges of this as well, we, I don't know that it's – I'd point to that as the thing that's, you know, driving our business incrementally. It's there. It's helpful. But if it goes away, it's also sort of we don't think there's – you know, we don't know that there's upside and we don't know if there's downside to it per se. So we're not really handicapping it as a major driver. I understand how that can be the case in many other markets, but in the interventional space, as Doug mentioned earlier in the call, it really tends to be driven by what's happening on the outpatient side.

Yeah, and one of the reasons I feel pretty confident that that is true is when we launched in peripheral, where about a half of the hospital-based procedures are inpatient for, I don't know, four years, all we heard was, you're not reimbursed, you're not reimbursed. And when we try to explain to customers, yeah, but you fall into the same DRG as atherectomy and stents and everything, they would point back to the, yeah, but outpatient, athorectomy has incremental payment and you don't. And we were sort of pigeonholed as an unreimbursed device even though in theory half of our procedures were paid exactly the same as other procedures because it's all dictated by the patient condition, not by the device that you're using. And when we received incremental NTAP for inpatient procedure, that didn't have any incremental benefit for us in our coronary pickup. The pressure that we felt initially when we launched and the customer frustration when we initially launched was, hey, you know, this is a big new cost to our PCI procedures. You'd beg our reimbursement. As soon as we got transitional pass-through, it completely relieved all the pressure and nothing really changed a few months later when we got in-depth.

Yeah, let me just pile on one thing, because I think we get this question a lot, and we're trying to put it to bed. The other scenario that we can point to, in addition to what Doug just said, is, as Rob said, if you do an interventional PCI, it maps to one of four DRGs. None of those matter what technology is used in the procedure. So if you take atherectomy, for instance, if you take atherectomy, there it is. If you do atherectomy and PCI, and it's an inpatient procedure, one atherectomy product on the market costs very similar amount to what IVL costs. The other atherectomy product costs about half that much. And we never hear any physician talking about choosing one atherectomy product over another because of the cost.

They just don't think that way.

Very helpful. From an interesting topic to a less so one, maybe for Dan, with the release of the valuation allowance, should we be modeling in a tax rate in 2023 or is there still some NOL to burn through such that, you know, a tax accrual is 24 and beyond?

Yeah, no, for book purposes, you know, we've guided like 25% on the tax assumption. We do have NOLs. We've got $239 million on NOLs. We should burn through those in 23 or so So on the cash side, expect to pay probably less than $10 million in 2023 for taxes. Hopefully that helps.

Yep. Thank you.

Our next question comes from Larry Beagleson with Wells Fargo. Please proceed with your question.

Good afternoon. Thanks for taking the question. I guess I will take advantage of Rob's presence and ask one more on reimbursement. So, Rob, just if you meet the criteria for APC 5194, why is the potential timing gap? That wasn't clear to me. And just remind us of the percent of U.S. coronary that's outpatient versus inpatient. I had one follow-up.

Hi, Larry. Thanks for the question. Okay, so just take it in reverse order. between inpatient and outpatient, we generally have that at about 50-50. And I think as data emerges with the coding sets that are coming into fruition, we'll be able to better answer the question in the future about how much that mix may be the same or different for coronary ARVL, but we don't really have any reason to think it's different. So that's sort of your second part of your question. Larry, your first part, I believe, was related to the sort of timing gap. And yeah, I think what happens is that transitional pass-through is on a calendar, a quarterly calendar. And so we happen to have our TPT approved in the third quarter of 2021. So that means it started on July 1st. The program goes for three years. So it's supposed to then sunset or end on June 30th, 2024. That happens to be mid-year. CMS typically wants to make their determinations on APC assignment via their annual rulemaking process, which allows for public comment and full sort of description of CMS's analysis and thinking and reaction to that. They like to consider it very carefully. And so based on that calendar, that means that They would either have to address it in their proposed rules or final rules here in 2024 or 2025, since the transitional program ends in the middle of the year. So that's really the rub, is will they address it in 2024 or 2025. We believe just based on the sort of stability, consistency of the data, that likely, whether they do an analysis now to make a determination for the 2024 rule, they do it in a year. they're going to come to the same conclusion, and that is a pretty clear and compelling, you know, this needs to map to 5194. So they're going to do it anyway, we think. And so for the reasons kind of mentioned earlier, we believe that it's more important to do it now. That avoids any kind of potential disruption or confusion among hospitals and physicians. And, you know, the other thing I'd just offer up, Larry, is that, you know, this has been – really a success story, we think, for shockwave, but also for CMS, because this was kind of one of the first, that I'm aware of anyway, the first breakthrough designated device to kind of go all the way through the process in interventional cardiology. And so, you know, here this program, within months of FDA approval, the transitional program was, the pass-through program was initiated. It was terrific at doing this job of you know, medic or facilitating access to, you know, breakthrough therapy for medical, for Medicare beneficiaries. And so now they come to the end of this program, it's this sort of, you know, structural gap caused by their calendars. And, and, you know, we think that this has been so successful that they're, you know, the reason I believe here is that they're going to just stick the landing and make sure that they transition off of the program in as successful a manner as they sort of transitioned onto it. Cause at the end of the day, you know, one of their aims is to make sure that Medicare beneficiaries have access to breakthrough devices. So it seems consistent with their program that they'd want to, or in their mission, that they'd want to avoid any time gaps. So that's sort of our thinking of why they may find it compelling. Does that help, Larry? Okay.

It does. Just to be clear, it could be changed for the 2024 rule this year. We could find out about it, or it could be change for the 2025 rule. You're just not sure which one it's going to be, but it sounds like you think that it makes more sense and there's a good chance it could be for the 2024 rule. I don't want to put words in your mouth, but is that the right way to think about it?

That's right, Larry. And we and some of our partners in the interventional cardiology community have gone to CMS and made that request that they addressed it in 2024. So it's up to them whether they decide to do that. But we certainly put forward all of the analysis and the arguments for why they may do that.

That's helpful. And just lastly, Doug, I feel compelled to ask, no one's asked yet about Abbott's acquisition of or pending acquisition of CSI. I mean, Abbott, you know, obviously believes that, you know, that atherectomy share has stabilized. I think, you know, that's the part of the impetus for doing the deal. I mean, what's your view on that and how their acquisition could change things for you? Thank you.

Yeah. As you know, we've spent almost all of our time focused on all the calcified patients who aren't getting any calcium modification. So we've never thought of this as a share game between shockwave and atherectomy. We see ourselves as largely complementary, at least our current patients. device that we sell in the coronaries. There's obvious evidence that people were, where you could use shockwave, people were using shockwave particularly instead of orbital versus rotational. I mean, I think the directional, I think the the atherectomy procedures we did pick up as a quote-unquote share were largely diamondback, less so rotablator. I don't know too many people who are trying to switch back to atherectomy. I don't know anyone, in fact, who's saying, oh, I was using shockwave, I'm going to go back. So has the full Has the dust sort of settled where, okay, now I know where I'm going to use IVL and I'm not going to further reduce my atherectomy utilization? I'm not sure. One of the areas where atherectomy has some attractiveness is if you have a long lesion and you're not sure if 80 pulses is going to get it done, you might grab an atherectomy catheter to treat the longer lesion because you can sort of keep moving it. we'll see if C2 plus and its ability to treat longer lesions enables the physicians to use a more predictable, safer option, in which case then maybe the shift hasn't been fully realized yet. We'll have a better sense, I guess, post C2 plus launch in the U.S. We won't really be able to tell internationally because there's really no presence for Diamondback internationally.

All right. Thank you very much.

Our next question comes from Cecilia Furlong with Morgan Stanley. Please proceed with your question.

Great. Good afternoon, and thank you for taking the questions. I wanted to ask about your BTK presence portfolio, if you will, what you've seen to date with M5 Plus, Plus S4, how you're thinking about growth in the BTK region, specifically in 2030, versus 22, and then just how you're thinking about that business from a longer term. I know you have many S, but just how you're thinking about better kind of targeting that region going forward.

Yeah, so we're – I think what we've – we've been running a – almost like a feasibility exercise with S4 to prove that IVL is really an excellent product for below-the-knee disease, and yet – It requires S4, which is a shorter balloon, and most below-the-knee lesions are quite long. It requires some patience and persistence, and luckily, many physicians absolutely love IVL, and they see that it is safer and more reliable and reproducible for below-the-knee lesions, so they do the work with a 40-millimeter-length balloon. We're certainly... encouraged thus far for the sort of the area just below the palpatines for below the knee. We're seeing incremental adoption of the smaller diameters, the 3.5 and 4s of the M5+, which sort of validates to us desire for something longer than the S4. And yet we also see how Limited, our penetration is, to date, relative to the vast number of patients who have calcified arteries below the knee. I mean, it's one of the most calcified vessel beds, and our penetration is, relatively speaking, more than above the knee lesions. So we're sort of licking our chops, both for further utilization of M5+, but as you indicated, we anticipate having M5+, S4, and at least two other versions in the next 24 months, 12 to 24 months. So, uh, we, uh, we see BTK as a meaningful growth driver to our business, uh, in the 2024, 2025 timeframe. Uh, and that also is one of the reasons why we're running the BTK2 study because we think, um, sort of having a robust data set land right as our portfolio expands and we have a spectrum of different devices that are that are custom designed to treat the variety of vessel beds and and lesion lengths for the complex disease below the knees is we think is going to end up in a really nice package come 2024, 2025. Great.

And if I could just follow up on China as well, if you could just speak to in more detail what you have seen recently just from COVID pressure from a geographic standpoint, where you are at this point from a rollout standpoint, and then just how you're thinking about timelines at this point too for the locally manufactured product.

Cecilia, as you've heard, the COVID, you know, when they opened up in Q4, COVID swept through very quickly. And that impacted hospitals, procedures, patients in Q4 and Q1. I think what we're seeing kind of post-Chinese New Year is in most of the big cities, that it's kind of back to normal because COVID went through so quickly. And hospitals are back to normal. So from a trend standpoint, we'll have our biggest number of cases in China this week since launch. We'll have, I think, excellent growth this year compared to last. I don't want to speak about the numbers themselves, but really a strong year. And that's based on kind of an excellent launch by that team, the JV team. They've just done a fantastic job with promotion, physician education, and marketing as they've launched the product. They're currently doing the yeoman's work of getting provincial listings. So you get a code for the product, then you need to get that code listed, and then hospitals can start buying. So they're working through that, and that's just going to be work this year. But within the procedure, you know, all provinces pay some amount for a PCI procedure. So there is payment for the procedure and then if you get the listing, the hospital can buy the product. And then we'll work on with the provinces getting additional payment on top of the PCI procedure payment for IVL. So this is going to be a multi-year run, but there's a plan in place and it's being executed. On the local product, we are not yet ready to say when we expect that to be ready.

Great.

Thank you for taking the questions.

Sure.

Our next question is from Iman Safar with Deutsche Bank. Please proceed with your question.

Hey, good afternoon. Thanks so much for taking my question. First on Germany and the new coronary reimbursement you got there, obviously a huge PCI market and generally For reimbursed medical devices, you know, you see pretty fast and pretty extensive adoption. So I'm just wondering how we should think about, you know, how big that market could be and how quickly in terms of 2023 revenue contribution. It also sounds like you have some market development work that still needs to be done there in terms of Salesforce expansion, et cetera. So if you can just frame that opportunity both near-term and long-term, that would be great. Thank you.

Sure, and welcome aboard, Imran. Good to have you. Thanks. The Isaac and I can tag team on this. So, for perspective, we talk a lot about Japan at 250,000 PCIs a year, and Germany is actually north of that at 330,000. Prices generally for devices are lower in Germany than they are in Japan. They are really, really good at... putting the screws to companies to keep prices down, and it certainly constrained utilization of IVL, because when a controller pulls a doctor aside and says, stop using that product, you're causing us a loss, they are very good at putting pressure on physicians to constrain use or get prices reduced. We took the strategy in Germany, as we did in the US, of sort of understanding the system and understanding that it was a cost-based system And fortunately utilization was high enough similar to what we've seen in the US That we stood a very good chance of having an uplift in our DRG which which thankfully Did come to fruition this past January The the size of the market may not be quite as large as Japan even though the volume is higher just because of that sort of ASP differential, but it is a it stands to be our largest opportunity, not just incremental opportunity, but total incremental opportunity in Europe, and it ought to be our second largest, or I guess largest country, sort of China, Japan, Germany, somewhere in that neighborhood, whereas now IVL utilization is sub-1% of PCIs in Germany, whereas it's sort of north of 3% in countries like the UK. So we've got sort of a manifold increase in utilization that we ought to see in Germany.

Okay, and then one quick follow-up, and depending on your answer, this might be a little bit of an esoteric question, but the CTO PCI segment seen some pretty compelling case series published recently showing some pretty good outcomes with IBL. I'm just wondering how big that opportunity is. Is it pretty niche or is it potentially pretty meaningful in terms of addressable market for IDL?

It's important because the top operators spend a disproportionate amount of their life dealing with those cases. So when we first launched, like when Isaac and some of our colleagues flew over to Europe when we first got approved and launched the product because we didn't have any sales infrastructure. We started with those CTO operators. Now, it's also the kind of case that tends to get referred because other people don't want to deal with it because it is not the routine PCI. So it's a niche. It's in the single-digit percents of the total cases, but it's... Being part of that and being part of the solution for those CTOs is meaningful because of how it enhances the reputation of the technology. It's important to us. If it all went away, we'd still have a very robust business. And it's certainly an area where we want to continue to get better because it It does what we try to do all the time. If we can make those cases go more smoothly, more predictably, we will increase utilization overall, pull more cases out of surgery, and expand utilization of IVL.

Yeah, I think to that point, and just to that point from an investment standpoint, You know, we have a significant amount of R&D dollars going into programs that are intended to make IVL products that are very crossable and much more crossable than we have today. And that's really going in and tackling that, you know, CTO or wire crossable but not balloon crossable type of lesion.

Thank you for taking my questions. Thank you.

We have reached the end of our question and answer session. I would now like to turn the floor back over to Doug Gluckshank for closing comments.

Thanks, everybody, for your time. And hopefully it was helpful, particularly on the reimbursement side, which I know there were lots of initial and follow-up questions. So appreciate the interest and attention with chatting with everybody in the near future.

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.