Shockwave Medical, Inc.

Good afternoon and welcome to Shockwave's fourth quarter and full year 2023 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 Renee Gaeta, Chief Financial Officer. Earlier today, Shockwave released financial results for the quarter and year end of December 31st, 2023. A copy of the press release is available on Shockwave's website. Before we begin, I would like to remind you that management will make statements during this call that include forward-looking statements within the meaning of federal securities laws which are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Any statements contained in this call other than statements of historical fact 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, clinical trials, reimbursement proposals, 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 global business, political and macroeconomic conditions 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 section of our annual report on Form 10-K on file with the SEC and available on EDGAR. And in our other reports filed periodically with the SEC. On today's call, we will refer to both GAAP financial measures and adjusted EBITDA, a non-GAAP financial measure. Please refer to today's press release for reconciliation of net income to adjusted EBITDA and additional disclosures regarding this non-GAAP financial measure. Stock wave 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 15, 2024. 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 the full year of 2023, which proved to be another banner one for the company. During the year, we launched C2 in Japan. We converted to direct sales forces in Spain, Portugal, Italy, and Canada. We launched two new products, L6 for peripheral vessels and C2 Plus for the coronaries. We were granted DRG codes specific to coronary IVL in the inpatient hospital setting, which pay on average about $9,000 more than codes for PCIs without IVL. We acquired and integrated Neovasc and the reducer product, which is the first device that addresses refractory angina, an often debilitating condition that impacts a large patient population that has no good treatment options. And we raised $750 million in a convertible debt offering. We achieved record revenue of $203 million in the fourth quarter, which was a 41% increase from a year ago, and a 9% sequential increase from the third quarter of 2023. Our revenue for the full year of 2023 was $730.2 million, a 49% increase from 2022 revenue. We witnessed excellent performance in all areas of the business, with U.S. peripheral and coronary businesses growing 47% and 41% respectively. and our international IVL business growing 75% compared to 2022. Really stellar performance. The team continues to execute at a high level, and we now have over 1,500 global employees. Our products are approved in 70 countries, and we are pleased that we now have EU MDR certification for M5+, S4, and C2-plus catheters and our generator. The MDR process was a long journey and required a major effort by the team. Our U.S. coronary business continues to shine, and we have a couple of meaningful reimbursement tailwinds that will support continued adoption. The new hospital inpatient DRGs for coronary went into effect in the fourth quarter of last year, and additionally, physicians are now being paid when they use coronary IVL, thanks to the CPT code that became effective on January 1st of this year. As we have witnessed in the past, reimbursement takes time to influence customer behavior, but we anticipate that the combination of these new payments will have a positive impact on our U.S. coronary business and will help lower the economic friction that has historically been the biggest constraint on increased utilization of IVL. We anticipate that physicians will increasingly use C2+, whenever they feel it is clinically appropriate, versus feeling pressured to only use it selectively or after exhausting all other options. We believe an IVL-first strategy is optimal for patients and is now even better economically for customers. Also on the coronary topic, we are continuing the launch of C2+, which has 50% more pulses than its predecessor, C2. Isaac will talk a bit more about this later in the call, but early reception from our customers has been very positive. On the US peripheral side, the prior authorization issue appears to have stabilized as our customers are learning how to navigate Aetna's increased scrutiny on peripheral procedures, and we have not seen any other payers follow Aetna's practices. Meanwhile, multiple medical societies have come together to form a working group, and they have been applying pressure on Aetna in hopes of getting them to reconsider their policy. There also has been considerable attention paid to Medicare Advantage recently. At the federal level, CMS recently announced new rules which will make it harder to pursue prolonged prior authorization practices. There also has been some productive recent movement among commercial payers specific to Shockwave, as Humana, the second largest Medicare Advantage payer, issued a positive coverage decision for IVL for their Medicare Advantage plans effective January 1, 2024. Staying on the topic of U.S. peripheral reimbursement, we were pleased to see that CMS improved hospital reimbursement by assigning peripheral IVL to new MS DRGs. These new DRGs increase inpatient hospital payment by $4,000 to $10,000 over previous levels. Most peripheral interventions are performed in an outpatient setting. However, a majority of the hospital-based below-the-knee procedures are for the more severe chronic limb-threatening ischemia, or CLTI, which makes them more likely to be performed on an inpatient basis than other procedures. This reimbursement uplift nicely complements the upcoming advances in our below-the-knee product offering that starts later this year. While on the topic of new products, we will be focusing back on peripheral in the second half of this year with two launches. First, we will introduce an upgraded version of L6, which will go from one pulse per second to two. We witnessed a very positive response from our customers when we made this same upgrade going from M5 to M5+. Shortly after the L6 rollout, we plan to launch the E8 peripheral catheter. E8 has an 8-centimeter-long treatment zone, which is twice as long as our current S4 offering, and is specifically designed to treat longer, diffuse lesions that are common in below-the-knee cases. We look forward to seeing our customers' response to E8. We think they're going to love it. Rounding out our future BTK offering, we anticipate the approval of our Javelin peripheral catheter in the latter part of the year and look forward to starting the limited market release of that product prior to an expected full market release in early 2025. That makes three significant new peripheral launches within the next year. And finally, on the operations front, our facility in Costa Rica has gone from first shovel in the ground in June of 2022 to a validated clean room and C2 Plus line in December of 2023. Amazing progress, frankly. We'll be hosting regulatory audits starting this month and anticipate shipping finished product into inventory in the third quarter of this year. 2023 was a great year for Shockwave, and we are even more excited about what lies ahead in 2024. We expect revenue between $910 to $930 million for the full year of 2024, representing growth of 25% to 27% over 2023. Before I turn the call over to Isaac to provide more color on the commercial front, I want to take a minute to thank our outgoing CFO, Dan Puckett, for the tremendous job he has done in his eight years at Shockwave. During his time here, he was instrumental in our growth from a small pre-revenue private company to a public company with over $700 million in revenue. Dan is not only a fantastic CFO, but he is a joy to work with. He's been the biggest cheerleader for all of us, always supportive and inspiring to everyone around him, and he will be sorely missed. We wish Dan well in his retirement and are pleased to introduce our new CFO, Renee Gaeta, who is jumping right in today and will present the financials a bit later in the call. And if she gets anything wrong, it's all Dan's fault. With that, I'll turn the call over to Isaac.

Thank you, Doug. Our record results in both the fourth quarter and the full year of 2023 reflect outstanding contributions from our businesses and teams around the globe. Q4 2023 was strong for our U.S. coronary business. Revenue grew 40% compared to Q4 of 2022, 11% sequentially from Q3 of 2023, and 15% sequentially on an average daily sales basis. The C2 Plus launch is proceeding well. We launched over 1,000 accounts, and the product has been very well received. What is particularly appreciated is the utility of more pulses and longer diffuse lesions, eccentric lesions, and calcified nodules. We expect continued momentum in the coronary business as our sales team focuses on the C2 Plus launch and on communicating both the favorable reimbursement changes and additional physician fees for using coronary IVL. Revenue from our US peripheral business in Q4 2023 was up 19% from a year ago, flat sequentially compared to Q3, and up 3% sequentially on an average daily sales basis. As Doug mentioned, we are seeing a stabilization of the prior authorization dynamic as providers are getting better at navigating the additional steps required for some patients. We continue to expect modest growth in the U.S. peripheral business in the first half of 2024 as we maintain a strong focus on the U.S. coronary business. We then anticipate accelerated U.S. peripheral growth in the second half of 2024 with the L6 and E8 product launches. Turning to our international business, we had another record quarter of IVL sales as revenue was up 67% from a year ago and 14% sequentially compared to Q3. We are now direct in all five major European markets. Germany, the UK, Spain, Italy, and France. Sales in Germany doubled during 2023 due to the improved coronary reimbursement. We are starting to see increased usage in some of the smaller German accounts, which can now afford IVL. Germany is the largest market in Europe, and we think there is tremendous upside for coronary penetration from the current level of just over 2%. We had our first full quarter of direct sales in Italy and are very pleased with the execution by that team. It feels good to see such strong and seamless execution from the direct selling teams in Europe. We continue to drive penetration with the focus of the Shockwave sales team and the support of our marketing and physician education programs. In Japan, we completed our first year of coronary sales. We exceeded our goals for the number of accounts launched, the penetration in the launched accounts, and revenue. We have initiated efforts to develop clinical data that will support using IVL in conjunction with atherectomy and drug-coated balloons. We are working closely with CVIT, the Interventional Cardiology Society in Japan, to ensure that IVL is available and appropriately used throughout Japan. In China, we are still experiencing the impact of the ongoing anti-corruption campaign, which is slowing IVL adoption in new centers. On the positive side, adoption within centers that had IVL on the pricing list before the anti-corruption campaign started is growing nicely. That said, we expect very little revenue from China in the first half of 2024. Finally, The European reducer team posted a very nice quarter. The teams in Germany and France are being rebuilt and, along with the established UK team, continue to generate revenue while testing different market development strategies and sales models. We are very pleased with the integration of NeoVASC and are starting 2024 with strong teams in place to both accelerate enrollment in the COSR2 trial and build the international reducer business. With that, I will turn the call to Renee to review the financials.

Thank you, Isaac, and good afternoon, everyone. I am thrilled to have joined the Shockwave team and look forward to working with all of you. Shockwave Medical's revenue for the fourth quarter ended December 31st, 2023 with $203 million, a 41% increase from $144 million in the fourth quarter of 2022. U.S. revenue was $158.1 million in the fourth quarter of 2023, an increase of 34% from $118.3 million in the fourth quarter of 2022. Foreignary products contributed $115.2 million to U.S. revenue in the fourth quarter of 2023, an increase of 40% from $82.1 million in the fourth quarter of 2022. U.S. revenue from our peripheral products was $42.8 million in the fourth quarter of 2023, an increase of 19% from $36 million in the fourth quarter of 2022. The growth in U.S. revenue during the quarter was driven primarily by increased utilization of existing accounts supported by our continued Salesforce expansion. International revenue was 44.8 million in the fourth quarter of 2023, representing a 74% increase from 25.7 million in the fourth quarter of 2022. Coronary products contributed 37.7 million to international revenue in the fourth quarter of 2023, an 83% increase from 20.6 million in the fourth quarter of 2022. International revenue from our peripheral products was $5.3 million in the fourth quarter of 2023, an increase of 19% from $4.5 million in the fourth quarter of 2022. Our reducer product contributed $1.8 million to international revenue in the fourth quarter of 2023. The increase in international revenue over the prior year period was driven by continued geographic expansion, particularly in Japan, the increased productivity of our direct selling teams in Europe, and the momentum from our C2 Plus launch. Looking at product lines, our peripheral products, Shockwave M5, Shockwave M5 Plus, Shockwave S4, and Shockwave L6, accounted for 48.1 million of total revenue in the fourth quarter of 2023, compared to 40.5 million in the fourth quarter of 2022, a 19% increase. Our coronary products, Shockwave C2 and Shockwave C2 Plus, accounted for 152.9 million of total revenue in the fourth quarter of 2023, compared to 102.7 million in the fourth quarter of 2022, representing a 49% increase. Revenue from our reducer product accounted for 1.8 million of total revenue in the fourth quarter of 2023. Gross profit for the fourth quarter of 2023 was $177.7 million compared to $126.5 million in the fourth quarter of 2022. Gross margin was 88% for the fourth quarter of 2023, consistent with gross margin of 88% for the fourth quarter of 2022. Total operating expenses for the fourth quarter of 2023 were $134.4 million, a 60% increase from $84.1 million in the fourth quarter of 2022. Sales and marketing expenses for the fourth quarter of 2023 were 67.2 million compared to 43.4 million in the fourth quarter of 2022. The increase was primarily driven by Salesforce expansion. R&D expenses in the fourth quarter of 2023 were 42.3 million compared to 23.7 million in the fourth quarter of 2022. The increase was primarily driven by headcount growth, higher clinical related expenses including reducer, and the facility expansion to support R&D. General and administrative expenses for the fourth quarter of 2023 were $24.9 million compared to $17 million in the fourth quarter of 2022. The increase was primarily driven by higher headcount to support the growth of the business. Operating margin was 21% for the fourth quarter of 2023. Net income in the fourth quarter of 2023 was $44.3 million compared to net income of $140.9 million in the fourth quarter of 2022. In the fourth quarter of 2022, we released a valuation allowance which resulted in a tax benefit of $99 million in that quarter. Basic net income per share for the period was $1.20. Diluted net income per share for the period was $1.16. Adjusted EBITDA was $68.2 million for the fourth quarter of 2023, a 20% increase compared to adjusted EBITDA of $56.6 million in the fourth quarter of 2022. Finally, I'd like to briefly recap some highlights from our full year 2023 results. Total revenue for the full year 2023 was $730.2 million, an increase of 49% compared to full year 2022 revenue of $489.7 million. U.S. revenue for the full year 2023 was $581.5 million, representing a 43% increase over 2022 revenue of $407.4 million. International revenue was $148.7 million for the full year of 2023, compared to $82.3 million in 2022, representing an 81% increase. Gross margin for the full year 2023 was 87%, consistent with 87% for the full year 2022. Total operating expenses were $475.7 million in 2023, An increase of 58% compared to operating expenses of $300.6 million in 2022. Operating margin was 22% for the full year 2023. Total net income for the full year 2023 was $147.3 million compared to $216 million for the full year 2022. Net income in 2022 included the $99 million tax benefit from the aforementioned release of our valuation allowance. Basic net income per share was $4.01 for the full year 2023. Diluted net income per share was $3.85 for the full year 2023. Adjusted EBITDA was $242.7 million for the full year 2023, a 40% increase from adjusted EBITDA of $173.9 million for the full year 2022. Looking forward to 2024, we expect to continue to make significant investments to support and sustain our growth and anticipate full year 2024 operating margin expansion of up to 100 basis points from the full year 2023. Similar to the pattern we saw in 2023, we do expect a step down in Q1 operating margin from the prior Q4, reflecting compensation and benefits cost, which reset at the beginning of the year, as well as the timing and increased costs related to our global sales meeting held in March. We ended the fourth quarter of 2023 with $990.6 million in cash, cash equivalents, and short-term investments. At this point, I'd like to turn the call back over to Doug for closing comments.

Thank you, Renee, and thank you all for joining us today. 2023 was another great year at Shockwave. The team continues to execute at the highest level as we achieve our mission to help treat underserved patient populations around the globe with our innovative solutions. And we're excited to continue this work in 2024. With that, I'd like to open the call to questions.

Thank you.

Ladies and gentlemen, at this time, we will be conducting a question and answer session. If you'd like to ask a question, you may press star 1 on your telephone keypad. A confirmation tone will indicate your line is in a question queue. You may press star two 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. Our first question comes from the line of Adam Meter with Piper Sandler. Please proceed with your question.

Hi. Good afternoon. Nice quarter and congrats on a fantastic year and welcome, Renee, on the new role. I wanted to start on the guidance construction, the top line, 910 to 930 million. Maybe just talk about what's embedded for some of the different pieces of the business, coronary versus peripheral versus reducer. And if I heard correctly, you said modest US peripheral growth in the first half of 24, then accelerating the back half with new product launches. Hoping you could flesh that out some. that's assuming some continued headwinds from Aetna, but wanted to, I guess, kind of understand what's baked in to the guide for Aetna prior us as well as China anti-corruption and, uh, any potential impact impact from the, uh, the step down and outpatient reimbursement on the coronary side in the back half of the year. And sorry for the long winded question.

Uh, yeah. So, um, and we'll probably tag team on, on this, the, um, we are anticipating, uh, modest growth on peripheral particularly in the first couple of quarters while we concentrate on coronary. And then as we start launching L6 and E8 and turn our focus back to peripheral, we'll start seeing a step up in peripheral growth. The year will be Another really strong year we anticipate for U.S. coronary contribution as a percent of the business. We anticipate U.S. coronary will be actually a larger percent of the total business than it was throughout the 2023. We obviously had a very strong international performance last year. We anticipate another strong year, although we have the China deficit, so ex-China, international is going to do very well, but we'll be losing over $10 million and somewhere between $10 and $20 million in revenue that we had last year in China that we're not going to get this year. So we're anticipating sort of very low single-digit revenue out of China. So ex-China, another strong contribution year from the international business.

And Isaac, I don't know if you... Yeah, I think the last point, Adam, you asked about was on the outpatient. For Coronary US in the second half, the outpatient payment, we don't anticipate. I mean, we're aware of the situation, obviously. We still expect baseline is that the TPT is set to expire July 1st, and it will expire July 1st. We still anticipate the up-leveling to 5194 will occur Jan 1 of 2025. But what we've seen typically with reimbursement in the U.S. is, you know, it takes time to move behavior and change behavior patterns. So we've, you know, now been on this kind of good run in coronary, and we have a really strong coronary business and momentum right now with the inpatient reimbursement continuing to be a tailwind, the physician fee continuing to be a tailwind, the C2 plus launches a tailwind, and we just don't anticipate that having the TPT expire in the middle of the year will be much of a headwind. TBD, but that's kind of what we've seen. That's what we've baked into our guidance.

Yeah, that's good color, guys. Thank you for that. And for the follow-up, we'll stick with the guidance topic and switch over to margins. If I heard correctly, you're expecting up to 100 basis points of operating margin expansion for full year 24 over 23 levels. You know, that's a little bit below kind of where the street is pre-call. You know, maybe we'd just love to hear a little bit more about kind of what's, you know, embedded in that assumption. You know, should we be orienting models to kind of 50 basis points, kind of the midpoint of that range, or should we start at 100 basis points, you know, kind of coming out of the Q4 call here? And, yeah, I just would love to hear a little bit more about the philosophy on the leverage piece. Thanks so much.

Yeah, so we as usual, we're going to continue investing in aggressively in our pipeline. Both are the sort of hardcore product development side and increasingly the clinical trial expenses, which whether it's the trial for reducer, the Casio Casio to study or the various trials such as duo that we're running now or empower. We initiated multiple trials next year, and they're becoming more expensive last year. And this year, we'll spend even more on those trials, so a big step up in clinical spend. We'll continue to augment our global sales footprint, but the U.S. team will not be growing at the same rate. rate that it has historically. We're not done building out that team, but the rate of change will be lower. So you'll probably see a little leverage on sales, sort of not incremental leverage on R&D. We shouldn't see much deleveraging on R&D, but that'll probably be static relative to the top line. We're still spending money right now. We're still having to expense Costa Rica. and that does not convert into inventory until later in the year. And so we're still having to absorb Costa Rica costs, which are not insignificant.

I got it. And just one clarification, Doug, no change to the 500 basis points operating margin expansion over 23 levels that you outlined at the Innovation Day last year. Just wanted to confirm that's still the case.

Yeah, we've articulated previously that it's going to be a 25-26. We're pleased that if this plan delivers as expected, we're very pleased with a up to 100 basis point improvement. If you want to model 50, I'm perfectly okay with that. And we'll obviously try to do better, but we're targeting top-line growth as our objective, not we think the Margin improvement is really an output of the business versus the specific objective of the business.

Thanks for the color.

Our next question comes from the line of Bill Plovedic with Canaccord. Please proceed with your question.

Hey, great. Thanks for taking my question. Just a couple things here. You gave us a little granularity on what you're seeing from Aetna. you know, just what do you think in terms of when this comes back? Is this just like a three, six, nine-month delay, or does this take patients out of the, you know, out of the funnel, or, you know, does it come back at some point in time? How should we think about just Aetna going forward?

Yeah, I'm going to answer this and bring in Rob Fletcher as well to add color. What's unknowable for us is a patient, is an Aetna shockwave patient that got treated today somebody who would have been treated four months ago, two months ago, one month ago? Don't know. It's impossible for us to have that level of granularity. And maybe Rob can talk a bit more about sort of what he's seeing more broadly from our team and from societies on this prior off.

Yeah, that's right. Hi, Bill. I think, you know, what typically happens after a change in practice from one of the payers that are out there is what you see is at the provider level, at the hospital level, there's often a reaction to that. They, you know, have to do more documentation or they have to take additional measures or steps or allow for more time to go through a prior authorization process. So typically what we see is, you know, over time after a some initial sort of temporal disruption, people figure out how to start working within this, and then they plan for it. And then it kind of becomes back to a steady state. It's kind of a new normal, but you wind up with more of a steady state type of effect. And I think that's what we're seeing and hearing now from customers is that that has really sort of stabilized. People have figured out how to work within that. Meanwhile, we do see action being taken from the medical societies, for example, who did over the course of this period come together jointly. There was multiple medical societies and did issue an additional letter to Aetna that covered a bunch of different things, including this prior authorization practice. So you are starting to see some pushback, and I expect that Aetna will you know, take that under consideration under many other things. But, you know, for the time being, I think it's, I describe it as what appears to be more of a stable situation at a new normal.

Great. And then as a follow-up, I don't want to leave Renee out on our first conference call. Welcome, Renee. Is your other income was significant in the quarter, well above, can you kind of call out any one times there for us?

It wouldn't necessarily be one time, but certainly interest income is within that number. And then, of course, our interest expense out on the convertible debt. So that number is going to be nice given interest rates currently. And thank you for the question.

So $15.3 million, is that something we should model in going forward?

$15.3 million. You know, it might be a little high. There's probably some FX in there. Yeah, it's slightly high, but there's just because of the FX for the period.

But it is largely interest income.

Great. Thank you. Our next question comes from the line of Patrick Wood with Morgan Stanley.

Please proceed with your question.

Amazing. Thank you. Maybe just to hop off on that point, you know, the amount of cash on the balance sheet. I mean, you're approaching a billion dollars, so it's nearly as much as is in my checking account. And so I kind of, I got to ask, like, what are you, like, updated thoughts? I know there was, like, a willingness to be sort of strategically footed around M&A. It's obviously, like, it's, like, nearly an eighth of your market cap. How are you thinking about capital allocation?

And if you want to Venmo me, Patrick, I'm... I'm receptive. I'll give you my number. So, yeah, we continue to be very receptive to smart strategic external opportunities, maybe emphasis on smart or trying to be smart at least. We raised the convert with the recognizing that there was a window where valuations for private companies were down significantly. And they still are. It's very hard to raise money for small companies. And valuations of said private companies were – and willingness of boards sort of had changed over a 12-, 24-month period. And we didn't – at the middle of last year, we did not have the cash wherewithal to – make offers on properties that we might be interested or thought we might be interested in, and we realized that the convert structure and terms were just so attractive that having a 1% coupon in a period where we can... We're netting a nice interest income relative to our interest expense right now, and we didn't raise the money so that we could invest the money. We raised the money so that we could... uh, be opportunistic if something came along. Um, that said, uh, the worst thing you could do is just because you have cash run out and buy something that is not smart to buy. And so, um, if at the end of the day, we don't see anything that we think is going to, uh, be, uh, accretive to our growth and accretive to, uh, our, uh, uh, our shareholder value, then we're, we'll, we'll sit on the cash until we find something that is worth investing in. Um, But it gives us a tremendous amount of strategic flexibility that we feel really fortunate to have our company at our stage to be growing at our rate, to be profitable, and have this much cash on the books. We recognize the unique position we're in, but we don't feel obligated to run out and spend that money on something because then we would be more likely to do something that wasn't smart.

Totally. And maybe as a quick follow-up, the, you know, slightly more bigger picture, and I know we don't talk about OUS all that much, but, you know, when do you think you're going to get to a point of a body of clinical evidence that can kind of help unlock some of the penetration in some of the other markets? Obviously, Germany went your way recently, and I know in the UK, NICE sort of reformulated that language around peripheral, but just kind of, is there like a critical mass of evidence that you feel is needed to unlock the markets, or is it something else?

I'll take a shot at that. I think in many of the markets, it's unlikely that at least with our coronary and our peripheral IVL that we'll amass enough evidence that those systems, kind of the national health systems, will increase or give extra payment for IVL. I think those are generally going to need to be large randomized studies showing cost effectiveness compared to other products, and we just don't see those studies um, being necessary, really, uh, one, but also we're not, we've talked about this a lot internally. We don't know what to randomize against, um, because we don't, you know, randomizing against a balloon, we don't think is, um, an appropriate study. Randomizing against that direct to me, we don't think is an appropriate study. There are different tools for different situate, different clinical situations. So we'll, we're working on it. Um, we have, Japan, we're in a good spot, obviously. Germany, we're in a good spot. Hopefully, you know, continue to get better. Our JV is working on regional reimbursement in China, and we'll make progress there. But I think generally, it's going to be – IVL is going to be paid for out of kind of hospital funds and the budgets they have to treat, you know, patients without any incremental payment for IVL. Yeah.

But what will be interesting to see is with Casira 2, assuming success in that study, that's exactly the kind of study that the sham-controlled randomized study, again, assuming it works, it will be undeniable that that product does what it was designed to do and actually increases the chances that Reducer could get reimbursement in some of those systems. it's a standalone procedure versus IVL that drops into existing procedures that are already paid for. So it's harder outside of certain discrete markets like Germany and Japan and the U.S., it's harder to get an incremental payment in those systems because they're kind of not structured to pay more per device, whereas a small subset of of countries do pay differentially based on the way they code for different device utilization.

I totally get it. Thanks so much for taking the questions.

You're welcome.

Our next question comes from the line of Travis Steed with Bank of America.

Please proceed with your question.

Hey, thanks for taking the question and welcome, Rene. Doug, maybe a little bit more color on what modest peripheral growth means. Is that still in the 10% to 15% range, or is it more low single digits? Is that modest growth every quarter of the year?

More modest early. So we think probably low singles for the first half of the year, stepping up to probably low doubles to teens in the back half of the year.

Okay, helpful. And then in Q1, or sorry, just like in January and February so far, anything to call out on trends in coronary or peripheral? And I'm curious if the total revenue for Q1 is still taking up sequentially a little bit.

Yes, on the latter, up a bit sequentially. And it was a strong fourth quarter, obviously. We were pleased with the fourth quarter. You know, we're relieved, not surprised, but encouraged that the contagion fear was not realized. We weren't afraid of a contagion from Aetna, but I know a lot of folks who are probably listening to this call were a little worried that it was going to be multiple payers were going to do what Aetna was doing, and we certainly aren't seeing that. I'd say procedure volumes appear sound. We're not... We're pleased with what we're hearing from the field.

Great. Thanks a lot for the questions. Yep. Our next question comes from the line of Larry Beagleson with Wells Fargo.

Please proceed with your question.

Doug, good afternoon. Thanks for taking the question. Starting, Doug, in the U.S., U.S. corn area accelerated in Q4 last How much do you think the new DRGs are helping already? And on peripheral, you know, sales were flattish sequentially. Aetna is only, you know, 10% to 12% of covered lives, I believe. You know, U.S. peripheral, you know, was a growth driver for you. So help us understand how Aetna has had so much of an impact. And I had one follow-up.

Yeah, yeah. Aetna was the – the phenomenon that was the real change that we noted after the mid, it really took place in September, so end of Q3, carried through into Q4. And when we first, when we did our call last year, I don't know that we described the underlying sort of slowness of procedures that we were seeing in the third quarter into the fourth quarter. for peripheral. So it would have been, we would have been a little soft on peripheral, and then you compounded that with Aetna. I'd say on balance, peripheral procedures appear to be somewhat less soft, but it's, so I think we feel more bullish about growth, particularly as we turn focus back to peripheral. Right now we're, for good reason, with two reimbursement changes and new product launch, we really want to maximize on our coronary opportunity. And then when we have three product launches in a row in peripheral, we'll be spending a lot of time on peripheral. So we're anticipating peripheral will contribute much more nicely to growth end of 24 into 25 and high hopes for Javelin to be a major contributor to that end as well. So we're You're not wrong. Aetna is a 10% to 20% player in the matrix of all the private payers. So it wasn't just an Aetna phenomenon, but Aetna clearly had a meaningful impact, but it wasn't the entirety of the impact on the peripheral volume in the back end of last year.

And, Doug, sorry, the first part of the question was the acceleration in U.S. coronary. Was this, you know, the strength in the quarter came from U.S. coronary. Have you started to see an impact from the new DRGs already? And I'll ask my follow-up, Doug. There's a late breaker at ACC on Neovasc, this Orbita Cosmic. How is it different from Cassira 2? And is there any read-throughs? you know, from that trial to what we might see in COSERA 2. Thank you.

It's really hard to, well, generally, as we say consistently on reimbursement because it's what we've observed, it's a dimmer switch, not an off switch, so it has an effect gradually over time. And we launched C2+, and we got the uplift simultaneously. It certainly did not hurt at all. It will always be impossible to disaggregate new product launch and reimbursement that happened simultaneously, and it's now going to be even harder because now we've got the CPT codes.

Yeah, I'll just pile on to that, Larry. What we've talked about in the past, what the inpatient – I think especially the inpatient uplift in the DRG, what it does ultimately is as the hospitals see the income coming in, it helps the cath lab budget get relaxed. And so the cath lab then puts less pressure on physicians to moderate their use. Physicians then feel like they can use IVL when it's appropriate and they're not getting pushback from cath lab administrators. And that takes time. I was at an account earlier this week in Santa Cruz, and that was the input from them. They're not getting pushback from the administration anymore.

And on Orbitacosmic, we certainly are delighted to see multiple data sets for Reducer at ACC. That's encouraging. We don't know the results from that study. It's small, 50-ish patients, so it's not going to be powered to make any conclusions about it. They use MRI as an endpoint, so really unclear if that's a – I see that as a feasibility of that tool versus something that's going to be dispositive about the reducer. I won't be surprised if you see that patients' symptoms are better because that's what we see consistently in the various studies that have been done on Reducer and what we see anecdotally from all the users in Europe. Whether you really learn anything that is a read-through to Casira 2 because we don't use MRI as an endpoint in Casira 2, so I don't know that that's going to really – be informative on potential outcome of the CSERA 2 study. If the patients feel better in the treatment arm, that bodes well for CSERA 2, I guess, could be the one takeaway. Got it. Thank you.

Our next question comes from the line of Michael Pollack with Wolf Research.

Please proceed with your question.

Good afternoon. Thank you. I want to ask on the outpatient coronary reimbursement topic, with an eye towards the up map to 5194, kind of two-parter, the event path from here, and then a question on coding. So is this event path simply we wake up in July, we see the proposal, and we see what we see? Or do you have an opportunity to engage with CMS here through the spring that might give you a better feel for how they're looking at this? And the second piece is on coding. I think we're operating under the assumption this winds up getting solved with a complexity adjustment using the new CPT code that was in effect Jan 1, 24. Is that correct, or is there potentially another to-be-determined coding solution here?

Yeah, it would be a waste if I tried to answer this one. Rob's sitting right next to me, so I'll let Rob take this one.

Yeah, I think the – so as part of – formal course of business we we do get on CMS's calendar as they start to make their they get into their rulemaking cycle and so certainly we have met with CMS you know again about this issue and the issue of the transitional pass-through and so on and so forth so I think your first question was what's the normal course of business and the sort of things that happen and the first thing that happens is that you sort of talk with CMS prior to them making the rule, drafting the rule, you know, about your issue at hand. And so that's happened. I think the things that we see from here, yeah, I would mainly point the next sort of public available information is likely going to be the proposed rule, which happens in early July. So we won't sort of see or hear much in the public domain between now and then. So hopefully, Mike, that got that part of the question. I think your second part of the question or your second question was just around the mechanism that would proceed here. And I think you've identified it correctly that, you know, here what we're talking about is a complexity adjustment that's based on, you know, an add-on code, a procedure add-on code. And that's the normal vehicle by which, you know, you know, if you have an add-on code in structure, that's how you get increased payment. Then you then sort of qualify, certain combinations of code qualify for a complexity adjustment. And that's exactly sort of what we're looking at here. And as I said before on this call and others, this is where, you know, we have a very large volume of data associated with that. We have sort of strong confidence in these combinations of codes and then qualifying for a complexity adjustment.

Yeah, no, that was great, Rob, on both fronts. And the brief follow-up is maybe back to Doug. I think, Doug, on several instances, you've suggested maybe 95% confidence in the outcome here of kind of achieving 5194 in 2025 and beyond is 95% still. How do you feel about this? I do not feel less confident.

I wish CMS, when Rob met with him, said, you're right, we're going to do it. But they don't say those things. They just look blankly at Rob. And every time we meet, usually we get a good outcome. And this time, I think the facts are pretty clearly pointing in the direction of moving to 5194. Helpful. Thank you.

Our next question comes from the line of Mike Kratky with Learing Partners. Please proceed with your question.

Hi, everyone. Thanks for taking our questions, and welcome, Rene. You called out 2% penetration in Germany. Can you just give us a sense of where you are in terms of penetration within key accounts, and what have you seen in terms of how utilization has scaled early on and what procedure volumes look like in some of the top accounts?

Sure.

We have, I think even in the top accounts in Germany, the penetration is still relatively low. What happens in Germany when there isn't sufficient payment to cover the cost of a product, there's a very tight linkage between the hospital administration and the physician's behavior in Germany, tighter than I think anywhere else except Japan. So what happens is the physicians will use the product until the administration tells them to stop, and then they stop. So you'd get these cyclical, you know, an account using the product and then it would just turn off in September. Or they'd use the product and the administration would come back the next year and say, hey, you used 50, you only get 25 this year. And so the product utilization would get curtailed. And then at smaller accounts, it would essentially be zero because they just didn't have enough money within the hospital system to cover these extra costs and the administration would clamp down. So we really have a lot of headroom in Germany, not just gaining adoption in smaller accounts, which is kind of a zero base in those accounts, but then really driving appropriate use and adoption at the larger accounts where it was being curtailed by the administration.

Does that answer your question? Yeah, that's perfect. I mean, just one separate follow-up. It looks like on Coursera 2, the CC.gov is giving you a primary completion date of June 2024, but just wanted to double check on how we should think about the timing there and when we could see those results.

Yeah, we need to update that. I don't think we've touched that since the acquisition, so that was not a realistic timeline ever.

That was the prior company's timeline. Right now, if you recall, we're forecasting approval in 2017. you got to back up from there for, um, submission and review of a PMA. Uh, and then that puts your, um, enrollment completion somewhere, uh, second half of, uh, 25, uh, is, is a, is a much more realistic timeline. And, um, and the team's doing a really exceptional job of, um, getting sites up. Uh, there was a, uh, paucity of sites that had been started, and many of those sites weren't really probably the right sites to choose to get rapid enrollment. So our team, once they took over, have gotten the trial on the rails. But it's a sham-controlled trial with a really rigorous enrollment criteria, inclusion criteria, which is why every time we show a clinicians, the trial design, they universally say, you know, if, and we would say when, when that study is successful, it will be irrefutable that that device works. So rigorous trial makes it hard to enroll. Rigorous trial also results in much more valuable data for market creation and inclusive of reimbursement.

That's super helpful. Thanks very much.

Our next question comes from the line of Mike Mattson with Needham & Company. Please proceed with your question.

Yeah, thanks. Just a couple on the new peripheral products, so E8 and Javelin. I can't remember if you had said anything about the pricing on those products that the investor did in the fall, but Can you give us any sense there on where those things would be priced? And then, you know, with javelin, I mean, am I thinking about it the right way that that's something that, you know, could drive, you know, more revenue per procedure because they would likely, you know, use that to kind of cross a lesion and then, you know, follow that up with one of the regular, you know, catheter, or sorry, balloons?

Yeah. We if we said anything about price, it would have been something along the lines of we will determine the price when we get closer to launching the product. And that would still be what I would say now. Thus far, we've we try to make sure that we deliver really. clinically meaningful new devices to our customers and price them in a way that we think enables the customers to have a good financial outcome and for us to reflect the value of the technology. In terms of Javelin, there likely will be some cases where you use Javelin Plus, Javelin Plus E8, Javelin Plus M5 Plus. But what we've witnessed thus far is that the power of the lithotripsy shock waves is not just cracking in a sort of forward effect to get you through the difficult-to-cross lesions, but it also has a radial effect, which enables you to then follow javelin with standard balloon angioplasty, and so our expectation is that the vast majority of cases will be Javelin plus POBA versus Javelin plus another IVL product. At some juncture, you start to get yourself in a challenging situation with your customers if you load too many IVL products into a single procedure. It just becomes a less economically attractive for them. So our expectation is that, for the most part, Javelin is going to be a Javelin plus other, Javelin plus balloon.

Okay, that makes sense. And then just as far as Costa Rica goes, I understand that there's some kind of startup costs and whatnot in the near term, but is that something that you expect to have a material benefit to your gross margins over time?

We have chosen to date to manufacture in one of the highest cost places in America, in Santa Clara. So we do expect that our cost of goods will come down in Costa Rica. We've not forecast how many points we'll pick up out of Costa Rica, but cost of doing business there in every respect is going to be lower than, other than materials cost, is going to be lower in every respect than what we have right now in Santa Clara.

Yeah, just important to remember, though, that for 2024, the product we sell will be manufactured in Santa Clara, so we won't see any benefit to gross margin in 2024.

Yeah, we'll put product into inventory this year, but it won't hit customers until 2025. Yeah, I understand.

So there'll definitely be a benefit yet to be quantified, I guess, so for 2025 and beyond. Do you agree?

Correct. Yes. I would certainly expect gross margins to be steady for this year. And then in the long run, we will see an improvement given the structure setup.

Okay. Great. Thanks. That was three mics in a row.

Mic, mic, mic.

Our next question comes from the line of Imran Zafar with Deutsche Bank. Please proceed with your question.

Hey, good afternoon. Thanks for taking my question. First on Japan, I'm wondering if you can just sort of give us any sort of metrics on where you are in that launch in terms of what percentage of the 1,200 or so cath labs there that you're in now at this stage of the launch.

Sure. So again, very, very good year for the team in Japan. It's a relatively small team, and they were incredibly productive in 2023. Based on the guidelines that Shockwave worked with the Cardiovascular Society in Japan to establish, we are currently limited to hospitals that do a certain number of atherectomy procedures. So those tend to be larger hospitals, obviously with surgical backup. There's also some limitations because of the way the trial data we have. We don't have trial data of shockwave followed by de novo dcb and de novo dcb is approved in japan we don't have trial data of shockwave after atherectomy you know rota shock for instance so part of the work we're doing it started last year and will be going on in earnest this year and and following years is to create clinical data to support the use of shockwave with de novo dcb to support the use of rota shock shockwave with atherectomy and then um as we gather more and more data, work with CVIT to show that the product can be safely used in smaller centers and centers without surgical backup. And as you'll recall, you know, we have that kind of stamp of approval in the U.S. from Sky already. So there is basically a certain number of centers that we've agreed with CVIT that we cannot access until we generate more data, and we're generating those data now. So with the centers that we really can access, which account for probably 75% of the PCI in Japan, we've launched over 50% of those centers, and we'll launch the remaining ones in 2024. Okay.

And what about on the peripheral IVL side in Japan? What's the latest timeline there?

We haven't disclosed a timeline yet. We're working right now with the PMDA to – establish the regulatory path. And then once that's done, kind of first half of this year, we hope to have the path established. Then we'll start lining out the timing and the steps and the timing to get there. And at some point, we'll tell you what that is.

Okay. I have one more international question on India. Obviously, a massive PCI market. Can you just remind us where you are there at this stage and how you're thinking about that opportunity over the next few years?

Sure. We have a distributor in India. We established the distributor in 2020. Launched coincident with coronavirus in February of 2020. So as that country has kind of gone through some ups and downs like the rest of the world, we've gotten a good footprint in India through a distributor. We've generated really nice post-market data in India, post-market registry, over 1,000 patients, all comers, core lab adjudicated. Those data were presented at TCT last fall, and we continue to have really nice momentum, particularly on coronary in India.

Okay, and then just one very quick pipeline question. Have you guys started human cases with the aortic lithotripsy product yet?

We have not, no. This year.

This year, okay, perfect. Okay, thank you very much.

Our next question comes from the line of Danielle and Talafi. Please proceed with your question.

Yeah, hey, good afternoon, guys. Thanks so much for taking the question. Congrats on a strong end to the year. Doug, I was going to ask about C2+, and how are you seeing that being adopted? I know it's early days, good feedbacks and good, but are you seeing it motivate more physicians to pick up IVL and do vessel prep in their patients? Or is it right now more about existing users treating more patients and accessing those tougher to treat patients?

Yeah, I'd say it's more adoption, existing users versus, versus new users. And that's, and the, More adoption is going to be with all of the different tailwinds we have, reimbursement and technology tailwinds, followed by another technology upgrade next year. It's really finding ways to help people shift from 4% to 10% and from 10% to 20%, helping give them a good reason to use Shockwave more than they already do. Those who don't use the device yet are in the minority and less of a sort of much less opportunity for us to drive growth with because they're probably also pretty low volume operators.

Okay. And that was kind of one of my follow-up questions. You already touched on it in existing users who go to IVL. And, you know, all of the patients, obviously, there's a large number of patients that are not treating all of them, so they are already using IVL. Why are they not?

So, your phone made it tricky to interpret your question, but I'm going to, I'll restate your question as best I can, and you tell me if I'm wrong. So, what is the impediment to increased use of IVL? Physicians. Right, for physicians.

Sorry about that.

No, that's okay. It just makes it a little more challenging. So the biggest reason historically has been is the economic concern. We have a premium device that we priced at a level that we thought both reflected the value and and would ultimately lead to a strong reimbursement position that would be beneficial to the hospital. Thankfully, the work Rob and team did was successful. We were successful in securing our own DRGs, which was shocking on the coronary side. CPT code, and we think ultimately will also yield sort of landing in the highest APC level for coronaries. But the initial reaction to the price was, oh, this is a high-priced device, and there was a lot of anxiety with TPT that's a little unusual in terms of a reimbursement mechanism. And so there's always been a perception amongst physicians that we're not really reimbursed even though we have been. So there's always been a reluctance in many physicians' hands and minds to, like, I'll only use Shockwave when I absolutely have to because it's an expensive device. So now that the first two of the three building blocks for eliminating that economic anxiety with DRGs and CPT code are in place, we think this year will be the first year where a lot of that economic anxiety is ameliorated. Another reason why they have been reluctant historically is, you know, I've got this long diffuse lesion. I'm going to have to pull two catheters to treat it. Maybe I'll just use atherectomy instead of shockwave. C2 plus addresses that lung diffuse reluctance. It also helps diffuse the sort of perception, misperception that shockwave is less effective on eccentric or nodular calcium. So now we give you more power. You can treat those eccentric lesions with one catheter. So those are really the two of the big headwinds we had faced, the biggest being the economics. And then ultimately, I think the last one of the sort of next hurdles that we'll knock down is our device is very deliverable, but it's not as deliverable as physicians would like. So there are times when they choose not to pull it. Because you know, it's a it's bulkier than a regular angioplasty balloon. So I'll just use something else That's a that's a 2025 fix that we'll have with arrow. So we've got we each year will be knocking down the remaining some of the remaining Pressure points that that have Capped utilization and we think we'll just keep uncapping and utilization each year.

Thank you so much.

There are no further questions in the queue. I'd like to hand it back to Doug for closing remarks.

Thanks so much, and thanks, everybody, for your time and attention. Looking forward to another great year in 2024, and delighted to have Rene on board. Look forward to chatting with you all as the year progresses.

Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time, and have a wonderful day.