Shockwave Medical Inc (SWAV) 2023 Q3 法說會逐字稿

Good afternoon, and welcome to Shockwave's Third Quarter 2023 Earnings Conference Call. (Operator Instructions) As a reminder, this call is being recorded for replay purposes.

I would now like to turn the call over to Debbie Kaster, Vice President of Investor Relations at Shockwave, for a few introductory comments.

Thank you all for participating in today's call. Joining me today from Shockwave Medical are Doug Godshall, President and Chief Executive Officer; Isaac Zacharias, President and Chief Commercial Officer; and Dan Puckett, Chief Financial Officer.

Earlier today, Shockwave released financial results for the quarter ended September 30, 2023. A copy of the press release is available on Shockwave's website. Before we begin, I would like to remind you that management will make statements during this call that include forward-looking statements within the meaning of federal securities laws, which are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995.

Any statements contained in this call other than statements of historical facts are forward-looking statements. All forward-looking statements, including, without limitation, statements related to our sales and operating trends, business and hiring prospects, financial and revenue expectations, reimbursement proposals, future product development and approvals in the integration of Neovasc and its technologies into our business, are based upon our current estimates and various assumptions.

These statements involve material risks and uncertainties, including the impact of macroeconomic conditions and global events such as the COVID-19 pandemic, that could cause actual results or events to materially differ from those anticipated or implied by these forward-looking statements. Accordingly, you should not place undue reliance on these statements.

For a list and description of the risks and uncertainties associated with our business, please refer to the Risk Factors section of our annual report on Form 10-K on file with the SEC and available on EDGAR, and in our other reports filed periodically with the SEC.

Shockwave disclaims any intention or obligation, except as required by law, to update or revise any financial projections or forward-looking statements, whether because of new information, future events or otherwise. This conference call contains time-sensitive information and is accurate only as of the live broadcast today, November 6, 2023.

And with that, I'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 third quarter of 2023. Our comments will be fairly brief today since we just had our Innovation Day a couple of weeks ago. Third quarter revenue of $186 million represented a 42% increase from the third quarter of 2022. We had a strong quarter led by our global coronary franchise. Revenue from our coronary products grew almost 50% from a year ago, while revenue from our peripheral products grew roughly 30% from the third quarter of 2022.

Our global coronary results in the quarter exceeded our expectations. Isaac will be covering details regarding the U.S. launch of the new coronary device C2+, but we are increasingly enthusiastic about the impact that device will have in the U.S. We had very strong coronary results in our international markets, and that is partially attributable to the momentum that C2+ has created.

We think this is a harbinger of what to expect in the U.S. We have seen an encouraging response to this product during the limited launch phase, and we are consistently hearing about the benefits of being able to treat long, diffuse and eccentric lesions that C2 would have been too limited to treat. A really solid new product.

Revenue from our U.S. peripheral business in the third quarter was up 31% from a year ago. Solid growth, though lower than we had expected, as we didn't witness the usual procedure rebound that we have seen historically in September. One recent phenomenon that coincidentally started in September is an increased level of preauthorization pressure from private payers, particularly Aetna, which delays procedures.

This is particularly the case for patients being treated for claudication, or leg pain. We've been seeing this in the field and heard it often at TCT and Veeva. Fortunately, our launches of E8 and JAVELIN are on the near-term horizon and the below-the-knee segment is primarily comprised of critical limb ischemia patients, who have a more acute clinical need, so they should be less subject to prior authorization pressure if payers continue their policies that long.

As we said at the Innovation Day, we are confident in the long-term growth of our U.S. peripheral business, driven by meaningful new product launches every year and access to an expanded number of procedures that are performed in the OBL once a new CPT code is established.

Regarding international business, it should be evident from our results that the team has done a great job identifying areas where Shockwave is underutilized. Our strategy of going direct is paying off well and complements the strong momentum we are seeing in Japan and Germany, as we have discussed previously.

We've reviewed the Reducer at some length recently, and the interest level and response to TCT once again reinforced how sizable this opportunity is going to be for us. We had over 100 physicians attend a Reducer symposium, which is a great sign for a product that is only in clinical trials in the U.S.

We have continued our efforts to enhance the performance of the Reducer program, and after a talent infusion into the clinical team, we are now working to upgrade performance in the European commercial operation. The team in the U.K. is executing very well, and we are restructuring the French and German teams to ensure we can deliver Shockwave-like support of our customers in those countries.

We have a new leader in Germany, who will rebuild the sales team, and we'll do the same in France. Touching quickly on some of our clinical trial activity. Our Shock India trial has enrolled over 1,000 patients in 18 months across over 50 sites in India. This represents the largest real-world coronary IVL evidence to date. 30-day data was just presented at TCT last month, and again demonstrated consistent safety and effectiveness in the real world as we have seen in our premarket studies, despite being more complex patients and lesions.

Our BTK 2 trial is enrolling briskly, and we anticipate completing our 250-patient enrollment this quarter. And lastly, Empower, which is examining the impact of PCI outcomes and the use of IVL in female patients with calcified coronary artery disease, is enrolling ahead of schedule. As a reminder, we are targeting total enrollment of 400 subjects across 50 global sites by mid-2025.

And finally, on reimbursement. Just last week, as part of the calendar year 2024 physician fee schedule final rule, CMS confirmed a Category 1 CPT add-on code for procedures involving coronary intravascular lithotripsy, which will become effective January 1, 2024. This means that physicians will now be paid approximately $140 when they perform IVL, in addition to the remuneration they received for performing PCIs.

This represents a 20% to 30% increase in physician reimbursement. Isaac will cover China in more detail, but we did see an impact to our business in the third quarter due to the anticorruption campaign, and we expect that to continue over the next few quarters. Overall, we are pleased with the performance of our business. And despite a reduced forecast for China, which assumes roughly $10 million less revenue in the second half of this year compared to our prior forecast, and a slightly more cautious view of near-term peripheral growth in the U.S., we still anticipate top line revenue in the range of $725 million to $730 million for the full year of 2023, representing growth of 48% to 49% from 2022. Regarding 2024, we will provide formal guidance on our fourth quarter call, but we remain comfortable with the current consensus of $920 million.

With that, I will turn the call over to Isaac to provide more color on the commercial front. Isaac?

Thank you, Doug. I am pleased with the team's effort and results in Q3. Revenue from our U.S. peripheral business in Q3 was up 31% from a year ago and slightly down from Q2 of this year, due to Q3 seasonality and the new insurance hurdles Doug mentioned.

We completed the launch of L6 in the quarter and expect that the number of new centers adopting L6 will increase slowly going forward. Q3 was strong for our U.S. coronary business. Revenue grew 34% compared to Q3 of 2022 and 5% sequentially from Q2 of this year.

Overall, 99% of this revenue was from existing accounts. We shifted focus of the U.S. team in September from the L6 to the C2+ launch. We initiated the limited market release of our new C2+ product and are very pleased with the early results. There's a lot of excitement around the product and the feedback we have received in the U.S. about C2+ nears what our international customers told us.

Of note, they appreciate the extra 40 pulses and have commented that the outcomes in longer diffuse lesions, eccentric lesions and calcified nodules have improved from good to great. These are lesion types that some customers were reluctant to use C2 [on], because they weren't confident that they could be effectively treated with only 80 pulses.

As a reminder, the 3 new DRGs for inpatient PCI went into effect on October 1. As we have said in the past, when reimbursement for IVL procedures has increased, the impact to our growth is steady and gradual. It is not a light switch.

We expect to see tailwinds from this change throughout next year and into 2025. We are on schedule to grow the sales force in the U.S. to over 110 territories by the end of this year, and we'll have about 2 clinical specialists per territory.

On the international side, we are pleased to report revenue that was 88% higher than Q3 of 2022 and up 11% sequentially from Q2 of this year. As Doug said earlier, the performance of our international coronary business exceeded our expectations. This was a result of the strength in the 5 large European markets of Germany, U.K., Italy, Spain and France.

I'll highlight our coronary business in Germany, which continues to expand rapidly, thanks to the increased reimbursement that started in January. The German team delivered coronary growth of nearly 200% in Q3 compared to Q3 of 2022, and over 20% sequentially versus Q2 despite seasonality.

This sustained performance demonstrates the long tailwind we see for revenue growth when reimbursement increases. We began selling direct in Italy in October. And looking ahead to Q4 in 2023 and 2024, we expect that the focus of our sales team in Italy will help drive more penetration, which is what we've seen in other markets as we transition from a strong distributor to a strong direct sales team.

We appreciate the long partnership we've had with our Italian distributor, Innova, and note that their performance in both coronary and peripheral IVL was excellent. They are a top-tier distribution partner. I'd be remiss not to mention how pleased I am with our Canadian sales team, which went live in Q2.

They are small but mighty, and are delivering great growth in the great White North [eh]. The strength of our international coronary business in Q3 is a testament to the positive response our customers have to C2+, and gives us confidence that the U.S. launch will be a strong tailwind for coronary growth next year.

In Japan, we had another great quarter. Penetration in our launched accounts continues to exceed our expectations, and our team is doing a great job ramping up physician training and peer-to-peer educational programs. We launched 200 accounts this year through Q3 and anticipate launching another 100 accounts in Q4. Again, excellent performance in the first 3 quarters of the Japan launch.

Finally, as Doug noted on China, we are in close touch with our JV partner, Genesis MedTech, and continue to monitor how the current government anticorruption campaign will impact our business. The ongoing dynamic for adopting newer procedures and newer technology is one of caution. Obviously, IVL falls into the category of newer technology with new costs to the hospitals and patients.

Most customers and hospitals are postponing the adoption of new technology during this time, and we expect that to continue as the anticorruption campaign continues. In short, products and procedures long established in China do not seem to be impacted nearly as much as new procedures, technology or capital equipment.

This has resulted in a sharp decline in the number of new accounts adopting IVL. This is meaningful since we are in the early stages of getting the product on provincial listings and then listed within each hospital in the province. We expect new site launches will start up again when the anticorruption campaign completes its work in each province and hospital.

As a result, the JV purchased approximately 20% less in Q3 than we had previously forecasted. And as Doug said, we are now forecasting meaningfully reduced sales to the JV in Q4. With that, I will turn the call to Dan to review the financials.

Thank you, Isaac. Good afternoon, everyone. Shockwave Medical's revenue for the third quarter ended September 30, 2023, was $186 million, a 42% increase from $131.3 million in the third quarter of 2022. U.S. revenue was $146.9 million in the third quarter of 2023, an increase of 33% from $110.5 million in the third quarter of 2022.

Coronary products contributed $103.6 million to U.S. revenue in the third quarter of 2023, an increase of 34% from $77.3 million in the third quarter of 2022. U.S. revenue from our peripheral products was $43.1 million in the third quarter of 2023, an increase of 31% from $32.9 million in the third quarter of 2022.

U.S. Generator revenue was $0.2 million in the third quarter of 2023. The growth of U.S. revenue during the quarter reflects increased utilization at existing accounts, new account adoption of IVL and continued sales force expansion. International revenue was $39.1 million in the third quarter of 2023, representing an 88% increase from $20.8 million in the third quarter of 2022. Coronary products contributed $32.7 million to international revenue in the third quarter of 2023, an increase of 108% from $15.7 million in the third quarter of 2022. International revenue from our peripheral products was $4.8 million in the third quarter of 2023, an increase of 17% from $4.1 million in the third quarter of 2022.

Revenue from our Reducer product, which we acquired through the Neovasc acquisition that closed in April of this year, contributed $1.3 million to international revenue in the third quarter of 2023. Generators contributed $0.3 million to international revenue in the third quarter of 2023. The increase in international revenue over the prior year period reflects continued geographic expansion, particularly Japan, the increased productivity of the direct selling team in Europe and the momentum of our C2+ launch.

Looking at product lines, our peripheral products, Shockwave M5, Shockwave M5+, Shockwave S4 and Shockwave L6 accounted for $47.8 million of the total revenue in the third quarter of 2023 compared to $37 million in the third quarter of 2022, a 29% increase. Our coronary products, Shockwave C2 and Shockwave C2+ accounted for $136.3 million of total revenue in the third quarter of 2023 compared to $93 million in the third quarter of 2022, representing a 47% increase.

Revenue from our Reducer product accounted for $1.3 million of total revenue in the third quarter of 2023. The sales of generators contributed $0.6 million in revenue in the third quarter of 2023. Gross profit for the third quarter of 2023 was $161.5 million compared to $113.5 million in the third quarter of 2022.

Gross margin was 87% for the third quarter of 2023, compared to gross margin of 86% for the third quarter of 2022. Total operating expenses for the third quarter of 2023 were $117.9 million, a 54% increase from $76.7 million in the third quarter of 2022. Sales and marketing expenses for the third quarter of 2023 were $56.9 million compared to $42.1 million in the third quarter of 2022. The increase was primarily driven by sales force expansion.

R&D expenses for the third quarter of 2023, $39.5 million compared to $20.2 million in the third quarter of 2022. The increase was primarily driven by headcount growth, higher clinical-related expenses, including Reducer, and facility expansion to support R&D. General and administrative expenses for the third quarter of 2023 were $21.5 million compared to $14.4 million in the third quarter of 2022. The increase was primarily driven by higher headcount to support the growth of the business.

Net income for the third quarter of 2023 was $35 million, which was consistent with net income in the third quarter of 2022. Basic net income per share for the period was $0.95. Diluted net income per share for the period was $0.92. In response to investors recently asking that we provide a clearer picture of our operating strength and profitability, we will be providing adjusted EBITDA.

For Q3 2023, our adjusted EBITDA was $65 million, an increase of 31% compared to an adjusted EBITDA of $49.8 million in the third quarter of 2022. We expect to continue to make significant investments to support and sustain our growth, and anticipate full year 2023 overall operating margin in the range of 20% to 22%. We ended the third quarter of 2023 with $917.3 million in cash, cash equivalents and short-term investments, which is inclusive of net proceeds of $634.4 million from our convertible debt offering in August.

At this point, I'd like to turn the call back to Doug for closing comments.

Thank you, Dan, and thank you all for joining us today. We had a great quarter at Shockwave as we continue to execute and grow our business, while at the same time paving an exciting path for our future.

With that, I'll open the call to questions.

(Operator Instructions) Our first question comes from the line of Patrick Wood with Morgan Stanley.

I've got 2 quick ones. I'll go one by one, if that's all right. Interesting comments around the preauthorization. Just curious why you think that's happening, the kind of duration? And is this something that we might see abate next year? Or is this kind of the new status quo going forward from some of the providers?

Yes. Thanks, Patrick. The -- it seems like it's linked to that New York Times article a few months ago, which we thought was interesting and wasn't going to have an effect. But it does -- that seems to have stimulated the private payers, Aetna particularly, to push back on peripheral procedures generally and not just specific device-type procedures. Like, they're not just pushing back on atherectomy, they're challenging peripheral cases requiring prior authorization on all of them.

It was a policy that was in place previously, but now they're enforcing it. And it seems like it was -- since it was only a couple of months separated from when that article came out, that our best guess is that was the justification for hey, it looks like there's overutilization. We don't want to pay for overutilization, so we're going to push back and push back pretty hard.

And in terms of forecasting how the duration, hard to say, I mean, our thesis is that this will take a little time to work through the system. And these patients, once you work them up and put them on exercise and optimal medical therapy, et cetera, et cetera, a lot of them will come out the other end and still need a procedure.

But it's a little hard for us to say for sure how durable this will be. They've sort of outsourced this to a third party to sort of offload the work and be more rigorous than Aetna was being on its own, or others were being on their own.

So there's a little bit of a new dynamic that we're looking to understand better. And certainly, something we've heard quite consistently over the past 6 to 8 weeks, like this is, I guess, 6 weeks, this is a phenomenon that wasn't really there before that is a change. And we're looking to better understand it.

Super helpful. And then just thinking about next year, I appreciate you want [to IDEAP] but the RVU change, and there's a bunch of I guess, reimbursement improvements that are going through. How hard has it been to kind of communicate those to the community? And do you feel that those are genuinely meaningful for further uptake and adoption? Just curious what you have there.

We're very encouraged by the positive feedback we're hearing on the DRG uplift. It's -- but it's -- as Isaac indicated, what we've observed in the past, like when we got an uplift on peripheral, it's not -- it doesn't sink into the minds of the hospitals and doctors right away. It takes a little time for them to understand, and for that to then influence device utilization.

What we are certainly hearing is a -- when the centers understand that this meaningfully higher DRG level is understood though by the hospital, It does seem to take pressure off. Where pressure was being applied in a lot of centers, there was a strong encouragement by administration to constrain use of C2, if possible. And at least the anecdotal feedback is this DRG change is alleviating some of that downward pressure.

It's a little too early to say: and here's how that has translated into an increase in use, but we certainly think the triple benefit of higher DRGs, a great new product with C2+, and then come January, physician fee uplift, we think is -- bodes very well for coronary growth for next year in the U.S. And it's going to be probably a little hard to disaggregate which one contributes the most, because we think they're all good guys.

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

So on the pre-authorization stuff, is this just Aetna only? Or are you seeing this more broadly with all the payers? And just why wouldn't this get to be a little bit more widespread going forward? And I guess the follow-up to that is, it sounds like that happened in the last 6 to 8 weeks, and that was enough to drive down peripheral 8.5% sequentially. How do you get comfortable reiterating the full year 2023 guidance, given the magnitude of that impact kind of the last month of September?

It's hard to say, and Isaac, Rob and I will all sort of tag team through this since Rob's team spends a lot more time with all the payers, obviously. It's hard to say if the pressure will spread to other privates. Other privates also have policies in place, and there are sort of varying levels of pressure that they apply on prior auth.

We've been sort of soldering through prior auths for quite some time on the private side. The -- we are anticipating, as I think I implied in my guide. So China is obviously a bogey for the fourth quarter. And we are anticipating that coronary will do probably better than the Street has it modeled right now, and peripheral will be -- will come in below where the Street has it modeled right now, because we're just assuming that this softness of procedures is going to persist through the end of this year. And it's not like a huge drain on procedures, but it's just enough, widespread enough where the -- you've got a backlog of patients starting to accumulate in centers as they work through the prior auth process.

Yes, just -- I'll maybe Travis, a couple of other things. So I think sequentially, peripheral U.S. was down 6%, where July -- as Doug said, July and August were sort of on track for what we had expected. And September, if you look at kind of what usually happens in that peripheral in our peripheral business in September, is September accounts for a much oversized chunk of the quarter.

So if September doesn't start moving, which it didn't very well, that's where we saw the impact. And as we've talked to a lot of customers, and we've kind of been able to identify pockets where this is being -- where you've got heavy Aetna population and it's being enforced, there is definitely -- you see a big impact on those centers.

So again, we're monitoring it. I don't think long term this is something that's going to kind of change the market. But short term, until we see how Aetna plays out and what happens to those patients after they've gone back for 30 days and done, as Doug said, exercise, et cetera, smoking cessation, they see how they come back into the pipeline.

Got it. Helpful. And would you be willing to take a guess at the impact on revenue? Whether it's like $5 million or $X million from the reimbursement thing. If you'd be willing to take a [cath], I'd love to hear that. And then Doug, you've been saying you're comfortable with the Street's 25% growth in 2024. This is a new variable on the reimbursement side. So would just love to hear how you're thinking about 2024 in light of this preauthorization stuff.

Yes. As I said in the prepared remarks, we remain comfortable with the 920 consensus. I think the mix is going to be more coronary based, probably because of all the positive new product launch reimbursement benefits, et cetera. And when we factor in the recovery -- the gradual recovery of China, which we think will happen. But next year, our China model is lower than it was initially. And we think we're going to be a little bit cautious going into the year on peripheral. But despite all that, we're very comfortable with the 920.

Our next question comes from the line of Adam Maeder with Piper Sandler.

Two for me and 1 quick clarification. I guess on the clarification front, are you able to break out claudicants versus CLI? What is that peripheral case mix in the U.S. look like for you guys historically?

It's hard for us to know. The broad case mix is probably a sort of 40-ish percent claudicant, 60-ish percent CLI. So we're excited that we're going to have a fantastic CLI portfolio or below-the-knee portfolio starting in the middle of next year -- towards the end of next year with E8 and then Javelin, since we've never really participated in earnest in that below-the-knee segment. But I think we have to assume that we're -- in our above the knee, we're probably not too dissimilar to the average. And above the knee is probably more biased towards claudicant than CLI, because CLI is heavily a below-the-knee segment. So that would suggest that above the knee is greater than a 50% claudicant mix.

That's helpful, Doug. And then for the next question, I wanted to ask about outpatient coronary reimbursement. How are you thinking about any potential impact to your business in the back half of '24 after the TPT sunsets in the middle of next year? T&S did not map to APC-5194. So do you think there's going to be an impact there? And then can you speak to your level of confidence that this gets addressed in the next rule-making period and goes into effect Jan 1, 2025?

So I'll start with the impact on the business. We still think de minimis to no impact on our business in that period. We've got 2 great reimbursement drivers that will be well understood by the middle of next year when TPT sunsets, and then soon thereafter, will be the proposed rule for 2025. So Rob, I don't know if you want to -- and no change in confidence.

Yes, no change in confidence. It remains again, a question of, not of if, but when. And the conclusion of the transitional pass-through program and the assignment of long-term reimbursement is on the docket for the coming year where Adam, it was not on the docket this year. We were just asking them to (technical difficulty) proactively. So we remain confident in the analysis, the data, that hasn't changed, and we remain confident that CMS will address this issue and placed on the docket next year.

That's very helpful. And for the last question, I just wanted to flip over to margins. Q3 operating margin had a nice sequential step-up over Q2 levels, better than we were modeling. Just any color on Q4? It sounds like you've reaffirmed the guide of 20% to 22% for the full year, but that seems maybe a little bit conservative, at least at the bottom half of the range. So wanted to just get more color there. And then I have the Street modeling 24% operating margin for 2024. Wondering if you have any reaction to that figure at this point in time?

Sure, Adam. Yes, we're pleased with the margin in Q3. We do expect a little uptick on OpEx in Q4 related to sales and marketing. We've got a lot of conferences, a lot of programs from education. R&D clinical. So the margin will probably dip. But on your point on the 20% to 22%, we're expecting it to be in the upper range at this point in time. So still in line with the upper range. Thanks for highlighting that.

And on the 24 -- I think 24% in '24, we're not giving guidance. We talked about our kind of trajectory on Innovation Day. And for now, just kind of focus on that.

Our next question comes from the line of Bill Plovanic with Canaccord Genuity.

It's [Sean] on for Bill tonight. Maybe also just to circle back to the outpatient question and maybe ask it a different way for you, Doug. What's the current mix between inpatient and outpatient in coronary? I know historically, it's been around 50-50, but I'm curious if that's changed? Or do you see that changing next year with these reimbursement changes? And how are your message to customers is around the outpatient gap in the second half of next year?

Yes. I -- we don't have data that indicates it's different -- that our business is any different than the 50-50 historical split and the general historical trend, we don't have updated numbers other than a few years ago. So we're not, we're still operating under the sort of inpatient-outpatient 50-50 assumption, and it seems to -- when we sort of anecdotally talk to customers, some people are really heavy inpatient if they get a lot of referrals, and some patients are heavier -- some of the hospitals are heavier outpatient. So I think it's safest to assume 50-50.

I don't think, even though the DRGs are quite handsome, and at teaching centers, they're even more handsome. They're really healthy if you're in an urban teaching center, because they pay at a different rate than, say, an urban -- or a sub -- rural hospital, for example. But I don't think many people are going to say to a patient, I'm going to keep you overnight for an extra night because I can get a higher DRG. I don't know if that's your question, I think it will probably -- they're going to treat the patient in the way that they think is best and appropriate clinically. And they will be delighted that they're going to get paid a nice additional remuneration, as I practice that word. You got that -- we got it right that time.

And when it's an inpatient, they all like it even better, because the hospital will be in a really good financial position. And I think back to the sort of, why is the second half of the year not going to matter in terms of a gap with the TPT until you get a final APC. They're going to look at the aggregate financial improvement that they're getting on IVL up until July. And then it's a short gap, and they'll have a strong habit of doing what's right for the patient [best] after several years of using C2 and even more C2+.

By the time they even sort of have thought through okay, I'm doing great on inpatient, not as well on outpatient, sort of all of a sudden, it will be January and they'll have what we believe will be the 5194 higher APC. So it's -- it may -- 6 months may feel like a long time by Wall Street standards, but for a hospital's reimbursement [gears], that's barely a noticeable period of time.

Got it. And then just on the prior authorization, do you guys have any internal support mechanisms or teams that are helping support customers through that? Are you thinking of investing there if this does seem like a prolonged period of denials going on?

There are several things that are going on in support of this now. First, there -- and the primary thing I would point to is there has been some action by the medical societies, the American College of Cardiology and SCAI, the Interventional Cardiology Society, in an attempt to work with specifically Aetna and their third-party eviCore in terms of rolling out or at least providing sort of a longer adjustment window for this prior authorization practice. So I think that is certainly something that is one that we hope will be effective.

The other -- there's another society, the OEIS, that represents sort of more ambulatory surgical centers. And that group has also started kind of a place to collect information regarding delays in patient care that may be affected or may have arisen as a result of this policy change. So I believe I'll point first to the action of the various societies out there as being ones that represent the entirety of medical care and really the goals of patient care. I think from a Shockwave perspective, we do have a field reimbursement team that has been and remains available to support customers as they seek things like prior authorization and the like. So I think all of those things are in place.

Our next question comes from the line of Larry Biegelsen with Wells Fargo.

Doug, I apologize. When Adam asked the question earlier, did you say if this is happening with the prior authorization more BTK, or above the knee pushback?

Well, it's all procedures, but the hardest push back or the hardest ones to get through are the other claudicants. In a lot of countries, they don't even treat claudicants much because it's leg pain. And so I think the payers are probably using my conspiracy view as they look at the New York Times article and say, "Hey, wait a minute, I can delay payment on these patients, and maybe I shouldn't be paying for them at all. So I'm going to hire this company to become, sort of throw sand in the gears and see if we can avoid covering some of these patients because maybe we were paying for too much anyway" is my best guess for what they're, how they're looking at the situation.

And so since below-the-knee is predominantly critical limb ischemia -- not all, but predominantly -- that would suggest that the above-the-knee segment is the one that's getting the, is more affected on a percent basis by -- or more successfully affected by the prior auth pushback.

And so my question is, how are you addressing this from an evidence standpoint, because when the New York Times article came out, I thought you guys would be okay because of the PAD, PADII, I think, trial, you showed a reduced stent utilization. So from an evidence standpoint, how are you addressing it? And I did have 1 follow-up.

I'll let Rob, since he [can give you the mix on it.]

Yes. I think one of the things here to clarify is that it's -- this isn't really an IVL-specific issue. This is general to PAD interventions. And so the kinds of things that we see is where there is some delay in terms of when the procedure can be scheduled because prior auth is requested. That prior auth may take a number of different phone calls and even an escalation procedure to even get through.

In other cases, there may be examples where the payer would request that there, for a given patient that additional steps be taken. In other words, some other sort of exercise regime or smoking cessation as mentioned here on the call, sometimes pharmaceutical agents, prior to the idea of them -- that patient actually undergoing a procedure. So some of this is just related in general to the idea of a PAD intervention and not so much specific to IVL. Where I would agree with you, Larry, there is terrific level 1B evidence to support utilization of IVL. But if that patient doesn't get to the table, then that's really what we're talking about here.

Doug, switching gears. Just on M&A. I've been thinking about this, and it would seem like mechanical circulatory support for high-risk PCI would seem to be a natural adjacency for IVL. I guess my question is, would you agree? And if so, what are some of the features and milestones you focus on when assessing Impella challengers?

We thought about buying J&J, but they're just -- it's just -- it's too rich. And then Ashley left and that made it impossible to get it -- just kidding. I think that's a great therapy. And particularly for Shock patients, I think it's going to do a lot of good.

We do a lot of cases with Impella. They're obviously the only ones out there. So we're -- we like what that does for patients and there are lots of other therapies out there that we also like the benefit they do for patients. So we're paying a lot of attention to a lot of different segments and haven't -- obviously, if we were going to announce a deal, we would have announced it in conjunction with this call. So we have nothing to announce about our BD strategy at this juncture.

Our next question comes from the line of Mike Matson with Needham & Company.

Yes. Thanks. So I completely understand your point about the outpatient coronary reimbursement and how the 6 months isn't a real long time. But I guess I was just wondering if you could -- can you explain kind of what the economics will be for those procedures in that setting without the TPT? Like, in other words, how much money will the hospitals be losing on each procedure, roughly speaking?

That's hard math because it all -- like different -- like how -- what other devices they use in the procedure, how complicated it is, how long does it take? So I won't try to come up with an average. But the APC 5193 pays about $10,000 national average.

And our device is a little bit less than $5,000 cost. So there is certainly money left over. And for a long time in the peripheral space, we had a business where the reimbursement was $5,000 and our device cost was close to 3,000. And while that was -- it got a lot better when we moved up to the 5193 APC on the peripheral side and had a $10,000 payment, and here really no pushback on financials anymore.

When physicians feel that the device is the right thing for the patient, it's $5,000 was adequate, $10,000 is more than adequate. So we think there's -- it may not be a money maker for the hospital, but it's not such a huge -- it's not like the payment is so close to the cost of our device where it's going to cause, we believe, a strong pushback from administration because it would -- aside from the fact that it's just going to take a long time to work its way through administration and back down to the doctor even if they have a problem, it's not such a severe problem that we think it would cause them to change practice and certainly not -- I can't imagine any doctor saying I'm going to use Shockwave for inpatient. I'm not going to use it for outpatient. I think it's going to average out to be just status quo. And obviously, we think the status quo is going to be up next year.

Yes. Okay. That makes sense. All right. And then just as far as the sales force goes, I think you said in the prepared remarks, you're at 110 territories with 2 clinical specialists per territory. So I think that's kind of maybe in line or to the lower end of the guidance you've given earlier in the year of where you wanted to get this year. So what I'm wondering is, how do you feel about kind of where your coverage is geographically and is there room to add more reps or clinical specialists in 2024 and beyond? And is that something we should expect that you could continue to expand the headcount there?

Yes, good question. Yes. So the numbers I gave on the script were where we expect to be at the end of this year in terms of reps and clinical specialists per rep -- or per territory. We'll continue adding some next year, much fewer than we added this year. We're putting together those plans now. But there'll be a little more management because they're bigger teams, we need more management to keep the span at a place where the management can teach and train. And when you're launching 2 products a year, business planning and teaching and training is a huge part of what we need to do with the team. So we'll add modestly next year, but it won't be as big of a lift as it is this year.

Our next question comes from the line of Imron Zafar with Deutsche Bank.

I had a couple of questions on the international coronary business, and specifically around 2024 outlook. First, on Germany, it sounds like you guys are still probably mid-single digit penetrated of that coronary market. What's the reasonable expectation exiting 2024? Is 20% a doable number in terms of TAM penetration there exiting next year?

Yes. I think we're low single digit right now in Germany, and that we were, I think, 1% coming into this year despite being on the market for 4 years. So it's -- we're seeing exceptional growth now that the payment to the hospital supports the IVL procedure adequately. But I don't think going from low single digit to 20% is reasonable in 2 years. We're just looking to have a nice sustained expanded growth. And so the German team, we've beefed up that team this year, and they're doing an outstanding job.

Maybe to put a point on that, though, I'd say you're going to have U.S. Japan, Germany, all with adequate reimbursement to support the IVL procedure. So that's where we see the strongest growth coming in the coming years.

Okay. And then on China coronary, you talked about the anticorruption crackdowns timing, new hospital penetration. And I think you also said back half 2023 China revenues were going to be hit about $10 million versus your prior plan? Just to level set, can you just give us a sense of how big the China business is now on an annualized basis? And even without getting new hospital accounts in China, can you still grow that business double digits next year just from higher utilization within your established accounts?

Good question. I'd rather not give kind of specific China revenue numbers. But taking -- we got wind or talked to the JV partner literally 2 days after our last earnings call. So it would have been nice to know a week before we had reset guidance. But we took about $10 million out of second half of this year from our prior guidance for China. Looking -- and I think you're -- we're not going to be able to, until the anticorruption campaign moves through its phases, we're not going to be able to add new centers.

That seems very unlikely right now, and that's our -- so we're planning not to be able to add new centers for the foreseeable future. But the sales in existing centers is staying pretty strong. The dynamic we're going to wrestle with here in the fourth quarter and the first half of next year is getting the JV -- the inventory at the JV to a level to support a steady state and somewhat growth business, versus a steady-state growth business plus new hospital additions. And so not having -- and we're still very early in the hospital acquisition phase.

So not having that trajectory of new hospital acquisitions, and again, early innings on that, we need to burn down inventory at the JV, and that's why we're essentially -- we have the enough inventory to support the existing hospitals, and we don't need the inventory like we thought we would to add new hospitals. And that's the dynamic we see going into '24. And hopefully, again, not -- trying to be conservative and not guess at how long this takes -- hopefully, it starts to free up towards the end of next year. Hopefully sooner, but end of next year, kind of a 1-year campaign would not be unheard of.

Okay. And then just sticking with the OUS coronary theme, Japan. You gave some metrics around customer additions year-to-date and then expected for 4Q. Can you translate that into kind of where you are in terms of penetration, whether it's on a procedure basis or account basis in Japan?

So the account basis, we'll end the year, there's probably 20% of the accounts, but those accounts that will have launched are certainly oversized in terms of the amount of volume they do. And so still, though, a vast minority of PCIs will -- in the accounts we launched this year, which we expect to end the year at about 300. We'll still be doing a small minority of PCI. And then as we roll through next year, that starts to get us into kind of towards the end of next year where we can get access for the accounts launched in the first 2 years to a majority of PCI.

Our next question comes from the line of Michael Polark with Wolfe Research.

I just want to drill down on U.S. peripheral again, sorry. And if you said it, I missed it, I've been juggling calls. But the -- sequentially for the fourth quarter, U.S. peripheral revenue, do you still expect it to grow with normal seasonal pattern? Or do you think this prior auth dynamic rolling through kind of contributes to flattish or down? What's your best guess for U.S. peripheral in the fourth quarter?

Yes. Our guess, to be conservative, is probably better to assume flattish than much growth in this quarter, as we didn't see the rebound in September that we normally see, and didn't really see it through October. So I think it's safer to assume flattish.

And then the, into '24 -- this dynamic, a headwind, but you're launching 2 new products, a tailwind. Sounds like Street is too high. But I guess in the context of blessing $920 million for the Street next year for total company revenue, that's up about 26%, 27%. U.S. peripheral would be growing below that. Is that a fair starting point? And I guess just to be more precise is, are you willing to put a kind of floor in for U.S. peripheral growth for '24?

It will grow below corporate average. I think that's a safe assumption as we're modeling it out right now. And U.S. coronary and international coronary will grow well above that average.

And I'd just say, as you know, we service the -- actually globally, we service our business with 1 sales force. And so they need to be facile in both coronary and peripheral. But what happens in that scenario is we don't have -- we could add an expense and add another sales force, in which case you could keep pushing hard on everything equally. But when you have a single sales force, we tend to toggle effort: lean into something 1 quarter or 2 quarters, then lean into something else. And over the last 6, 8 quarters, we've been leaning into peripheral launches with both M5+ and L6. And as we've turned into September, like I said on the call and first half of next year, we're going to have a lot of focus on the coronary C2+ launch in the U.S.

So we think there's going to -- we expect a lot of momentum coming through with coronary. And hopefully, this minor headwind we have with the pre-op and the -- goes away, in which case, peripherals start sailing a little bit more.

So did that answer your question? And the E8 will launch in the back half of next year, and Javelin is probably more like early '25 as we shared a couple of weeks ago. So below the knee starts to really contribute back into next year.

Our next question comes from the line of Mike Kratky with Leerink.

First, can you just confirm whether your longer-term guidance through 2026 considered the weakness in peripheral and the impact in China from anticorruption? Would you be willing to reiterate that 25% revenue CAGR?

Yes.

Great. And then as a separate one, first full quarter of Neovasc producer sales post acquisition, how does that compare to your internal expectations? And what are the catalysts or initiatives that you think are really going to help drive an inflection in sales for that product ahead of U.S. launch in '27?

So in the past, we've described this -- the phase we're in right now with Reducer as sort of figuring out the model, figuring out referral pathways. Understand in advance of the [Cassira II] data, which we think is going to be very important for our international business, obviously critical for U.S. because we've got to win on that trial to get U.S. approval.

But as we understand, in the markets where we can play right now, which is the U.K., France and Germany, what does it take to build a robust business. And as I described earlier, the U.K. team is doing a really good job of figuring that out. We've had to work through to figure out who else on the international team in the other 2 markets, are working hard to figure that model out.

And so we're in the process of restructuring, hiring a new team in both Germany and France, where there is currently adequate payment. And they'll be up and running next year, which we think will be stimuli to growth. If everybody is performing at the level of the U.K. team, you'd be seeing a nice growth rate. So that's our sort of expectation, is we'll have a Shockwave team versus an inherited team, other than the inherited team in the U.K. that we're really impressed with so far.

Our next question comes from the line of Danielle Antalffy with UBS.

Sorry to harp on the peripherals thing. You guys are probably tired of talking about it. But just to follow up on Larry's question and talking about the evidence that is needed. I guess, a different angle here is if this doesn't -- if this dynamic doesn't change, does that change the great outlook or TAM that you laid out at Analyst Day at all?

And I guess just curious about how physicians react to this. Is this something that eventually physicians, if it doesn't change, get frustrated and I mean I'm just trying to get a better understanding of, is it just delaying the time of procedures because it now takes longer to get the prior auth? Or is this something that could ultimately prevent physicians from really treating these patients, which is, if that's the case, is really a shame.

Yes. I mean it's -- this is a nuisance, not a fundamental change in the scale of the opportunity. More of a speed bump than a roadblock, if I could find different analogies. The effect is -- and so 0 change in opportunity. We have near term some caution, which is what we're trying to communicate today, that we think turns in -- it turns into a BTK growth engine starting next year.

And then we pick up reimbursement in OBLs and have other product launches for above-the-knee and above the knee becomes a significant growth driver. In no way are we backing away from what we think is an enormous opportunity in peripheral, both above the knee and below the knee, with big chunky growth vehicles, just not in the next kind of 6 months.

So a little bit of a reset on the near term because of this more aggressive implementation of a pre-existing policy for those Aetna covered lives, private and Medicare Advantage-administered Aetna patients. So it's a big enough population because Aetna is pretty big, that if every -- if a lot of centers have a little bit of a drag on their patients, it's enough, given our -- the breadth of our installed base, which we're very proud of. It adds up when onesie, twosie patients adds up across a broad spectrum of doctors. It's not enough where the doctors are like -- I mean some doctors are very frustrated because they have a lot of Aet patients. Other doctors yes, I lost a patient or 2 last month, but I'll get them back once I win the argument.

So it's -- it's not a fundamental this is such an aggressive change that suddenly PAD procedures are going to drop precipitously. They're just going to not grow and our business is not going to grow as much in the very near term.

I would just add there are many centers because this isn't a policy change. I mean this policy has been in place from all the providers, getting pre-auth from peripheral arterial disease. Some centers have a -- they work with the policy already. They have a smooth machine for doing it. The doctors don't even know it's it happens.

Other centers, this is that low. You're changing how our patients flow and they're not set up to deal with the change. So I think the likelihood is centers who are doing big peripheral volume, who are having this roadblock put up by Aetna, they'll figure out administratively how to deal with the roadblock and smooth things out going forward.

Got it. That's helpful. And then just on the coronary, we're always so focused on center adds there, but actually not every interventional cardiologist has adopted Shockwave IVL in each center. So just curious about the incremental utilization potential within the existing centers. If you can somehow frame the opportunity that way, that would be helpful.

Yes, it's a good question. So to your point, we kind of completed adding centers a number of quarters ago for the most part. And so where we are getting the growth of revenue is sort of 2 places: with physicians who have adopted us as part of their treatment algorithm. As the economics improve and as they get more experience with Shockwave, moving earlier in the PCI to use Shockwave but there's calcium. That -- and we have experience with physicians who do that, they tend to say the cases are smoother.

They don't get in trouble so much. There's less gear used if they use Shockwave earlier, when the calcium is there. So that's kind of, we call that moving kind of up the treatment algorithm. And the second place for growth is physicians within that hospital who haven't really adopted us.

And that's, I think, a rich area for us. And what we're doing on that front is, at the business planning level for the territories, really a focus on understanding which doctors are practicing at the hospital -- they move around sometimes within areas -- and which of those physicians are utilizing Shockwave, why or why not? And then that's helping our team target physicians in the hospital and getting them to adopt. So that's sort of the thrust of the growth going forward.

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

Thanks very much, and thanks, all of you, for your time and attention. Look forward to seeing you -- many of you later this quarter. Have a good day.

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.