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ABIOMED, Inc. (NASDAQ:ABMD)

F1Q13 Earnings Call

August 1, 2012 8:00 am ET

Executives

Susie Lisa - Senior Director of Investor Relations and Corporate Development

Mike Minogue - Chairman, President and Chief Executive Officer

Bob Bowen - Vice President and Chief Financial Officer

Analysts

Brooks West - Piper Jaffray

Greg Simpson - Wunderlich Securities

Anthony Petrone - Jefferies

Steve Beuchaw - Morgan Stanley

Operator

Good day, ladies and gentlemen and welcome to the Abiomed first quarter 2013 earnings conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will be given at that time. [Operator Instructions] As a reminder, today's call is being recorded.

I would now like to turn the conference over to Susie Lisa. Ma'am, you may begin.

Susie Lisa

Thanks you, good morning everyone and welcome to Abiomed's first quarter fiscal 2013 earnings conference call. I am Susie Lisa, Senior Director of Investor Relations and Corporate Development for Abiomed and I am here with Mike Minogue, Abiomed's Chairman, President and Chief Executive Officer; and Bob Bowen, Vice President and Chief Financial Officer.

The format for today's call will be as follows. First, Mike will discuss strategic highlights from the quarter against the framework of our key operational and strategic objectives for fiscal 2013. Bob will then review the financial results for the quarter and provide an update on guidance for the year. We will then open the call to your questions.

Before turning the call over to Mike, I want to remind you that during the course of today's conference and the question-and-answer session that follows, we may make projections or other forward looking statements that are subject to the Safe Harbor provisions of securities laws regarding future events or the financial performance of the company.

We caution you that these statements are only predictions and that actual results may differ materially. We also alert you to the risks contained in the documents we filed with the Securities and Exchange Commission, such as our annual and quarterly reports on Form 10-K and Form 10-Q. We do not undertake any obligation to update or correct any forward looking statements.

With that, I will turn the call over to Mike.

Mike Minogue

Thank you, Susie. Good morning, everyone. We are happy to report the best quarter in company history with 42% growth in total revenue at $38.8 million and 56% growth in Impella revenue.

We believe our sustained ramp and U.S. Impella growth of 61% indicates Impella is becoming the new standard of care in the U.S. for percutaneous circulatory support. The record results and sequential revenue growth, this Q1 elucidates the importance of the updated ACC/AHA/PCI guidelines, the TCT and ACT clinical and cost effectiveness data and the publication of the U.S. Impella registry.

Impella is now at an annual run rate of approximately $140 million and has grown greater than 30% year-over-year for the 11th straight quarter. The company is off to a fast start this fiscal year, solidifying our position in the industry as one of the fastest growing profitable medical device company. I personally want to thank and congratulate the entire team for our best ever results.

Today, I would like to highlight the quarter relative to our four fiscal '13 corporate goals. So, first on goal number one, achieving sequential revenue growth every quarter by maximizing the productivity of our commercial organization. This goal of sequential quarterly growth alone make Abiomed a unique company.

We achieved this goal despite the reduce customer face time in Q1 compared to Q4 due to our annual headquarters training for the field team, numerous clinical meetings and employee management reviews. We are expecting a challenge to this goal in Q2 after four straight quarters of large sequential growth entering into our summer quarter where cath lab significantly slows down.

The breakdown of reported usage was 50% for prophylactic, 37% for combined emergency support and 13% for all other applications. All grew double digit year-over-year. Additionally, we believe that the steady flow of peer review publications and physician training are key drivers of our growth.

In Q1 there were eight relevant peer reviewed manuscripts published on Impella and we had over 10 events interacting with over 500 physicians. The first of a series of PROTECT II papers were submitted in early February and we are confident in its publication this fiscal year. Additional PROTECT II papers on pre-specified endpoints are already in process.

Our second goal is quantifying and publishing the cost effectiveness and quality of life gains for Impella patients requiring hemodynamic support. Healthcare reform prioritizes quality of life metrics and penalizes hospitals for patient readmissions within 90 days from discharge.

This is the exact opposite incentive plan of the prior coverage policy where hospitals were reimbursed for readmissions, stage PCI procedures and repeat revascularizations and our products have demonstrated the ability to positively influence these metrics.

For example, PROTECT II, in conjunction with the economic study revealed that the Impella arm at 90 days had a 56% reduction in major adverse events from discharge had half the rate of repeat revascularizations and had 67% less per readmissions in hospital charges. The PROTECT II cost effectiveness or ICER study will be submitted for publication in September.

From a quality of life perspective, the peer reviewed publications of PROTECT I and RECOVER I FDA studies, MACH II, the Europella and the USpella have all reported Impella patients had a significant increase in ejection fraction at 90 days and/or improved New York Heart Association Status.

Additionally, this year, several institutions are submitting publications on cost effectiveness of Impella usage with emergency patients. We continue to believe that this utilization of our technology is one of the most cost effective paradigms in the medical device field because of the potential to reduce costs while improving quality. Impella patient Jara Herron, mother of six, pictured in our annual report released last month represents one of hundreds of success stories in both clinical and economic terms.

Our third goal is executing on our clinical and regulatory processes in order to provide patient access to new heart recovery products. In Q1, Abiomed received the European CE mark and Canadian approval for our Impella cVAD, a higher flow percutaneous Impella heart pump.

We had a successful evaluation with dedicated resources on site for the first 30 Impella cVAD patients in Europe. This concentrated effort will generate rapid data collection, new clinical abstracts and enhance the future training and performance of the product. The lessons learned will be incorporated into our cVAD U.S. controlled launch anticipated in September.

In Europe, we provided the pumps at no charge, lowering our revenue for the quarter but demonstrating the role Europe serves for Abiomed related to both clinical publications and first demand experiences. This European evaluation model will remain in place with the expansion of Impella RP and Symphony products.

Turning to Japan, we continued to make progress and reiterate our forecast to enter the Japanese market in the end of calendar year 2013 with reimbursement to follow within six to 12 months. We are motivated to treat more global patients and provide treatment options and access to new heart recovery products.

Our fourth and final goal is driving operational excellence in customer service. We are approaching 700 U.S. hospitals and are growing a solid service business in our installed base. As a result of our growth, we continue to enhance the training programs, advanced hemodynamic physician workshops and add resources around onsite support and our 24/7 call center.

The new AIC console which is currently at 40% of our U.S. install base has significantly improved ease of use. The new Autoflow software installed at 50% of our AIC sites receives consistent praise for its automated patient flow setting allowing for ramp and weaning algorithms.

Our manufacturing and supply chain team has risen to the challenge of producing more Impella pumps and more types of pumps while maintaining stable yields and increasing our finished goods inventory.

We have also completed the additional Impella line in Danvers, Massachusetts for future flexibility. Financially, the company continues to strengthen its cash position to a new record high, maintain strong growth and gross margin and increase profitability while incurring no debt.

In summary, we reached a new record result in Q1 and are succeeding because of our single mindedness around achieving positive patient outcomes. Today, and in the future, Abiomed offers innovative solutions to hundreds of thousands of patients that have a clinical need for percutaneous hemodynamic support.

Our company mission to recover hearts and save lives is unique in the field of heart failure and why we are confident in our future. Thank you to all stakeholders for your support.

I will now turn the call over to Bob Bowen, our CFO.

Bob Bowen

Thank you, Mike, and good morning, everyone. Before I get started I would like to refer you to the Safe Harbor language noted at the outset of the call as well as the risks and uncertainties noted in our SEC filings, particularly our most recently filed 10-K. I would also like to bring to your attention the GAAP/non-GAAP reconciliation that we have provided in the earnings press release, which is intended to aid investor understanding of our financial results.

As noted in our earnings release, fiscal first quarter revenue up $38.8 million was up 42

% from last year, as a result of strong U.S. Impella revenue growth which was up 61% due to increased utilization. With regard to field inventory levels, which I have reported on during past calls, the average Impella 2.5 inventory level at hospitals in the U.S. was essentially unchanged from last quarter at 2.2 catheters per site.

Worldwide Impella revenue totaled $34.7 million, up 56% from $22.2 million in the prior year. This was the highest year-over-year Impella quarterly growth rate in the past 10 quarters. Impella revenue outside the U.S. was slightly lower on a year-over-year basis and sequentially. Our cVAD market entry program in Europe included providing cVAD products at no charge to a select number of sites in order to secure faster clinical feedback as we prepare for a full commercial launch in Europe.

This reduced European revenue in fiscal Q1 and we expect this will have some continuing effect on fiscal Q2 European revenue as well,. Our near terms primary focus in Europe continues to be around first demand efforts and clinical publications.

Gross margin for the quarter was 80.8% compared with 78.5% in the year ago period. Gross margin rate improved due to a higher portion of revenue from Impella disposables and higher unit production volumes, partially offset by a higher console placements. We placed 164 consoles worldwide this quarter compared to 126 in the prior year, as we opened 34 new Impella 2.5 sites in the U.S. compared to 25 in the prior year, and upgraded a number of existing accounts for the AIC.

As of the end of the quarter, approximately 40% of the U.S. Impella 2.5 sites have received the new automated Impella controller compared to 30% in the prior sequential quarter. Total operating expense for fiscal Q1 was $27.8 million compared to $25.9 million in the prior year or up 7% on a 42% revenue increase, which reflects the strong leverage of our business model.

In Q1, income from operations totaled $3.6 million or 9.2% of revenue compared to an operating loss of $4.4 million in the prior year. GAAP net income was $3.1 million or $0.08 per diluted share compared to a GAAP net loss of $4.6 million or a loss of $0.12 per basic and diluted share in the prior year. As a reminder, at the start of the year, we had a U.S. federal net operating loss carry forward of approximately $191 million.

Looking at the balance sheet, accounts receivable of $18.3 million equated to days sales outstanding of 43 days, down 5 days from 48 days in the prior year and inventory of $12.5 million turned at 2.5 turns compared to 3 turns in the prior year. As noted on last quarter's earnings call, we began an initiative to increase safety stocks for select finished products and raw components, which through the end of first fiscal quarter is largely complete other than for Impella cVAD.

The cash and short term marketable securities position improved $4 million to $81.2 million, notably $3.8 million of the $4 million generated in fiscal Q1 was generated from operations net of capital expenditures and as a reminder we have no debt.

Turning to guidance, full year revenue guidance for fiscal 2013 as noted in our press release was increased from a range of $152 million to $157 million, to the range of $155 million to $157 million, representing an annual growth rate of 23% to 24%. We expect to Impella growth of greater than 30%, driven by increased utilization as our primary focus continues to be on going deeper at existing sites.

For fiscal Q2, we are anticipating the normal summer slowdown in the cath lab in the U.S. and continuing economic challenges in Europe along with the summer slowdown. In Europe, and when available in the U.S. we anticipate a controlled rollout of the Impella cVAD with a focus on clinical outcomes.

Consistent with prior years and the seasonal pattern of our business we expect to see 45% to 50% of total year revenue in the first half and 50% to 55% of total year revenue in the second half. We had a better than expected fiscal Q1 and great start to the new fiscal year.

We will now open the call to questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question is from Brooks West with Piper Jaffray. You may begin.

Brooks West - Piper Jaffray

Good morning, thanks for taking the question. Mike, I wonder if you would frame the Japan opportunity in a little bit greater detail and also talk about, is that a market that you would go direct, go distributor, a mix of those two things, any thoughts there would be helpful.

Mike Minogue

Sure, we expect, as I mentioned, approval by the end of the 2013 year with reimbursement to follow within six to 12 months. There are multiple steps that are ongoing that give us confidence around the guidance.

Overall, we think this is a big opportunity because of the high IVUS rates in complex PCI procedures. They have real transplant programs. They are a smaller population and there is already use of 25,000 Intra Aortic Balloon Pump and around 10,000 ECMO circuits that are used.

What we are likely to do as we are getting closer is to do a hybrid model where we have some direct employees in-house which we currently have two direct Japanese employees to identify and continue to work with the leading sites and the leading interventional cardiologists for training centers and then augment those training centers and the rest of the coverage outside of the main sites with the distributor.

Brooks West - Piper Jaffray

That’s helpful, and then let me ask a follow-up. Just again, checking your thought process. You opened 34 new sites in the quarter. Talk again about balancing new sites versus penetrating the existing sites and where are you on your sales and field support staff. You feel like you are adequately covered for the growth there. Thanks.

Mike Minogue

So the second part of your question, first is, we have now broken the 100 person mark for people in the U.S. field team. We are continuing to add four to six people per quarter. Relative to the number of new sites, we still prefer to be in the 25 to 30 range but we are experiencing a significant demand for the Impella consoles and we continue each quarter to have sites that are willing to pay for the consoles to secure their slot.

When you look at our current franchise account numbers, it is around 35 in the U.S., so we are still talking about one per site or one per franchise per quarter, which we think they can handle, and then in the Q1, Q2 time frame with the seasonality slowdown we should be able to maintain more quality on the training. The one last component of training is, as we swap out the old consoles for the new consoles, we still have to update those folks just to the new user interface.

Operator

Thank you, our next question is from Greg Simpson with Wunderlich Securities. You may begin.

Greg Simpson - Wunderlich Securities

Thanks, good morning, guys, great quarter and the execution here has just been fantastic. So, a bunch of questions, I may have to circle back, but Mike, first of all, could you repeat the comments you made about U.S. cVAD launch. It is earning season, so I am a little dimwitted or more so than usual.

Did you say something about controlled launch in the U.S. in September? Did you give us an update there?

Mike Minogue

I did, Greg. What we are anticipating, as we have said, is we expect to a have controlled launch of the Impella cVAD in the September time frame in the U.S. and we do have lessons learned from the European experience but will also, as I stated, will be a controlled launch because we will focus on the quality over quantity and also the Impella cVAD only runs on the new AIC console.

Greg Simpson - Wunderlich Securities

Did I miss something then? You were telling something about the FDA approval process?

Mike Minogue

While we have consistently said that we believe we are going to have the Impella cVAD cleared by the end of the summer.

Greg Simpson - Wunderlich Securities

Okay, all right, thank you. Secondly, did you guys, reclassify the usage of Impella? Sounds like you gave it a little bit differently and the way you presented it, I guess the question is, is the emergent use of Impella really taking off to that number? It was certainly much bigger than it has been?

Mike Minogue

Yes, we did combine. So in my comments, we did combined all emergency use. So we now call it 37% for combined emergency use. Prior to that we were only really picking on subset of patients that required support and what we believe is more accurate is to classify the required emergencies support whether they are in the cath lab or the surgery suite.

Greg Simpson - Wunderlich Securities

Okay. If you had to look at this quarter, and obviously phenomenal Impella strength, especially in light of the seasonality inherent in the quarter, I know the answer is going to be that all categories were growing but is there one that really, specifically drove the elevated growth?

Mike Minogue

While some of the numbers are bigger in the different categories but they all grew double digit year-over-year.

Greg Simpson - Wunderlich Securities

Okay, and then obviously, the guideline to bring more doctors under the tent, as you, I guess, the pace of adoption, the pace of increased utilization, are you seeing, maybe, a quicker pace as new guys come and begin to use the technology? Are you seeing a faster uptick?

Mike Minogue

Well, we are certainly seeing growth. So I think it is probably a combination of the guidelines, the AIC console, some of our newer publications and some of the cost effectiveness data. So we have consistently built the plan around improving training and data and so the training is getting easier. We are adding more people. We are enhancing our call center and then the data has continued to be, both the clinical publications as well as the guideline.

Greg Simpson - Wunderlich Securities

Okay, great. Then just one last one. I apologize for all the questions but Bob, on cVAD in Europe, is there anyway to quantify how much of a lost revenue impact, if you will, resulted from giving them away free and then how do you account for that? Did that have an impact on gross margins?

Bob Bowen

Yes, well, it's probably in the $300,000 to $400,000 range, Greg, of lost revenue and the actual cost of those units that we provided at no charge went into our market entry expense line which is in the R&D bucket.

Greg Simpson - Wunderlich Securities

Okay, all right, great. Okay, thank you very much, guys.

Operator

Thank you, our next question is from Anthony Petrone with Jefferies. You may begin.

Anthony Petrone - Jefferies

Good morning and congratulations of the quarter. Mike, in prior quarters, you actually gave the breakout of the EP volumes. I am just wondering if there is an update there. If you can provide that number.

Mike Minogue

Sure so. In the all other bucket, that’s where we put it, based on its size, it is probably 7% as the '13 it is growing and we just didn’t break it out.

Anthony Petrone - Jefferies

Sure, no problem, and just looking at the actual 34 sites added and usage per site, by my math, that went up as well and you added 34 sites this quarter. If I look back historically, that’s a larger number. So I am wondering, just on adding new sites, for one, what was more of the impact there? Was that specifically related or just a combination of everything you mentioned earlier?

Then on the actual utilization per site, can you also breakout the delta between your high users and your moderate users. Is that converging or the higher use is still just increasing at a faster rate?

Mike Minogue

So, as I commented, we think based on the demand that’s out there for the Impella consoles we can handle up to 35 but we are not trying to pursue a large number and what we are seeing is a steady flow of purchasing of the consoles throughout the quarter. So it enables us spread the training protocol each month.

The second question you were asking. Could you clarify what you were looking for?

Anthony Petrone - Jefferies

Sure. Basically, the delta between your heaviest uses of Impella per month and the more moderate uses. Is that closing or is it still heavily weighted toward your top 20% of users?

Mike Minogue

Actually, what we saw this quarter, Anthony, is, I guess, I would call it the mid to upper mid tier of users had the largest increase in utilization relative to last quarter. So the highest users continue to use at rates similar to where they were and the two tiers below that increased their usage.

Anthony Petrone - Jefferies

Okay, and is that at all correlated to independent users if you have an update on how many sites are actually independent and how many are still being the company buying (inaudible).

Mike Minogue

So the rate is still around one out of three Impella's as put in independently but more than half o four sites are independent. What's happening is, we still attend many of the cases to either train an additional doc or tech or own internal people and we will continue to drive that over time but we also want to make sure that its quality over quantity, that we are training as many folks and going as deep as we can to each account.

Anthony Petrone - Jefferies

Sure, and the last one from me and I will get back in, is just the customer reimbursement question, Mike. So, one, can you just provide, I know last quarter you actually mentioned the company would be a little bit more proactive on the private sites. So any update there?

And just how you are thinking about the potential for a CPT code next year? And anything you can share on the reimbursement front, thanks.

Mike Minogue

Sure, Anthony. I guess, overall on reimbursement, I would say, that we have had established reimbursement that has been in place since 2008 and we have had success I believe based on our clinical and economic data and the proof of that was, both the NHIC ruling last summer as well as Impella being incorporated into the ACC/AHA guidelines in November.

Our dedicated team is in dialogue with CMS through the national and regional payers. We don’t know of any specific changes that are pending. Yesterday, CMS updated the IPPS status and there is no change to any of our DRGs or classification and we also said if there is additional reviews, it’s a public notice. So it’s a 60 day to 90 day period. So everyone will know about it and we are confident we will end up with a similar positive outcome as happened in the past and even today, we have more publications and inclusion into the guidelines that we didn’t have over prior ones.

Relative to your CPT question, we again believe this will happen. The codes be announced at the end of the month and the dollar amount should be announced in the October time frame and we think it will take effect in January 1 and we expect the range to be for in-plant and ex-plant and repositioning to be in the range of 600 to 1,000 which is not that different than other technologies and it is much lower than other hemodynamics support devices like surgical or paracorporeal badge or ECMO.

Your last question on the commercial carriers. We are starting to approach some. There was an update by Humana earlier this month. Humana is an account that had a prior no coverage policy on anything with Impella. Interestingly they did not do a formal tech review. They just did an update to it on their own. The new policy does cover patients that have a need of emergency support. So that’s good.

It basically allows us to go back in and talk about other publications and applications for p prophylactic use. In their update, they did not include the -- and update their guidelines and they did not again do a technology review or look at our latest publications. The only one that’s done that that we have done a technical review is with the Health Net, which did full coverage and their coverage matches essentially the ACC/AHA guidelines in terms of covering, both prophylactic and emergency patients.

Operator

[Operator Instructions]. Our next question is from David Lewis with Morgan Stanley. You may begin.

Steve Beuchaw - Morgan Stanley

It's Steve Beuchaw for David. I wonder if you could give us an update on any of the new Impella modality efforts, any of the work that you are doing on new clinical studies that can think of a couple of indications there? Didn’t hear an update in the prepared remarks.

Mike Minogue

Steve, what specifically would you like relative to the registry or future publications?

Steve Beuchaw - Morgan Stanley

Future publications

Mike Minogue

On future publications, we have a series of protective papers. So the main publication has been submitted and is in the peer review process. There are other studies that are being completed now with the executive steering committee that are around the pre-specified endpoints such as atherectomy, no atherectomy, STS scores, triple vessel disease and the enroll and learning curve and on the USpella registry it was published in the beginning of Q1 and we will continue to add more sites to the registry data, both for Europe and U.S. to continue to publish on multiple applications.

Steve Beuchaw - Morgan Stanley

And on the AMI trial, or should we not expect any progress there?

Mike Minogue

So on the AMI study, the mini study, what we want to do is we are looking at the protocol in place and we would like to, at some point, look to expand it to also incorporate the Impella cVAD. So we haven’t made any official changes and we are still monitoring what the current study looks like.

Steve Beuchaw - Morgan Stanley

Okay, great, and then, Bob, a question on gross margins. They stepped down a bit sequentially. I wonder if you could quantify the impact on gross margins from the higher console placements in the quarter and should we still be looking for flattish gross margins with a ramp into the first quarter?

Bob Bowen

The biggest affect on gross margin is the number of console placements. As I mentioned, we placed 164 worldwide in the most recent quarter and prior sequential quarter we placed 111. So it was up dramatically and that’s largely what affected the sequential decline in GM rates.

I think we have guided or gross margin rates to be around 80% to 81% and we monitor the upgrade cycle in order to try and manage that number.

Operator

Thank you. I am showing no further questions at this time. I would now like to turn the conference back over to Michael Minogue for closing remarks.

Mike Minogue

Thank you everyone for your time today. If you have questions, please let us know. We would also like to announce that at CCT we will have an analyst and investor breakfast on Thursday, October 25th and it will be between 7 am and 9am at the Lewis Hotel. Look forward to seeing everyone. Thanks again for your time.

Operator

Ladies and gentlemen, this concludes today's conference. Thanks for your participation. Have a wonderful day.

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