Abiomed, Inc.
Q2 2017 Earnings Call Transcript

Published: 28 Oct 2016

[Operator:]

Good day ladies and gentlemen and welcome to the Q2 2017 Abiomed Incorporated 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 follow at that time. [Operator Instructions] I would now like to turn the call over to Ingrid Goldberg, Director of Investor Relations, please go ahead.

[Ingrid Goldberg:]

Good morning and welcome to Abiomed's second quarter of fiscal 2017 earnings conference call. This is Ingrid Goldberg, Director of Investor Relations for Abiomed and I'm here with Mike Minogue, Abiomed's Chairman, President, and Chief Executive Officer and Mike Tomsicek, Vice President and Chief Financial Officer. The format of today's call will be as follows. First, Mike Minogue will discuss strategic highlights from the second fiscal quarter and then turn to our key operational and strategic objectives. Next, Mike Tomsicek will provide details on the financial results outlined in today's press release. We will then open the call for your questions. Before I begin, I would like to remind everyone, this presentation includes forward-looking statements about the Company's progress relating to clinical, regulatory, and commercial matters as well as government regulation, litigation matters, capital and other expenditures, and financial performance. Each forward-looking statement contained in this presentation is subject to the risks and uncertainties that could cause actual results to differ materially from those projected in such statements. Additional information regarding these risks and uncertainties appears under the heading forward-looking statements in the press release we issued this morning and our annual report on Form 10-K for the year ended March 31, 2016. The forward-looking statements in this presentation speak only to the date of this presentation and we undertake no obligation to update or revise any of these statements. Thank you for joining us. I am now pleased to introduce Abiomed's Chairman, President, and Chief Executive Officer, Mike Minogue.

[Mike Minogue:]

Thank you, Ingrid. Good morning everyone. In Q2, Abiomed increased quarterly revenue by 35% to $103 million and increased patient utilization by 35% in our summer quarter. This quarter's historic achievement with Japanese PMDA approval reflects years of regulatory execution. Additionally, today we are announcing two significant new milestones, Impella heart pumps assigned to heart assist implant MS-DRG 215 and FDA approval of our feasibility STEMI study for a new patient population. I am proud of our team's ability to consistently accomplish our strategic initiatives and execute our tactical plans as Abiomed builds the field of heart recovery. We have now accumulated three FDA approvals for four Impella pumps, a dedicated US CMS-DRG category, seven guidelines, European and Japanese approval, 237 million in cash, 379 clinical publications, and 254 patents with an additional 220 pending. Abiomed continues to have no debt and remains one of the fastest growing GAAP profitable medical technology companies. For today's call, we would like to highlight our continued progress in the Protected PCI and AMI cardiogenic shock indications as well as explain our updated Impella reimbursement and our new FDA study. The Protected PCI indication, which grew 26% year-over-year continues to be a significant contributor to our revenue each quarter even in our summer months. However, many of the appropriate potential 121,000 high-risk heart failure patients remain unaware of this new minimally invasive solution. This quarter, I would like to provide details on two recently published articles confirming this under-treated patient group and acknowledge some of the gaps in treatment. First, a white paper published in circulation and titled Treatment of Higher-Risk Patients With an Indication for Revascularization. It provides a validation of the treatment from a prestigious cardiology journal. This paper was authored by 18 key opinion leaders and concludes patients with severe coronary artery disease who are candidates for PCI but are high-risk represent an understudied and potentially underserved patient population. Further, the characterization of a new field of coronary interventional procedures aimed to fulfill an unmet need to better define this population and to focus the use of PCI in these patients, who potentially have the most to gain from coronary revascularization procedures. The second paper I would like to highlight was published in JACC in August of 2016 entitled Underutilization of Coronary Artery Disease Testing Among Patients Hospitalized With New-Onset Heart Failure. This paper studied over 67,000 patients and found that only 17.5% of the patients identified with new-onset of heart failure during an inpatient hospitalization underwent testing for ischemic coronary artery disease. Additionally, only 2% of the patients underwent revascularization during the index hospitalization. This paper suggests significant underutilization of ischemic coronary artery disease assessment in new-onset heart failure patients. Turning to the AMI cardiogenic shock indication, this quarter, the U.S. emergent population grew 50% year-over-year. This is our second quarter with approval and we continue to educate and train customers and new employees to establish protocols for therapy to address the potential 100,000 U.S. patients. Recall that cardiogenic shock represents one of the highest mortality risk for patients in the hospital and we are now helping hospitals improve patient outcomes around heart recovery through education and training. Our Abiomed Impella Quality Assurance database called IQ consist of over 40,000 Impella patients and establishes a platform for observational analysis of real-world evidence to track outcomes based on defined protocols, processes, and adherence to best practices. Moving onto our Abiomed reimbursement update effective October 1, 2016, the American Hospital Association released simplified CMS coating guidance for all Impella implant procedures, which will now map to MS-DRG 215 Heart Assist System Implant instead of mapping to MS-DRG's 216 to 221. Similar to TAVR, moving out of DRG 216 in 2014, our Impella update was a result of new FDA indications for heart recovery, the allocation of resources required for the longer term support and expanded use. The analysis of historic Impella in-patient hospital charges also identified that up to 30% of the cases required outlier payments. To note, the CMS incidence of AMI cardiogenic shock has increased 50% over the last five years and heart recovery remains one of the most cost effective solutions in medtech. Today, Abiomed is also announcing the FDA IDE approval of our 50 patient Door to Unloading or DTU Feasibility Study to evaluate the use of Impella CP heart pump for unloading the left ventricle prior to Percutaneous Coronary Intervention PCI in patients presenting with ST segment elevation myocardial infarction or STEMI without cardiogenic shock. This represents a less sick and potentially new population for Abiomed of approximately 200,000 patients in the U.S. that may benefit from hemodynamic support by reducing or limiting damage to the heart muscle during the acute event. Despite the current standard of care and guidelines, 76% of patients experiencing their first heart attack without cardiogenic shock will develop heart failure within five years. We have more work to do, but this concept remains one of the most profound ideas that can impact millions of future heart failure patient. Finally, I would like to mention that we are looking forward to an exciting TCT next week in Washington, DC with 30 plus Impella sessions, five anticipated live cases, and an evening CHIP event complex high risk procedures. We are also holding an investor breakfast on Tuesday, November 1 and will outline our Abiomed IQ program, Door to Unloading study and new products with our Chief Medical Officer, Dr. Seth Bilazarian and our Chief Scientist and Impella inventor Dr. Thorsten Siess. In summary, Abiomed continues to build a new era of medicine focused on the field of heart recovery. We are now the only safe and effective, reasonable and necessary percutaneous heart pump for Protected PCI and AMI cardiogenic shock indications. Our growth platform expands with penetration of existing indication, expansion of new indications, approvals in new geographies, and progress on new products. We are financially secure and operationally prepared to continue our mission to recover hearts and save lives. I want to thank the team for their dedication to our patients and customers and thank our investors for their support. I will now turn the call over to Mike Tomsicek, our CFO.

[Mike Tomsicek:]

Thanks, Mike. Good morning everyone. Today, I'd like to share details on our financial results posted in the second quarter of fiscal year 2017. While impacted by the expected cath lab summer slowdown, the adoption of our Impella technology expanded rapidly versus last year. We've continued investing in marketing efforts and commercial infrastructure that will pay dividends in the second half. We are committed to all of the efforts necessary to get our technology in the hands of skilled care givers around the world. Fiscal second quarter revenue increased 35% to $103 million. U.S. Impella revenue rose 34% to $89.3 million driven by a 35% increase in patient utilization. Protective PCI and emergent patients were the foundation for our growth in the quarter representing year-over-year growth of 26% and 50% respectively. Outside the United States, Impella revenue totaled $8.6 million and was up 73% predominantly as a result of our investments in and focus on Germany where the U.S. dollar revenues were up 126% versus last year. Worldwide service revenue of $4.5 million was up 15%. In the United States, as of the end of the second fiscal quarter, the Impella 2.5 has been placed at 1,099 of approximately 1,400 targeted hospital sites for a penetration rate of 79%. Impella CP has been placed at 923 hospitals sites for a penetration rate of 66% of total hospitals. Impella 5.0 has been placed at 428 sites for a penetration rate of 31%. Impella RP has been placed at 112 sites for a penetration of 8%. As with last year, new sites added during the summer months lay a foundation for growth in the second half of the year. Reorder performance was strong for Q2 with US reorders at $81.7 million and growing 38% versus prior year and our reorder rate was approximately 100%. Average combined Impella 2.5 and Impella CP inventory at hospital sites was 3.16 units per site, up slightly versus 3.04 in the prior quarter and 2.82 in the prior year. This slight increase was driven by heavier use of Impella at existing sites necessitating more pumps on hand to maintain service with back up support where multiple Impella procedures can occur in a single day. Abiomed is maintaining its system where customers stock pumps for immediate use and rely on rapid replenishment direct from Abiomed. Gross margin for the quarter was 83.2%, compared to 84.1% in the same period of the prior year. Gross margin was impacted by U.S. demand for consoles in our revenue mix which was likely driven by the cardiogenic shock PMA. Margin was also impacted by fast growing sales outside the United States where ASPs are lower. R&D expense for the second fiscal quarter totaled $18.1 million and was approximately 17.5% of revenue. The bulk of the spend comes from investments in new products, product enhancements, and investment in new manufacturing processes that will further capacity and efficiency. SG&A expense for the second fiscal quarter totaled $53.1 million, up 33% from the prior year. Most notable here is the expansion of our U.S. commercial team where 15 employees were added this quarter bringing the total to 254 professionals. Our plans for fiscal 2017 include continued investments in this industry-leading field team and we expect hiring at a pace of 10 additional field employees per quarter. The addition of clinical and commercially focused staff allows us to go deeper in existing accounts and support the use of Impella for all appropriate PCI and AMI shock patients, which are both in the early innings of growth. Operating profit for the second fiscal quarter was $14.5 million or 14.1% of revenue, compared to $12.8 million or 16.8% in the prior year driven by the lower gross margins previously mentioned and the recent investments in Japan and U.S. commercial resources that will pay dividends in the second half. GAAP net income for the quarter was $8.9 million or $0.20 per diluted share, up from GAAP net income of $7.7 million or $0.17 per diluted share for the prior year period. The balance sheet remains debt free and we ended the quarter with cash and marketable securities growing $13.7 million to a balance of $236.9 million. Our top priority for use of cash is to support our organic growth and to continue to build our substantial advantage in intellectual property. The Company has approximately $48 million in net deferred tax assets primarily due to NOLs. Turning to guidance, we are maintaining the revenue guidance provided on our last earnings call in the range of $435 million to $445 million for growth of 32% to 35%. Turning to operating margins, while Q2 results were down from Q1, we are reaffirming our total year operating margin guidance in the range of 18% to 20%. Our investments during the first half of fiscal 2017 in manufacturing and distribution will lay the groundwork for long term growth. And our 18% to 20% total year guidance for 2017 delivers nearly flat to slightly improved margins versus last year. Over the last 24 months, we have added 313 employees bringing the total to 858 worldwide. Many of these additions were driven by our commercial organizations in the United States, Germany, and Japan and our expanded manufacturing and customer training capacity in both Aachen, Germany and Danvers, Massachusetts. We are now taking the time to digest and assimilate the new employees and invest in their training. These resources will be necessary as we partner with our customers for training and education to improve clinical outcomes in Protected PCI and AMI cardiogenic shock. It is this training that supports our ability to improve patient outcomes and provide cost effective solutions. As a result of this focus and its impact on time spent in the field, our guidance for revenue is established to balance both immediate growth and sustainable growth as we launch in the United States, Germany, and Japan to effectively improve the standard of care for heart failure. With that, my comments on Abiomed's second quarter financials are complete. We continue to make important financial progress and we are well positioned for success this year and for the future. Operator, will you please now open the line for questions.

[Operator:]

[Operator Instructions] Our first question comes from Danielle Antalffy with Leerink Partners. Your line is now open.

[Danielle Antalffy:]

Mike, just a question on the ICD-10 code and how they're timing your own individual code help potential adoption, does it -- I imagine it eases the reimbursement process for the hospital, but also I wanted to see if you could comment maybe on what that means for reimbursement going forward because that seems to always be a concern for investors and I wonder if this kind of puts that to bed for good.

[Mike Minogue:]

I think it's asleep for good relative to the value statement of what we can do for heart recovery. The origin of the change Danielle is that the introduction of the new ICD-10 system took a four-code system to now a seven-code and that happened this prior year and what that does is it allows for the opportunity to be more detailed coding descriptions. Now that we have a dedicated category for other heart assist implants, we are going to move out of the DRG 216, which was valve surgery and other which is also where the percutaneous valve or TAVR was. So, we're now in a category that can be identified as such and we think its great news because it simplifies the coding process, makes it more accurate, easier for the hospital, for the coders. I think it puts a real focus on it from a hospital perspective so they can dedicate more resources to it, not just from the billing, but also from the allocation of resources and identification of the patients. There is another component that will have a likely positive impact on the identification of cardiogenic shock and the use of hemodynamic support around the potential of bundling AMI patients in the future. This will likely help hospitals establish protocols to earlier identify cardiogenic shock patients, something that's very important relative to the implant timing and survival for a patient. And if you think about historically what happened to patients that would show up at the hospital and go into cardiogenic shock, the treatment was quite random. The treatment a lot of times depended on which doctor was on call, what resources were available, which nurses we're comfortable with which technology and so that's why protocols really matter in outcomes and if you think about what's happening in the population of CMS, we have a 50% increase in cardiogenic shock and the goal of recovering heart muscle has a complete profound impact on the patient, but it also is one of the most cost effective applications today in medical devices. So we're very focused on heart recovery. We believe as a company, we can partner with our hospitals now and we can improve outcomes and it's great to have a dedicated CMS process and coding to simplify things for the hospital as they move forward with established protocols.

[Danielle Antalffy:]

Okay, that's helpful and just one follow-up question. Very strong growth in Germany and I know much smaller number of days. So, not looking for you to comment on whether that growth is ever possible here in the U.S., but Germany is a little bit more advanced than they are thinking actually than the U.S., at least as it relates to balloon pumps and classifying them as potentially causing harm? And I wondered if you could talk about whether that dynamic could ever move over here to the U.S. and could Germany serve as a model longer term at least in the way hospitals approach balloon pumps versus Impella. Thanks so much.

[Mike Minogue:]

Danielle, thanks for your question. You're referring to the guideline in Europe for AMI cardiogenic shock and the update that has placed the intra aortic balloon pump as a Class III recommendation, which means it's harmful to the patient. So, that's clearly been assisting us in our growth and the establishment of protocols of the use of Impella in shock. Your question on whether that could come to the United States is that's the way the process works. They're all looking at similar types of clinical data. There's also been several publications and consensus documents and site specific protocols have been published by some of our users where they have eliminated the use of the intra aortic balloon pump in cases of AMI cardiogenic shock.

[Operator:]

Our next question comes from Raj Denhoy with Jefferies. Your line is now open.

[Raj Denhoy:]

I wonder if I could press you a little bit on the new DRG code 215. We've been looking this morning after we learned about it to find a rate, but what is the reimbursement rate that's going to be paid for that new DRG relative to the old one or the old system.

[Mike Minogue:]

So, it's usually a formula based on where you are teaching hospitals and beds, but on average, the DRG 216 is around $70,000 for these patients and the DRG for 215 is around $90,000, so it's about a 28% increase. Overtime as you've seen, we've continued to grow our shock population as well as our high risk PCI patients or some of the sickest patients in the hospital and what that's been doing is increasing the complexity around these patients. As I mentioned, 30% of our patients in the database at 216 had outlier payments, which means that the hospital has to can only lose a certain amount of money as it goes over and the other additional charges kick in. So that's one of the driving factors of moving from 216 to 215, but we also have the benefit now that whether you put it in any technique left side, right side, biventricular, it also maps the DRG 215 and since implant is 215, we still maintain the DRG 268 for the hub and spoke model where a receiving hospital accepts a patient already on Impella and then manage that patient in the ICU and then goes ahead and explants the Impella itself. So they still have their dedicated DRG for transfer again, DRG 268. And just, if I can add to that is why that's so important is in the past, we had patients that were not at advanced centers and advanced centers would essentially request that outlying hospitals send the patient in without any support or with an intra aortic balloon pump. Many studies including our own registry data revealed that if you allow a patient to sustain organ failure for a prolonged period of time, the chances of survival and recovery decrease. So, now we have a model where the hospitals, whether it's a spoke or a hub can do the right thing, can support the patient early to protect the organs, can immediately start to unload the left ventricle and that's how we end up with stories like Christine Albert, who happened up here in New England where she ended up going from one hospital to the next getting intra aortic balloon pump. She got transferred to Tufts, turned out she had biventricular failure at Tufts. They both an Impella in the left and the right side and two weeks after that, going from a very high mortality rate, she walked out of the hospital with her own heart and months later, she was at her holiday party dancing with her boyfriend. And we have several examples of these where patients either show up in outlying hospital or show up directly at the heart hospital and again what we now have is a program to move these patients around to get the best outcomes, but again, the best outcomes for our company, it's not survival, which leads to something else, it's heart recovery where the patient can retain their native heart.

[Raj Denhoy:]

Great, so just to put a finer point on it. So the reimbursement rate is going up fairly substantially and then also, I guess it's becoming a lot easier now just for, by reducing it down to one code, so overall you have us view it as a pretty positive development.

[Mike Minogue:]

I think it's a very positive development because it allows the hospitals to dedicate resources, it simplifies the process and remember that CMS has their own physicians and they're very thoughtful in their analysis and they use reasonable and necessary as the criteria. Since CMS is evaluating and looking for things that improve the population that's 65 and above, you have a population that heart recovery becomes one of the key indicators of success. Some of the patients when they hit the age of 70 or above are no longer candidates for a transplant. So, heart recovery could be the only option and we also have significant amount of data in studying this population from some of our others studies. And the FDA has given us approval for high-risk PCI, but in the case of AMI cardiogenic shock, we also have, it's been identified that the device can be used for heart recovery.

[Raj Denhoy:]

Okay, helpful. This maybe just on Japan. You haven't really given a lot of detail around your expectation for the Japanese market. I know you're still waiting for the reimbursement to get put in place, but when you think out into the next fiscal year 2018, do you have any thoughts around what Japan could do for you from a revenue perspective, how many sites you think you could train, the utilization and even anything around what you think you'll price the device in Japan will be helpful.

[Mike Minogue:]

So Raj, we're going to wait until we get closer to the forecast for the prior year, but as we've said, this fiscal year, we expect to start doing a couple cases in our fourth quarter, our March quarter with or without the approval of reimbursement in place. We think the opportunity is in the range of 50,000 potential patients in Japan. They really don't do transplants. They don't believe in the prevalence of sternotomies or opening the chest and so they do a lot of complex high-risk procedures in the cath lab or the EP lab. So we're very focused on the growth, but we also want to make sure that we have such rigor in training that all the sites that we start working with get great outcomes and we're thinking about it in the long-term, but we'll give more details on the forecast for the prior year when we get into next year's forecast.

[Raj Denhoy:]

That’s great. Thank you.

[Operator:]

Our next question comes from Chris Cooley with Stephens. Your line is now open.

[Chris Cooley:]

Thank you. Good morning. I appreciate to taking the questions. Maybe just two quick ones from me. Mike, if I may, just in regards to the operations, you had prolific growth over the last two years and clearly with this new more favorable coding system would expect that to continue and so I understand why with the investments a little bit of compression there in margin versus what we are modeling, but could you help us maybe understand two takes. One, as we start to see growth in Japan, I guess I'm trying to get a better understanding if we'll continue to see a higher concentration of consoles to the back half of the fiscal year relative to the catheters and similarly, just from a clarification standpoint, I think in your prepared remarks you mentioned 10 incremental employees per quarter to the U.S. commercial force. Is that 10 incremental to the old four to five that you were adding a quarter or 10 in total? And then I just have one other quick question on the business.

[Mike Tomsicek:]

Thank you, from a mix standpoint, this tilt in mix towards consoles is something we've seen two summer quarters in a row. I expect it to be more pronounced in summer quarters than in others. So I'm not predicting that, that will continue, but we do have the guidance range on gross margin from 83% to 85%, but typically Q2 has been a lower one and then specifically with respect to the headcount adds, it's a 10 individual total growth in U.S. commercial that we're expecting as a pace going forward.

[Chris Cooley:]

10 in total? Okay, thanks for clarifying. I just want to make sure I had that correct and then similarly if we think about the STEMI indication going forward and I apologize if I missed this, just one clarification, when do you anticipate that trial actually commencing. Got on the call just a little bit later, I apologize, thanks.

[Mike Minogue:]

No worries Chris, this is Mike Minogue. We expect it to start the first half of the calendar year 2017. It's up to 50 patients and we expect it to be completed within 18 months.

[Operator:]

Our next question comes from Jan Wald with Benchmark Company. Your line is now open.

[Jan Wald:]

I guess I have maybe a follow-up to the last question, the STEMI opportunity, could you go into that a little bit and explain what you think the opportunity is, once you've completed the trial, how that's going to help you with adoption? Just go through that a little bit.

[Mike Minogue:]

The STEMI study, first, if I could give you the hypothesis of the study, it's around the patients that today have a large anterior infarct AMI and the concept of today's standard of care is to treat the patient within 90 minutes of presentation of symptoms. So door-to-balloon time and that's the angioplasty balloon and what they're trying to do is within 90 minutes, they want that patient to be in the cath lab and they open up the blockage in the coronary artery and that's been a huge advance for medicine and the care of patients. It's responsible for significantly reducing the mortality rate in these patients and it's been held as one of the best protocols in the field of cardiology. However, the treatment does keep more people alive but there is something that is causing about 76% of those patients that survive to become heart failure patients within five years. And the speculation on why these patients become heart failure patients is due to two things. The first is there's some sustained muscle damage or myocardial damage in the original heart attack, the process of the heart attack and the heart muscle itself goes into a stun mode to protect itself because it's not getting as much oxygen and when it doesn't get enough oxygen, it transitions now to a phase where there can be potentially damage to the heart muscle and basically something called apoptosis where it can trigger cell death and that happens when the blood flow is restored, the muscle now has this apoptosis that occurs and what that is doing is its creating something called reperfusion injury. Reperfusion injury has been studied extensively for many years and the hypothesis of our study is that the unloading ability of Impella that reduces the oxygen demand and the work on the heart muscle can precondition and provides a level of protective support for the myocardium so that when the coronary flow is restored, the hypothesis is we could reduce some of the size of the infarct due to reperfusion injury. Now the study itself is not designed to see a significant difference in the 50 patients, but it's a feasibility for safety and for the approach where instead of now immediately just opening up the coronary blockage, one of the arms will have the Impella placed before the blockage is eliminated, you will unload the left ventricular, you'll precondition the myocardium and then you'll restore flow. And so the idea of that protocol will be looking beyond just the openings or the plumbing for the heart muscle and then that will then lead to a bigger study that could be something that's more pivotal that we can look for the advantages of what's happening to the size of the infarct and potentially how we can reduce the resulting effect of heart failure for patients that have large anterior infarcts.

[Jan Wald:]

Great, thank you. And I guess my last question is, we saw a kind of a higher spend rate than we had anticipated seeing in this last quarter. That's probably our model, it could be other people's models, but is that, is the spend rate that you're incurring now likely to remain the same? How should we understand that over the course of the year?

[Mike Tomsicek:]

Yes, thanks, we tried to indicate early on that some of our spending would be a bit front-end loaded as we prepare for launches, but you'll see and I made some comments on what led to that the commercial investments etcetera during the course of the quarter. But I also indicated a reaffirmation of our overall guidance which would for operating margins, which would indicate that the growth in spending will slow in the back half of the year and will remain in that 18% to 20% operating margin range.

[Operator:]

Our next question comes from Ben Andrew with William Blair. Your line is now open.

[Ben Andrew:]

Mike, talk a little bit about your comments around the typical seasonal slowdown in the cath lab. Was it particularly stronger this quarter versus your expectations because obviously the Protected PCI number was the one that I think came in a bit slower, and then it obviously somewhat of an elective aspect of that?

[Mike Minogue:]

Sure, Ben, this is Mike Minogue. The prior year was our first summer in having the Protected PCI indication and we were essentially a 100% focused on that. So we had a very large ramp, we've had very large ramp, we've had very large ramps sequentially for the last four quarters and in the summer quarter as you mentioned, it does slow down. So it's a tough comparison. At 26%, we think that's pretty strong growth in the summer quarter because you have a lot of the physicians that are out, you have less resources at the hospitals and you have patient preference to avoid some of the elective procedures during the summer time. At the same time, we were doing a lot of hiring, a lot of training for both our internal people as well as the hospitals to establish protocols. We took advantage of the slowdown in the summer months to really set up and do more training and partnering more with certain hospitals on basically on the protocols from the speed of the implant to the treatment in the ICU for Impella support and I think that it's a good investment and labs should start to pick up again in Q3 and Q4 and that's been our historical model.

[Ben Andrew:]

Okay, so you would expect the growth rate in Protected PCI in the back of half to be higher than 26% and shock still say at that was the very robust rates of the early launch?

[Mike Minogue:]

Well, I think there is seasonality and the forecast is in the guidance, it will go through that, but essentially yes, we expect a busier Q3 and Q4. That's where the labs pick up. The numbers are getting bigger, but we also are trying to grow both Protected PCI and shock.

[Ben Andrew:]

Do you feel like the organization is stretched or maybe was in the quarter because obviously you gave us a lot of detail about the investments you're making and maybe that caused some disruption during the summer months?

[Mike Minogue:]

Well, I think when you're growing the way we're growing, you always feel stretched and the way you respond to that is you hire more people and you train. And in the summer quarter, we really did a lot of both and when you're training people, you're not getting the immediate productivity out of it, but you're setting yourself up for success for the next several years.

[Ben Andrew:]

Okay and obviously a lot of both of the indications are around either physician education for shock or working the referral network. What sort of progress you felt like you made this quarter versus what perhaps the investments will help you do in the back half as a way to specifically drive procedure volumes?

[Mike Minogue:]

So Ben, I would answer that from a perspective of what's happening at the hospitals today and look at where their challenges are occurring. In the case of the cath lab, you have somewhat of a very specific focus on different types of programs and hospitals are starting to look at a program around high risk and PCI and where are those patients in the community, what referring docs are out there and there's a lot of programs being instituted at the hospital level and also by the physician societies things like CHIP and those are beneficial because it gives us a platform for education. On the second component, hospitals are looking at reducing their expenses and costs, length of stay, and readmissions and if you look at the AMI population, this represents a key opportunity for the hospital in many ways specifically cardiogenic shock has one of the highest mortality rates. These patients tend to die organ at a time and the outcomes can be very poor. So when we can go into a hospital and partner with both our processes and our technology and we can improve survival, improve recovery, we can lower the length of stay, we can reduce readmission and we can lower costs. And even if the shock population is only 5% to 10% of the total patients in the hospital, in many cases, they can account for 30% to 35% of the total hospital costs. So, we're incredibly excited about our program now to partner with hospitals to improve outcomes and I think you're going to hear and see more about the value that we can bring to hospital relative to supporting them all the way to the intensive care unit and helping them get the best outcomes.

[Ben Andrew:]

And Mike, maybe a more granular question as we think about Protected PCI. As you've been out there now for a few quarters with it, do you have a growing sense of what percent of those cases are actually elective i.e., is this something somebody would do within a month, within three months, within a week because that obviously can go to the seasonality question.

[Mike Minogue:]

For the Protected PCI patients, they are elective. That's about 60%, 70% of them and those are folks that, those people that are in the community, they are in hospice, they're scheduled, they can't wait a month, but they schedule them out within two days to seven days. The other component of Protected PCI, the urgent population patients, those are the ones that show up in the hospital with a non-STEMI and they likely need to be treated within 24 to 48 hours and that's still about 1% of the total procedures that are done in the cath lab today. So lots of room to grow at its current rate.

[Ben Andrew:]

Okay and then just to clarify an earlier question, the new DRG code you said pays around $90,000. Do you have a sense with the outlier payments what DRG 216 was net paying versus kind of the listed code of 70?

[Mike Minogue:]

So let me explain that. So an efficient hospital, the majority of the time should breakeven to make a little profit under the DRG system. So as a hospital has a program for either Protected PCI or AMI cardiogenic shock in the mix, that's the goal. So they will lose money on certain patients, they will potentially make money on other patients and the net is that when you applied an analysis to all of the 216 payments under our codes, 30% of those sites hit a certain point, it's around $20,000 something where they go into a loss and then they submit for outlier payments to assist them in anything more than that. And as our patients have gotten more complex and sicker, the hospital charges and the profile of these patients has continued to increase and I think we've somewhat predicted that would happen over time and I think you're going to continue to see this type of patient, but when you get good outcomes and good protocols, you're looking at something that has the potential to save more dollars and more costs than most other DRG systems because if they're successful and they get a good outcome, they can be more profitable and I think that's the way innovation is supposed to work and I applaud CMS's ability to focus companies on reducing costs while achieving better outcomes.

[Ben Andrew:]

Okay and then last one for me, just to make sure I'm clear. When you talk about a couple of hundred thousand STEMI patients, that is incremental to STEMI patients that are currently treated under Protected PCI or is there some kind of complex overlap there we should think about? Thank you.

[Mike Minogue:]

Sure, Ben. So Protected PCI patients are not those patients that are considered Protected PCI because the Protected PCI patients are those with heart failure Class III, Class IV with advance coronary artery disease and are turned down for surgery or the folks that have non-STEMI and have ischemic disease. The shock populations are patients that have STEMI and go into cardiogenic shock or any and all shock. We think that's about 100,000 patients. The STEMI population is a population that does not have cardiogenic shock and if you look at how many people have heart attacks, it's about 630,000 have an initial heart attack and it's another 300,000 that have a recurring heart attack and of that 930,000, about 200,000 of those patients do have STEMI, do not have cardiogenic shock, and that's an entirely new patient population for Abiomed and Impella usage.

[Operator:]

Our next question comes from David Lewis with Morgan Stanley. Your line is now open.

[Scott Wang:]

Hi, guys this is actually Scott Wang in for David. Two quick questions from me. Mike, the color on the undertreated patient population in Protected PCI was very helpful. I was wondering if you can give us a bit more color on your strategy to reach those patients and whether you feel you need to accelerate your outreach efforts to physicians or patients?

[Mike Minogue:]

Sure, Scott. That's question number one. So it is a very important question and one that we have a couple different approaches in order to reach the population. So number one, first step to reach that community of patients that are not getting treated today is working with the clinical community. So these type of publications are helpful, it's working with the heart team at the hospitals. So that would include the heart failure cardiologists, also the heart surgeons that are potentially going to turn the patients down and working through the process of establishing more awareness and some guideline and protocol perspectives of how do you find these patients. The second component is to have the administrative and the operational focus and this is where the new DRG really simplifies that program and allows the hospitals to dedicate more resources to it by themselves to help educate the local community. So you will see certain hospitals that are now advertising Protected PCI out with their own teams similar to what they do for TAVR and in many cases, we've been fortunate enough to follow the excellent model that's been driven by Edwards that this is exactly what they're doing. Now, our average age patient for high-risk PCI is around 70. The average age for the TAVR patients historically has been around 82 to 85, but the process itself is very similar in the way you approach the community and get to the referring physicians. And then the last component of what we're looking at is we're piloting advertisements in prints. We've also started piloting a commercial in four markets and see the effect it has within that community so that the patients who are unaware of the benefits in the alternative treatment of Protected PCI can find out directly and then reach out for those hospitals that offer that support.

[Scott Wang:]

And then one quick follow-up from me on the newly hired commercial organized -- the newly hired members of the commercial organization. I'm sorry if I missed this earlier, but are these new hires you made more targeted towards kind of in-field sales personnel to target new hospitals or more clinical educators to support kind of existing positions who are ramping up Impella cases. And how long does it typically take a newly hired member to fully ramp?

[Mike Minogue:]

Scott, we've hired people in the field organization that are in three buckets. One is sales, but again our sales team, we call them the Cardiology Account Manager, they're very clinical. Most days, they're in scrubs and they do provide patient support and many have clinical backgrounds. We also have an advanced group of clinical consultants, which are experts in the field, worked in hospitals extensively and have been in the industry and they can provide expert advice and support at the ICU level. And then the last is what we call Clinical Educators, where these folks maybe recently out of the hospital and what they are there to do is to just focus on training and education and really take some of the work off of the team, specifically around the management of these patients in the ICU.

[Scott Wang:]

And so, the recent hires are more for the in-field personnel it seems?

[Mike Minogue:]

Correct, a lot of our hires have been based in the U.S. clinical support team. They help the growth that we've been having in cardiogenic shock.

[Operator:]

Our next question comes from Jayson Bedford with Raymond James. Your line is now open.

[Jayson Bedford:]

Just a couple of quick ones. Some of it's been addressed, but the 26% growth in Protected PCI, realize it's a tough comp, but it is a little slower than what we were looking for. Do you think the focus on shock is taking away resources or marketing intensity from Protected PCI?

[Mike Minogue:]

I think there's the natural process of where we are spending a lot of time on shock. We do have to train nurses and the different types of physicians that we've talked about. If you think about the impact of just one day of patients, that's about $1 million and certainly we took the opportunity in the summer to do as much training as we could but we got to be able to do both as an organization.

[Jayson Bedford:]

Okay, when we entered the year, you talked about the education needed around the shock indication and that may take some time and then we see the bigger financial impact of this broader label in the second half of the year. Is that still the case?

[Mike Minogue:]

We have always said that the shock indication will be a catalyst for growth, not just in the second half but for the next five plus years and we believe that. [50% growth] is still very good and as Mike mentioned in his comments, we're trying to balance immediate growth with sustainable growth and ethical growth that gets the best outcomes for patients. So, Jayson, we'll continually to do that, understand how important growth is, but we also know that this will be something that can be the standard of care for the next 10 plus years, the intra-aortic balloon pump had 40 years and now we have Impella pumps for multiple indications for the left and the right side and we want to make sure we do it right and we feel we have an obligation to do that in the best interest of patients.

[Jayson Bedford:]

Okay and just last one from me on Japan. At one point, I think you guys were talking about partnering to address the Japanese market. Is that still -- that's you're going at it alone, that decision has been made. Is that fair?

[Mike Minogue:]

Jayson, you're correct. We talked about different models in the past. Where we are today is we're going to go direct for the Top 200 hospitals. We're identifying the Top 10 now and after we address the Top 200, we will look at other ways if we want to have partners to cover the rest of the country and we're open to that currently.

[Operator:]

Thank you. I'm showing no further questions. I would now like to turn the call back over to Mike Minogue for any further remarks.

[Mike Minogue:]

Great. Well, thank you everyone for your time today. For those that will be attending TCT, I look forward to seeing you and if there is any follow up questions please feel free to reach out. Have a great day.

[Operator:]

Ladies and gentlemen, thank you for participating in today's conference. You may all disconnect. Everyone have a great day.