Abiomed, Inc.
Q3 2017 Earnings Call Transcript

Published: 26 Jan 2017

[Operator:]

Good day, ladies and gentlemen, and welcome to the Abiomed Inc. Q3 2017 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 will 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 third quarter of fiscal 2017 earnings conference call. This is Ingrid Goldberg, Director of Investor Relations for Abiomed. 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 for today's call will be as follows. First, Mike Minogue will discuss strategic highlights from the third 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 that 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, our annual report on Form 10-K and the year ended -- 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 Q3, Abiomed advanced our corporate goals and delivered our best ever quarterly results with $114.7 million in revenue. This was the largest sequential revenue lift in company history and represents 34% in overall revenue growth year-over-year. U.S. Patient Utilization also set patient records in both Protected PCI and emergent support, up 34% and 36% respectively. We have dedicated CMS and total reimbursement are in 1,119 U.S. hospitals, and today we have supported more than 45,000 patients; more than any other heart pump in history. We are referenced in seven clinical guidelines, have published over 350 cogent clinical papers and currently have 264 patents and 237 patents pending. Additionally, this quarter closed with $259 million in cash. Abiomed has no debt, and continues to be one of the fastest growing GAAP profitable medical technology companies. For today's call, I will highlight two topics. First, growing the utilization in Protected PCI and emergent indications; and second, elaborating on Impella's ability to be effectively utilized in our Hub and Spoke model and creating a new field of heart recovery in your community. So, first on our indications; after the slower summer quarter, the Protected PCI indication returned to a robust 34% year-over-year growth validating the population and continued need for Impella and its indication. Additionally, the emergent AMI cardiogenic shock indication grew 36% year-over-year. The key to our long-term success and sustainable growth lies in our ability to identify these elective and emergent patients and help hospitals improve their clinical outcomes, while lowering their costs. Most often, the cause of the problem for these patients is coronary artery disease and heart failure. Coronary artery disease is the number one cause of death in the United States. This results in approximately 900,000, or one in every three deaths each year due to blockages in the coronary arteries causing the restriction of blood flow and oxygen to the heart muscle. These are significant clinical problems that occur over time for elective patients or emergently for AMI shock patients. It is important to understand this distinction. Hemodynamic support with Impella enables a patient to undergo a PCI procedure, because it assists the pumping function and maintains stability for the patient's weak heart, helping physicians focus on complete revascularization. Complete revascularization in PCI is proven to maximize the patient's outcome. Nearly 700,000 of the Class 3 and Class 4 patients in the U.S. have significant coronary artery disease and poor heart ejection fraction. Abiomed's goal is to help repair these appropriate PCI patients with an experience intervention cardiologist at a heart hospital in their community. We believe that 121,000 patients today will benefit from Protected PCI and 100,000 emergency patients should receive Impella heart pump support during their existing admission for hemodynamic instability. Well over 100,000 patients are treated in the hospital with inotropic drugs and escalating doses are proven to increase mortality rates. Overall we estimate a penetration rate of only 7% today of the total 221,000 appropriate patients. This high-risk PCI population exists in every community, and we are uniquely qualified to help educate the physicians and identify patients not offer treatment or denied open heart surgery. While many large companies are engaged in this exact process of identification and education for percutaneous valve candidates, we are now one of several CHIP companies engaging in CHIP education. CHIP stands for Complex High-Risk Indicated Patients, who are working within the community of other companies as well as the physician groups to educate and identify these high risk patients. To note, these risk PCI patients are on average 69 years old and about 12 younger than the current percutaneous valve population. Beyond high risk PCI, Abiomed supports multiple types of urgent and emergent patient with the majority younger than 65 years old. This leads to our second topic of building a new field of heart recovery by educating physicians and patients at all levels of the hospital through our hub and spoke model. There are some hospitals in your area that are specialist in high risk PCI and recovering heart muscle. Alternatively there are other hospitals that are generalist and using Impella for primarily emergency patients. The way these hospitals work and work together are keys to maximizing outcomes because it allows for patients to transfer between sites with the most expertise and best trained physicians and nurses when necessary, because Abiomed is committed to improving outcomes, we track nearly every patient that receives and Impella. Our field team is unique because they are supporting the hospital to identify and implement best practices around protected PCI and heart recovery. Our team and call center provides full service and 24/7 support as hospitals learn and work towards independence. We are leveraging our Impella quality assurance database and real world cVAD registry to optimize patient care and publish clinical results. Our dedicated team of Abiomed employees puts patient first in everything we do and our customers recognize this dedication. Before closing I will tell you a recent story of a nine year old girl from New York. This little girl had a cardiac arrest after being brought to the hospital in November, although not currently in approved use of Impella because of her age, the treating physician decided that it was in the patient's best interest to implant the Impella 2.5 with hopes of keeping her stable during transport out of state to a children's hospital. We have learned from our IQ database the importance of unloading early for hemodynamic stability, from implant of Impella in New York to her admission ultrasound at the children's hospital her ejection fraction or EF improved from 10% to 30%. The doctor made the decision to leave Impella in overnight and the patient was veined from inotropes we have learned from our cVAD registry, the importance of reducing inotrope to help rest the heart. The patient then went to the cath lab for a workup and biopsies the next day. There they found the patient left vein, the main artery of the heart was occluded and the next morning the patient went for surgery, after surgery the doctor told the Abiomed representative that help supports the patient, that the patient's heart function had return to more normal. This little girl went home to her family with her native heart. This story motivates our company and physicians to focus on recovery of the heart with unloading therapy and demonstrates why it is one of the most cost effective solutions in the medical technology industry. We have learned and published that recovering the native heart promotes quality of life for patients and avoids the cascade of the most expensive and invasive treatment and surgeries. In summary, these are the best of times for Abiomed because the high risk patient population has been validated and only now with our regulatory approvals can we educate and train our customers to improve the standard of card through hemodynamic support. We began building this field of heart recovery less than one year ago and in the medical technology industry, history demonstrates the impact of FDA approvals on adoption. We are excited for this opportunity not just this year but for the next 10 years. We have short-term, mid-term and long-term growth opportunities in existing and new indications, products and geographies. Abiomed is financially secure and operationally prepared to continue our mission to recover heart and save lives. I want to thank the team for their dedication to our patients and customers and our investors for their support. I will now turn the call over to Mike Tomsicek, our chief financial officer. Mike?

[Mike Tomsicek:]

Thanks, Mike. Good morning everyone. Today I would like to share details on our financial results posted in the third quarter of fiscal year 2017, as mentioned we posted record quarter-over-quarter revenue growth and advance both protected PCI and shock PMA adoption, fiscal third quarter revenue increased 34% to $114.7 million, U.S. Impella revenue rose 34% to $100.3 million driven by a 32% increase in patient utilization, outside the U.S. Impella revenue totaled $8.9 million and was up 47%, predominantly as a result of our investments in and focus on Germany, where the U.S. dollar revenues rose 80% versus last year. Additionally worldwide service revenue of $4.8 million was up 20%. In the United States, as of the end of the third fiscal quarter, the Impella 2.5 has placed at 1119 of approximately 1,400 targeted hospital sites for a penetration rate of 80%. Impella CP has been placed at 972 hospital sites for a penetration rate of 69% of total hospitals. Impella 5.0 has been placed at 442 sites for penetration rate of 32%. Impella RP has been placed at a 120 sites for penetration rate of 9%. Reorder performance was strong in Q3 with U.S. reorders at $95.1 million and growing 37% versus prior year. And our reorder rate was approximately 100%. Average combined Impella 2.5 and Impella CP inventory at hospital sites was 3.3 units per site, up slightly versus 3.2 in the prior quarter and versus 2.9 units 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 level. Gross margin for the quarter was 83.4%, compared to 85.1% in the same period of the prior year. Gross margins reflect a positive development, namely the addition of new capacity and production lines. All else held equal, these new lines will become efficient as they are more fully utilized. The strength of our balance sheet has allowed us to invest in manufacturing to stay ahead of not just present demand, but also prepare for future growth. R&D expense for the third fiscal quarter totaled $16.4 million and was approximately 14.3% of revenue. The bulk of the spend comes from investments in new products, product enhancements and new manufacturing processes at further capacity and efficiency. SG&A expense for the third fiscal quarter totaled $53.9 million, up 29% from the prior year. Our plans for fiscal 2017 include continued investment in our industry-leading field team, and we expect hiring at a pace of up to 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 in our Hub and Spoke model. Operating income for the third fiscal quarter was $25.4 million or 22.2% of revenue, compared to $17.5 million or 20.4% in the prior year. GAAP net income for the quarter was $15.4 million or $0.34 per diluted share, up from GAAP net income of $10.6 million or $0.23 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 $22 million to a balance of just over $259 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 $38 million in net deferred tax assets, primarily due to NOLs. Turning to guidance; we are increasing the lower end of our fiscal year 2017 revenue guidance with the new range being $440 million to $445 million, and increase of revenue of 34% to 35% from the prior year. This compares to the prior increase forecast of $435 million to $445 million. Looking at Q4 of '17 alone, we project revenue will be around $122 million for the quarter. Turning to operating margin percentage; we are reaffirming our total year operating margin guidance in the range of 18% to 20%, we expect our investments during fiscal 2017 in manufacturing and distribution will lay the groundwork for long-term growth. Our guidance for revenue and operating margins as well as our plans for investments in the business always revolve around strategic and sustainable growth. Abiomed's growth has been at the very top-end of the MedTech's base, and this is the result of our focus on patients and caregivers and quality outcomes. We believe this focus and the tireless pursuit of heart recovery will allow us to maintain industry-leading growth for years to come. With that, my comments on Abiomed's third quarter financials are complete. Operator, could you please now open the lines for questions?

[Operator:]

[Operator Instructions] Our first question comes from Chris Cooley with Stephens. Your line is now open.

[Chris Cooley:]

Good morning, and congratulations to you and the Abiomed team on the record quarter; great results. Just two questions from me if I may. First, Mike, you have a phenomenal quarter, record growth, seeing the strong uptick once again in Protected PCI. Help us think a little bit about how you bend the adoption curve a little bit, I know you're making continued investments in the sales and marketing infrastructure, you are leading with clinicals, but basically how do you keep pace with this type of growth as you try to drive greater penetration across the hospital network? And then just as a quick follow-up, earlier this week, the net cap questions were actually published, would really appreciate hearing your thoughts on, you know, going forward what this may or may not imply to products that are in the pipeline, obviously doesn't affect your existing portfolio that's commercial, but just trying to get a little bit of a better read on how you see that directionally? Thanks.

[Mike Minogue:]

Thanks, Chris. So I will answer both questions. So, first on your question about bending the adoption curve and keeping pace; what we have talked about is that we're investing in education as well as training and we are putting that into a couple of buckets. So, first is on the physician education, the peer-to-peer lectures, and that's coming through local community types of programs as well as nationally recognized society groups. We also are continuing to publish on average 15 to 20 a quarter. We have clinical dossiers that are out there, but we also have a lot of clinical information around quality of life, benefits to the patient, reduction of costs, reduction of readmission, so -- and then the third is a bit of a patient awareness campaign. So we are doing our best to work with the physician groups, the programs such as CHIP that are being driven by the intervention cardiology community as well as the heart team groups, and trying to drive more awareness in the community and piggyback on the outstanding work that Edwards has done to identify those patients in the community that are turned down for surgery. In their case, it's for the aortic valve, for our case it's for PCI and revascularization. So, that always comes down into the bucket that we call training, data, and time. And then specifically we track certain things within the quarter. So, to kind of give you some numbers, we had a 100 speaker programs in Q3. We had 28 courses across the board. That was over a 1000 customers and that can include nurses and techs. We had TCT in the quarter, which had four live cases and two symposiums. We have a speaker certification process and we also have the heart team certification around the RP that was over 40 physicians, and we've been training fellows and train more than a 100 fellows on average each quarter. So we are hitting over a 1000 people, but we're really trying to focus on the people that see this as a new field and want to develop a Protected PCI program as well as have a Hub and Spoke model to treat the AMI cardiogenic shock patients. So, moving to your second question on the MedTech, for bit of background for everyone, they recently announced a general meeting to discuss future study endpoints. If you go to their Web site and I'll read off their Web site, the MedTech panel will examine what health outcomes in studies in heart failure treatment technologies should be of interest to CMS. And overall we believe that these are great questions such as improving EF, improving quality of life, looking at patient preference, and in fact when you look at what we're doing for high-risk PCI and native heart recovery, those are endpoints that already look at those things. So we are excited for a focus in general on a high-level around heart failure and quality of life outcomes. This meeting is coming up in March. Again, it's not specific to any products or any company, but to give you one final opinion, they're asking four questions and one of the questions that they are asking from the panel is looking at endpoints around clinical studies for heart failure treatment, and it specifically calls out cardiac remodeling as well as ejection fraction, and as we know, when Impella was used in Protect 2, we saw a significant improvement in ejection fraction for these patients and has been shown in all of our studies, Protect 1, Protect 2 and Registry Publication, and for cardiac remodeling to some extent the science of hemodynamics pressure volumes -- some of our newer products are going to also look at cardiac remodeling as well for heart failure. So we think it's good that there is more emphasis on these type of approaches, and the reason that I think everyone is seeing that is because heart failure and specifically coronary artery disease remains the number one killer and the system really has to do find a way to improve outcomes for these patients.

[Chris Cooley:]

Thanks, and congrats again on the great quarter.

[Mike Minogue:]

Thanks.

[Operator:]

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

[Raj Denhoy:]

Hi, good morning.

[Mike Minogue:]

Good morning, Raj.

[Raj Denhoy:]

I wonder if I could maybe start with a high level question, you know, with the business in the last few years now, a couple of years now performing at a pretty high level, when we think about, you know, the future going forward the next several years and the challenges you sort of outlined today about having to identify patients and work for hospitals and improving profitability and all these sorts of things, in your mind what is the sustainable revenue growth rate for this company? Is it something in the 35% plus range or something closer to 30? I am just trying to gauge where you are comfortable with that modeling going forward.

[Mike Minogue:]

So Raj, last -- two summers ago, we gave our 2020 vision. And to be clear that was not guidance, but we thought it would provide insight what we call our blueprint to a $1 billion in the U.S. market. So far we have beaten the average growth inside that model, which is reduced now to a five year growth rate of around, CAGR of around 30%, and we really don't want anyone fixating on this as guidance. We want to clarify that this is a vision, you know, a vision is what you see ahead and guidance is what we commit to for the next 12 months. So, our fiscal quarter is we are in. So, on the next earnings call we will give you that range for the next fiscal year, but to come back to the philosophy question, we believe that we will maintain a pace that will put us in this classification as one of the fastest growing GAAP profitable medical technologies for many years to come. And if the vision means that we hit the billion with some added indications of some new products over the few more months, so be it, but we also plan to continue to grow beyond the one billion in the U.S. because we do have these new indications and new products and new geographies to go. And so, without giving you a formal number for the next year, the numbers are bigger, but we again see a path for years to come to be one of the top growers.

[Raj Denhoy:]

Right, and that initial vision that you laid out back in 2015, and granted you have exceeded it the last couple of years but there is nothing that you see from this point forward that would deviate from that or anything that you are doing in the sense that wouldn't allow you to hit that, because a lot of it is driven by things you do in terms of adding sales rep and capacity and those sorts of things, you're in the sense of still building to that goal I guess is a way to ask the question?

[Mike Minogue:]

We are. And I think the important point is what you are saying is that only now have we had the FDA approvals and if you look historically at MedTech that FDA approval really helps to be a driver for adoption. We don't expect it to be linear as we have talked about, and there are different types of approaches whether you are doing elective patients which is where you are bringing these patients into the cath lab that may not be treated versus on the patient population that's emergent. They are in the hospital being treated. And one of the things that we've talked about is the size of the population, and we are very conservative and what we are talking about is still the number one killer. So you can find reports that say there are 4 million Americans with coronary artery disease. You can -- the reason we narrow down to Class 3 and Class 4 is because these are people that are already suffering from poor quality of life. A Class 4 patient is in the hospital and can't really move out of the bed. And of that population, about 60% have both coronary artery disease and low EF. And so, we are really focused on trying to identify that population. And being that this is a new treatment option, we are working with things like CHIP and the Physician Societies, but we are also watching and learning from what the percutaneous valve physicians and companies have done and they have been be a great role model for us to piggyback on.

[Raj Denhoy:]

Helpful, and maybe just one update, just I think this year, this calendar year, we are expecting several clinical advances, things like ECP 55 moving into clinic, the RP IDE beginning, is there any update you can give us some timing of those clinical event at this point?

[Mike Minogue:]

On the RP, we have completed our post-market study as we talked about and we will be submitting at the very start of this coming fiscal year with the intent to convert the humanitarian device exemption approval to a PMA. And once we have a PMA approval then we will more broadly launch the RP. Relative to the new products, the ECP which is a nine [indiscernible] 3.5 liter Impella pump that's ideal for Protected PCI. We expect to be in our first in man patients outside the U.S. next year around this time a little earlier than this time, and we also expect to be in our first in man outside the U.S. for the Impella 5.5, which we are targeting as a three to five month Impella pump that does 5.5 liters of flow and really will allow for minimally invasive VAD, which would be axillary implanted similar to what we do with the 5.0 today. And I think that will have a great opportunity to treat some of these patients that maybe more chronic Class 3 that need the support to remodel and to also perfuse the organs and bring these patients back to base line. So, we are excited for both of those new products.

[Raj Denhoy:]

Great, thank you.

[Mike Minogue:]

Thanks, Raj.

[Operator:]

Our next question comes from Chris Pasquale with Guggenheim. Your line is now open.

[Chris Pasquale:]

Thanks. Congrats on the quarter guys. One question on the Japanese opportunity and one on the U.S; your Japanese labeling for the treatment of acute heart failure, which seems most analogues to the shock indication. Can you just clarify whether you need to work on a high risk PCI indication there as well, or do you think that initial labeling really gives you access to both patient groups?

[Mike Minogue:]

So just as an update, Chris, the approval happened and we were waiting on the reimbursement approval, and we do have -- as you mentioned we have an acute style approach. So that really is urgent and emergent, some of the patients that are in heart failure that when you try to treat them in the cath lab or just put them on their back, they will go into a urgent or emergent type of heart failure. But what we may be doing over time is either collecting a subset because we are collecting data on every patient in Japan or we may do another subset study specifically to call out more of the elective population. But in Japan, they are very focused on data part recovery, they do a lot of minimally invasive cases and so some of these patients that historically would be elective are going to require that support because the type of complexity they are going to do, that these patients will become urgent or emergent during the procedure. The example of those young women that we talked about that is something that was most likely Kawasaki disease, and in Asia there is other types of heart problems, whether it's viral that they have a much higher population that have these types of approaches and viruses and so we really are going to focus on the emergency and the urgent population first and then we will work our way into developing more of their elective type approaches, but again this population already does the most complicated procedures that put these elective cases or put these elective patients into that instability during the procedure.

[Chris Pasquale:]

Thanks, that's helpful. And then turning to the U.S. can you just talk a little bit about the recent reimbursement increase there and what impact you think that's going to have on the business, now that some time has passed and maybe the chance to talk with hospital about how this is going to change their view on Impella or how they intend to utilize hemodynamics support going forward with the economics changing gear any early insights?

[Mike Minogue:]

Chris, we do not think -- everyone knows about the new reimbursement to clarify for everyone on the call. We were -- we use to be in DRG 216 to 221 and it was more complicated in that it wasn't a dedicated bucket for percutaneous heart pump. Now that there is a dedicated heart pump, for percutaneous support which is now DRG 215 it creates a classification, what we do and what we have seen is that when the hospital understand that there is this category now. We see them investing more resources now in protected PCI or in shock protocols because to some extent this has been validated by both the FDA indication and PMA approvals as well as the CMS recognition that this is a -- this is its own classification similar to the way percutaneous valve move from DRG 216 out to the own DRG. The one thing I do want to point out though is we are taking the initiative to differentiate the reimbursement and we are advocates to meet the intent of CMS, which is that CMS recognize the allocation of resources between patients that are treated only in the cath lab versus a patient that gets continued treatment and support with impella in the ICU. And again, we think this matches the intent that CMS outlined to recognize that there are additional resources to support a hemodynamically unstable patient in the ICU for multiple days and then this is validated by our FDA approval for shock compared to two hour to three hour elective high risk procedure in the cath lab. So what that means is, as a company we are advocating and educating our customers to quote for DRG 216 for a cath lab only support and DRG 215 for Impella therapy into the ICU. And so what that means is for the Impella patient is that the physician can make the best decision depending on the stability during or after the procedure and again the CMS has already put in place a transfer code that's very helpful for our hub and spoke model, which means that if a patient is transferred from one hospital to the other, the receiving hospital maps to the DRG 268. So, this eliminates the perverse incentive of transfer that existed and allows for the best hospital to specialize on recovering the patient like the example we gave in my script of a nine year girl.

[Chris Pasquale:]

I think if you don't mine, let me just follow-up on that, I think it's an important point, something we have heard as a potential problem down the road would be CMS bifurcating the code and point to lower reimbursement for PCI. So you are saying even though technically Impella cases could fall under 215 today, you guys are steering hospitals to 216 for cath lab and procedures?

[Mike Minogue:]

Correct. We are steering to what they were getting before the change for high risk PCI and we are advocating to CMS formulate that, we support and think this matches their intent. But again it allows for us to really focus on the different types of patient, which is something we talked about, you have a patient that's elective that requires certain types of support and resources and then the FDA protect 2 we track the economics and cost and show that these patients that are $180,000 on average hospital charge and so its cost effective to use Impella for protected PCI mainly because we reduced the maze out of the hospital and we cut the repeat, readmission rate in half compared to the control arm. But when you move over into the shock patient, these patients do require multiple days of support, we now have an FDA indication that matches multiple days of support and most importantly that is you can recover these patients you will save more costs than probably any other example you can point to in medical technology and that's the intent, the intent is to either enable the procedure to do a better job with the DRG 216, which is what they always had or identify additional resources so hospitals have the ability to treat these patients that are in shock or transfer them to a specialized center to get the best outcome.

[Chris Pasquale:]

Great. Thanks, Mike.

[Mike Minogue:]

Thanks, Chris.

[Operator:]

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

[Ben Andrew:]

All right, good morning, and thanks for taking the questions.

[Mike Minogue:]

Hello, Ben.

[Ben Andrew:]

I guess first one is for Mike T, if we kind of think about the gross margin in the quarter. Can you break down a little bit for us, how much of that was absorption or the new lines and was there any kind of cancel placement dynamic that we have seen in the past that sort of move that around and then how quickly might the gross margin recover as you do absorb that new capacity?

[Mike Tomsicek:]

Sure, Ben, thanks for the question. It is not attributable to a mix disadvantage when you look at this quarter versus the same quarter a year ago. Our mix in consoles were really potentially dead on, so this is about efficiency loading and yield and I am confident that it will steadily improve over time and we don't needed to flip overnight, we have more capacity now, we have invested in more clean room and more lines and if it takes us a while to absorb that whole capacity, we are completely fine with it, because as we said we are investing in readiness, flexible readiness for any kind of future demand or demands on where we need to make things and we are happy with the situation, we are in.

[Ben Andrew:]

Okay. Does it take a year, Mike, to get back to where you were or longer?

[Mike Tomsicek:]

Again, we have put capacity on line that will make us flexible to wherever we need to make things and if that costs us a little bit to have that capacity in place, we are fine but I think we will see a steady track of improvement on that gross margin number.

[Ben Andrew:]

Fair enough, I hate to try to pin you down. And then as you think about puts and takes of the operating margin as we roll through calendar 2017, guidance of 18% to 20% and you are well above this quarter, it look R&D was a little bit lower and offset gross margin and SG&A as well, should we be thinking about a couple of 100 basis points of operating margin expansion structurally per year for the company or do you target a different number, now that you got a little bit of reset in the gross margin?

[Mike Tomsicek:]

Again, I would like to give some of that clarity after we work our way through the budgeting process and we have the ability to generate good leverage, we have the ability to generate great leverage. But we will make decisions based on sustainability in the business, we will look hard at technological improvement that could benefit users and improve outcomes through our budgeting process, but we traditionally said that, we think it's good and efficient for the business to be targeting leverage, steady leverage in the number it keeps on our game and forces us to invest in the most impactful projects and processes for improving the business. And again this all leads towards this vision of 30% operating margin business at the tail-end of our vision.

[Ben Andrew:]

Fair enough. And then lastly for me in Europe, obviously your business is pretty concentrated today what do you think the next couple of countries that you can launch into successfully and what sort of engagement do you have or do you need to have with the national organizations to drive meaningful revenue growth?

[Mike Tomsicek:]

Ben, we are still very focused on U.S, Germany and launching in Japan, and we still have a lot of room for growth in those markets in the U.S. its 221,000 patients potential. In Japan, it's 50,000 and in Germany it's 25,000. What we will need to see is beyond just the centers that work with us that hospitals and are doing research is the commitment both with reimbursement as well as the ability to set-up Hub and Spoke models to address that cardiogenic shock problem and we've already started to see is physicians from Germany come to the U.S. to spend time at the hospitals that are doing a cardiogenic shock initiative which is basically there network and with our integration of hub and spoke, and we are going to try to put those models in place in Germany as well.

[Ben Andrew:]

Great, thank you.

[Operator:]

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

[Jayson Bedford:]

Good morning, and thanks for taking the questions. I apologize if I am asking or repeat question, I jumped on a couple of calls, but I guess with the breadth of PMA indications right now are you seeing more physicians within existing centers using Impella and if so, is there anyway you can kind of quantify that dynamic?

[Mike Minogue:]

Yes, it is difficult to quantify that across our user base, but the answer is yes. One of the strongest drivers of growth for us is the addition of physician using the technology at existing site and that's the goal of ours and that's the goal of protocol that the success of the program is independent on individual doctors but patient's will get consistent care whenever they present. So that is important but it is not the exclusive source of our growth and it's difficult to quantify or attribute the growth of different sources because every quarter we talk about the site, that we have added that we didn't had before and those are great, because they drive growth next year and I will also show that our biggest centers continue to increase their pump usage, through better patient identification methodologies through alliances they have to dive referrals from centers, they can't handle the highest risk patients and so we are really growing on all those levels, but that addition of physicians and mid tier account is super important driver for us.

[Jayson Bedford:]

Okay. And I guess with the more formal marketing push following that the cardiogenic shock PMA labelling I am wondering what have you learned that maybe different than what you initially thought entering the year? And then obviously you've got a lot of different marketing initiatives out there, what do you think are the top couple here that will drive deeper penetration into that shock patient base? Thanks.

[Mike Minogue:]

Jayson, what we have learned is there is different needs for training data and time for protected PCI as compared to emergency day jobs. For protected PCI, it's identifying the physicians with the expertise and the interest in developing a protected PCI program and we expect this to be our specialized sites and we are partnered with those position similar to way the top centers put in [indiscernible] we have a model like that for the protected PCI our top users, our top site. For the model for training data and time on shock it's more broadly spread out because you have many patients showing up at multiple different heart hospitals and you need to ensure that the heart team understands what's the steps, what are the protocols to achieve heart recovery for these patients and you may have go outside of an interventional cardiologist you could be with the heart failure specialist, you could be with heart surgeon and that's why they launched of the Impella RP and brining that team to together has been really helpful for our company. What we said at the beginning of the year for this reason was that we did not anticipate seeing the impact of the shock protocol and the FDA approval the way we did for high risk PCI because this requires a lot of other parties and we said it would take the second half for the year and into the next five years as it develops. But the exciting thing about it all is one program drives the other and as we strengthened and bring the things together with protocols we continue to get more awareness with both the physician groups and patients and this is a new therapy and that heart recovery should be the goal for these patients.

[Jayson Bedford:]

Thanks, Mike. That's helpful.

[Operator:]

Our next question comes from Danielle Antalffy with Leerink Partners. Your line is now open.

[Danielle Antalffy:]

Thanks so much. Good morning, guys and thanks for picking the question. Mike, or Mike as you look at the growth trajectory for high risk PCI in cardiogenic shock, Mike thanks so much for all those details, but that was actually really helpful. But is it true to sort of think about these patient populations as cardiogenic shock patients are little more I don't know if volatile is the right word. But you have less control over those patients coming in and getting treated versus the elective and hence the commentary you provided about it's really about high risk PCI providing the foundation for long term growth. Is that the right way to think about it and then secondarily to that as we think about the allocation of resources internally to the two different indications because they are two different training? They require two different types of training etcetera. Is it balanced or will you focus more on one versus the other just now that have both indications of PMA approved how do we think about the long-term growth trajectory for each of them?

[Mike Minogue:]

Danielle, let me try to answer that question. The first part it is correct your assumption that they are different relative to control an allocation, which is why I kind of refer to the protected PCI, the work that we are doing is more like farming. We are out with the physicians, we are educating, we are providing clinical analysis and publications around these types of patients and we are partnering with the educators, the expert in protected PCI physician. And that's really the farming nature of what we are doing you are preparing your growing and you are building the foundation of your business. From the shock patient perspective it's more like hunting because you could have three patients show up in a same day at the same hospital or they could be spread out in one territory and that's why having a protocol in place and having the people trained they know what they are doing relative to the steps they get the best outcomes such as putting the Impella in to stabilize the patient early as one of the things we have seen in our observational database as well as in the cVAD registry and so what we are always trying to do is bring the protocols in place so that we can move our customers to independent use but help them along the way develop best practices and so that is the way it looks and then the second part of your question was around allocation head and what you saw last 12 months we have added 60 people in the U.S, which is beyond just sales people with the lot of clinical people and that was anticipation of having more training for nurses, more time in the ICU, we have also increased our call center so that these trained nurses can call in and talk to people at midnight and we can actually track and see how these patients are doing. But it is all to transition over time to independent use and because these patients can be emergent where we are not going to be there, we used both indications to get them comfortable to be able to put the device and buy themselves which most of them can all do today but really the complexity of managing the patient in the ICU because you are talking about different groups, different types of physicians as well as the nurse staff. So that is what we are doing over time and that is why ease of use is important and we continue to work on components so one quick example is in Europe today we are starting to use the optical sensor what the optical sensor does is it allows a user in the ICU to know the exact location relative to the aortic valve of the Impella pump without requiring an echo from ultrasound or going back to the cath labs for full image. That also will save about 15 to 20 seconds in set up and what we are always trying to do is make this procedure, this process as easy as it can be so that the physician and nurses can focus on recovery and not focus on managing the device.

[Danielle Antalffy:]

Right. And that makes a lot of sense. And then just following up on this quality assurance initiative, you mentioned protocols, are there any metrics you can give as far as how many of your existing centers are you in protocol already just trying to get a sense of in the existing centers how much opportunity there is still because I think that is a real meaningful opportunity that might be under appreciated just getting into the protocols?

[Mike Minogue:]

So I will give what we believe is our opinion of it and on high risk PCI probably more than half have protocols around protected PCI because these people have been doing this for a long time, they are the leaders in this space, they are published that is what they do as a business and they are out in the community and driving that protocol on their own even before we got the PMA approval. We are shocked it gets a little more complicated because you do have different groups as a general rule, if somebody has an RP which means the heart team has been engaged and understands left and right side failure which is around 120 sites in the U.S. so about 10% those sites we feel very comfortable let us say they have a protocols that is transparent and uniform outside of that, there were sites and physicians that have types of protocols but what I won't say is it uniformly accepted between all the different departments. So we have a lot of work to do but also a lot of opportunity as these protocols grew to more of our users.

[Danielle Antalffy:]

That is great. Thank you so much.

[Operator:]

Our next question comes from Brooks West with Piper Jaffray. Your line is now open.

[Brooks West:]

Hi, good morning. Can you hear me?

[Mike Minogue:]

We can. Brooks, how are you?

[Brooks West:]

Great, good. Thanks, Mike. So I apologize I have been jumping around on calls, I had two the first and Mike maybe you disagree with this but it seems like when you got the shock label there is a big shift that is in the field source to maybe come in and train behind that and maybe that caused a little bit of the disruption in our lesser focus on the elective side of the business. I am just wondering if you are kind of improve our initial training emphasis and in its the focus is back to being maybe a little bit more balance within the field, that is question number one, question number two is on the elective side obviously big opportunity to continue to detail the intervention but I'm wondering how the message is resonating with the referring cardiologist who is maybe sitting on lot of these patients maintaining them with drug protocol instead of referring them through elective PCI procedure. Thanks.

[Mike Minogue:]

So Brooks, it is always good when I can agree with you, so I agree with you on your first part of your question that we did get distracted in Q2 and during training that was the first time we had full approval from the FDA, so we were able to train our people on our education material as well as train customers. What also compounded a little bit of the slowness was that December was really slow in the cath labs for elective PCI, and it does appear that it did come back. You saw the strong growth of 34% and 50% of our patients in Q3 were Protected PCIs. So, certainly the numbers match the -- what we were both talking about and agree on. On the second part, it's a less of a number-based answers, the referring cardiologists in some cases have had a preference for optical medical management, and it was a paper that came out a while ago, years and years ago, but a follow-up came out, it's called STICHES and it's the STICH trial and what it showed that revascularization through open heart surgery cabbage actually had better outcomes than optical medical management. So that's bringing more patients back now to the referring physicians to start looking at whether or not they can have revascularization, and if they're referred to for surgery and turned down, that's where we want to see that the opportunity of Protected PCI can be considered. And again to point out how important the protective study is in this regard is it showed a permanent improvement in a patient's ejection fraction at 90 days, and an improvement in ejection fraction with stenting or PCI hasn't been the routine has been shown and FDA study it's always been symptomatic relief less chest pains, but in our Protect 1, Protect 2 and all our registry publications, we are able to show an improvement in EF, it's a relatively minimally invasive procedure, and you don't have to have hysterectomy and if you are 65 and above, it's something that can be other alternative for people that have coronary heart disease. So, we think that will continue over time, and one of the best things that happens to us is when these referring physicians send one of these patients into a specialized Protected PCI center and they see the patient come back, within a short period of time, with an improved outcome and improved quality of life and more active lifestyle it tends to bring new referrals into the system.

[Brooks West:]

That's really helpful, Mike. Maybe you'll let me speak one more and -- just on the political environment, you know, lot of talk about repealing ACA and changes, I'm just wondering if you are sensing anything as you talk to hospital administrators, any change in behavior apprehension on adopting new technology capital equipments, just wondering what you are seeing?

[Mike Minogue:]

I think we are excited to see the potential permanent repeal of the medical device tax. That was tax policy not really around healthcare policy. So I think that's going to be helpful. And the second part of it is I don't think we are going to see a change for people looking at value. So that will continue, because we need it to continue, and therefore the focus on aligning with improving outcomes in the hospital, reduction of length of stay, reduction of time in the ICU, reduction of readmission, and improvement in quality of life for all things that we're focused on, and I think that's going to continue as is, and we're excited that there is more interest in this, including talking about bundling AMI, because AMI patients are driving part of the epidemic of heart failure because more to live through their procedure, but many become -- about 70% become heart failure patients within five years. And so, one of the challenges we see is cardiogenic shock is not identified early, and I think what things like focusing on AMI or bundling, we're going to see earlier identification of cardiogenic shock patients, which helps us improve outcomes for recovery.

[Brooks West:]

Thanks, Mike. I appreciate it.

[Mike Minogue:]

Thanks, Brooks.

[Operator:]

I'm showing no further questions, I will now like to turn the call back over to Michael Minogue for any further remarks.

[Mike Minogue:]

Thank you everyone for your time today. If there is any follow-up questions, please feel free to call in. 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.