Hey Fools,
Here’s the full Q&A transcript from my meeting with Ingrid Goldberg, who is Abiomed’s head of investor relations.
I edited the transcript a little bit to help with the flow.
Brian
Brian Feroldi (BF): Could you just give us an overview the competitive landscape for your products today?
Ingrid Goldberg (Abiomed’s head of investor relations)(IG): We are the only PMA approved minimally invasive hemodynamic support device that it indicated for high risk PCI or cardiogenic shock. So as right now we’re the only ones with that approval. That said the real competition for us is displacing the old technology which is called the Interaortic balloon pump. or IBP.
BF: So there’s no other company on the market with a device that it does exactly what your device does? Instead you’re wrestling market share away from things that have existed for 30 or 40 years?
IG: Correct. There’s one other company that is working on a trial but its not in the market right now. It had a trial that had started about three years ago but it was stopped in February of 2016. There are other companies that would love to get into the space. But one thing that’s kind of special about Abiomed is that we like to say that we are a 34 year old startup. Our Chief Scientific Officer did his thesis [on the technology] 25 plus years ago. So there’s a very long development cycle. I think it’s challenging for other companies to maybe get into this space. We have 291 patents and another 258 pending. And so as of right now we are the only company with this FDA approval for these to treat these types of patients minimally invasively.
BF: So let me ask that same question slightly different way. Assume I went out tomorrow and raised a billion dollars. What would prevent me from competing against you guys in three years’ time?
IG: A couple of things. The regulatory pathway is very, very long for these [products] and you now have to get a PMA approval, which, for reference, ours took over eight years. So they take a very long. Number two is that Impella has been treating patients since 2002. We got a CE mark in Europe and then received 510k clearance in 2008. We’ve got over 70,000 patients worth of information. So that means data. We’ve been obsoleting our own product since then by making a ton of little innovations and little tweaks for over a decade now. Number three is access and our relationships with hospitals. 70% of cases are supported by an Abiomed person, so we have incredible access to the cath lab because what we really care about is improving patient outcomes. Those relationships take an incredible amount of time, effort and tenure to build. And so this is not something that can be done in three or four years. Fourth, I would say the [intellectual property] component. We have 291 patents, 258 pending. We’ve really been investing in to continue to build out that moat. We believe we’re building a new space and now we want to keep that space.
BF: Can you go back to your comments on 70% of patients who are supportive? Does that mean you guys are in direct contact with the physician during surgery?
IG: We are literally in the cath lab in scrubs standing there in the room. Our field [team] is made up of multiple different roles, but at a high level it’s basically the salesperson who does go around in scrubs and is responsible for scrubbing in and helping and supporting cases, but they’re kind of more of the person that might open a new site. They might use slides, they might have conversations with hospital administrators. Again, there in scrubs sport and cases, but they’re more of a salesperson and then at least there’s probably 70 or 80 of them at this point and then another call it 250 people are clinical. And so these are people that are typically [former] nurses, they might have worked in the Cath lab and they might have run a cath lab and so there are people who their primary role is to do that support cases. And so they’ll know if pauline’s the physician, Dr Hussey will call me and say, you know, Ingrid, I think I have a protective PCI patient. I’m scheduling for next Thursday. Can you come into our person? Our clinical person will literally go and stand there in the room and just be helpful, answer clinical questions, help with nurses, maybe help someone who’s not as familiar with Impella. There’s the physician that’s using, but then the second position might be kind of wanting to learn more. So we have incredible access to the cath labs and given our peoples are, their backgrounds, have more clinical background and they truly care about the patient. If you do doc checks in the field, we’d get wonderful feedback about how dedicated our people are and how they checking on the patient afterwards and just build relationships with everyone in the cath lab.
BF: Why would it be in 70% of cases and not 100%?
IG: Half our cases are protected PCI and half are cardiogenic shock. Protective PCI cases are scheduled. So these are typically for a high risk PCI, we call it a protective PCI. These are people who are typically turned down for surgery and they have complex coronary artery disease. They have what’s called low ejection fraction, and they usually have some other diseases. Some are diabetic. Some have renal problems. They’re very sick people who are often times housebound. So for this half of our business, our goal is really to find these people and let them know they have an option. We can help them with an Impella procedure in a minimally invasive way. That’s one half our our procedures and we are there for most of them.
BF: And protected PCI is what percentage of your sales?
IG: It’s about 50%, plus or minus a couple percent. The other half is what’s called cardiogenic shock. Cardiogenic shock is when you’ve had some cardiac acute cardiac event to your heart. Most often from a big heart attack, an AMI or acute myocardial infarction. Cardiogenic shock is basically is is when your heart is in such a bad state that it literally can’t pump oxygenated blood to the rest of your body and you can die one organ at a time of because you native pump is not working. And so in that scenario Impella is put it and turned on and it pumps blood and it literally sustains life. It keeps the entire body oxygenated. That’s why the 70% is not higher. It’s because it’s such an immediate event that usually the Impella is in before our rep jumps out of bed in the middle of the night and races to the hospital. We always check up on our patients after in the ICU once they’re recovering. That’s why we have this massive databases of the 70,000+ patients in what’s called our Impella quality assurance database IQ. There’s tens of thousands of patients in there because we follow up on about 95 percent of our patient and build date on them.
BF: So could you quickly or just give me a high level overview of the business model? What I mean by that is let’s say your reps goes out to new hospital system and they get in touch with the head of surgery at the hospital. You go through the selling process and they say “yes, your solution sounds great.” Does the hospital stock your devices and whenever there is a problem they take one off the shelf and then they send you guys a reorder?
IG: Correct. That’s exactly how it works. They purchased an Impella from us. Every quarter we disclose the inventory levels. We try to keep our hospital sites as lean as safely possible. What I mean by that is we always want to have a hospital with two pumps and a backup because if you have someone that has an elective scheduled case and then someone comes in with cardiogenic shock and then you’re using two pumps, you want to have a backup just in case. And so that’s how we use it. What happens is they use it and they turn to the rep that’s frequently in the room and say, doctor, “would you like to reorder?” Our reorder rates has been 100% for several quarters.
BF: Sounds high.
IG: The only time that’ll go up is if a site is doing more volume. And so for instance, say that they’re having to schedule cases and they have someone coming in shock, we’ll let them carry four instead of three. And that’s what I mean by we keep it as lean as safely possible. We do disclose all the reorder revenue every quarter
BF: The Impella is implanted for what, one day, seven days? I think you just got approval for a 30 days?
IG: It depends on the patient is the answer. A planned high risk PCI can be two to three hours. Now, if a physician deems it necessary that a patient needs support for longer because they’re not comfortable weaning them off the device yet because for don’t forget, these are typically really sick patients and they’ve just had a big procedure. And so in that case they might be on for another handful of hours, 12 hours a day, or whatever is needed. With cardiogenic shock it can be multiple days or even longer. The label for the Impella CP pump is four days and then the label for the Impella 5.0 is up to six days. But in any scenario a physician determines what is medically necessary.
BF: From a business perspective, whether they use it for one minute or seven days, revenue is the same?
IG: Revenue is the same to us. It is a different time resource for us because our people are so supportive and we care so much about patient outcomes. If someone’s on Impella for six days we get the same amount of dollars even though it’s a much larger investment from our clinical team.
BF: On your last conference call you guys have stated 9% market market share in the US. Talk to me about the potential of the business. I would have guessed that 100% is not realistic. Please share what your total addressable market is as it exists today, your pipeline, etc.
IG: The way we define our TAM [total addressable market] I think is a little bit differently than other companies might because we believe that we should get 100% of what I’m about to talk about. So in high risk PCI, there are 121,000 potential patients in the United States for cardiogenic shock, which that emerging group, there’s 100,000 cardiogenic shock patients every year in the US and that’s where we’re getting our 9% percent penetration rate. Number one both populations are growing every single year. Heart failure is a growing epidemic in the United States as we are getting older. What’s interesting is people are surviving heart attacks, which is a wonderful thing. However, when you survive a heart attack you have an injury to your heart. A big AMI can take 15 years off of your life. That’s an American Heart Association statistic. 76% percent of people go into heart failure in five years and 39% die in five years. So once you’ve survived a heart attack you’ve started the downward spiral. In fact, earlier this year we got an expanded FDA label which we have not yet put into these TAMs yet. One is the FDA said that they have removed the requirement of having a reduced ejection fraction from our label for high risk PCI. And then in cardiogenic shock they added another subset of patients, which is basically cardiogenic shock from cardiomyopathy. So there’s myocarditis, which is a viral problem, or postpartum or Perry partum or scad, which is spontaneous coronary artery dissection. These events are populations of maybe 5,000 to 10,000, but they’re young people. They’re typically 20 to 30 year old people. So when you start thinking about what that means for costs, if you can avoid some of the much more invasive procedures for those types of patients and recover those patients it does incredible things for their quality of life, but its also significant cost savings for the entire healthcare system.
BF: And you guys are now in Germany, Japan is starting. Is it safe to assume that Australia, the UK, Switzerland, France, all those are on the docket down the road?
IG: Rest of world. Absolutely. Eventually. We’re very, very focused on the US, Germany and Japan, so in Germany and we estimate that market 25,000 patients are about 12 percent penetrated and then in Japan there’s about 50,000 patients with essentially zero percent penetrated in Japan. We treat both protective PCI and emergent patients in Germany. In Japan it’s more the labels a little bit different. The way that the label indication actually reads, it’s more of an emergent or urgent situation. It’s not the scheduled case yet or not technically speaking.
BF: Presumably that’s something that more clinical trials will get that. Yeah, I know how hard it is to break it to Japan.
IG: But what do you know about why we’re so excited to go in Japan and why we think it’s going to be such a successful market for us? They really don’t crack the chest open in Japan. So for years have understood the hemodynamic science behind Impella because they don’t open the chest up. They do some of the most complex and longest procedures on the globe. So they came to us several years ago and said “can you please bring Impella to Japan” through their three main heart failure societies. They went to MLHW, which is their governing body and said “we need this device.” They then came to Abiomed. That’s what started the process in Japan. So our technology aligns extremely well with how they already treat patients. So it’s just a matter of time for us. We finally have gotten approval and reimbursement. We’re going to launch at a kind of a go slow to go fast mentality to make sure that we do it right.
BF: Do you have a training center over there?
IG: We do. We have about 15 to 20 people on that commercial team now and we’re continuing to add to it as needed.
BF: What’s distinctive about your corporate culture? Talk to me about the general philosophy of the company and how you treat employees. Why would somebody come to work at Abiomed instead of another company?
IG: I have a lot to say on this topic. Our purpose is recovering hearts and saving lives and our mission is patients first. I think a lot of companies talk about putting patients first and all that, but our company lives it. I’m in finance and I have a sign on my door that says “patients first.” If I were to go deeper, one thing that’s kind of under appreciated about our management team is how long they’ve been together and how long they’ve been at this company. Mike Minogue has been our CEO 15th years, but I would say the average tenure of the top 12 people tend is about 12 years now. So our corporate culture is incredibly strong and its also very studied group. We study books together like “Blueprint to a billion” or “Built to last” or “Switch” or Accelerate.”
These are our four guiding corporate principles at the company: recovering hearts saving lives, leading in innovation and technology, growing shareholder value, and sustaining a winning culture. Everyone in the company can recite those principles. We just live by it. And I would say the other thing is our operating procedures, which is adapt, execute on the x axis and then lead manage on the y axis.
We have a very tough criteria for who we hire as well. They need to be passionate people, work ethic is a huge thing here. It’s a very dynamic environment since we’re growing so rapidly. One thing I love about the culture is that it’s very helpful group of people. It’s very team oriented. You have to be when you’re growing as fast as we are. I think our management team does a fantastic job of bringing patients back to headquarters. We have a summer barbecue every August where 15 patients and their families come back and tell their stories and it’s a real celebration. There was a bouncy castle, it’s really fun. People in our clean room who are actually manufacturing these pumps meet the people whose lives they’ve changed. So if you are someone that wants to work in that type of an environment, you want to work, you would want to work here.
BF: Is there anything that you think Wall Street or investors in general don’t appreciate about your business or they don’t understand about your business?
IG: We have great investors and great sell side analysts. I think one thing that could always be more appreciated is actually what we’re doing for patients. When you think about the spectrum of patients that we help, whether it’s a 18 year old with a virus that is attacking their heart or a 31 year old mom who is gone into complete heart failure due to postpartum heart failure, or a 51 year old experiencing their first heart attack, or an elective scheduled case for someone who is 85. The spectrum of patients that we’re helping is really, really wide. Our entire mission is heart recovery. We want to send people back home either recovered completely or if they’re very sick, heart failure patients back to baseline. And so what that means is no additional procedures, no additional medications. Our goal is to get you back to your native heart function. So what that means for cost savings for the entire healthcare system is huge. Our mission is really around improving outcomes for our patients with that recovery in mind. I think it’s just hard to grasp the magnitude of that.
BF: How much does an Imella pump costs?
??IG: The blended average of the four pumps on the market today is $24,000.
BF: How does that compare to the technology you guys are replacing?
IG: So an entry aortic balloon pump costs about $800. But what’s very interesting is when you start looking at the entire cost of what’s required to get that patient out of the hospital, Impella is far more cost effective. There’s a publication that came out of Yale. The physician that ran it showed that even though the starting points were so different, $800 versus $24,000, the balloon pump patients became 25.2% more expensive than the Impella patients during that hospital and next day. And so that’s where the cost effectiveness information starts to come in. We have eight different studies on reduction of length of stay from two days to 12 days, depending on what type of patient it is. We reduce repeat readmissions by 52%. That is super important to hospitals because we’re actually helping them to improve their metrics. Hospitals are actually penalize if patients come back and under 90 days experiencing some of the same issues. And so while its kind of expensive relative to the balloon pump when you started thinking of the big picture and what’s required to take care of that patient actually becomes far less expensive even though starting points are a little bit different.
BF: Are you familiar with Intuitive Surgical? They have been made trying to make the same case for years.
IG: Yes. Same idea.
BF: One of the things we look for in winning investments is what we call optionality, which is basically the idea that you take some products, some services, some something and find multiple different outlets for it. So like the ultimate example is Amazon.com. What were they when they first started books? Book seller. What do they sell today? everything.
IF: That is very wise. And that is why this page, the one I showed you with the in our corporate pitch, but the patient populations is extremely conservative. I mean these markets doesn’t include things that were approved for right now. It doesn’t include the fact that it’s not a requirement to have low ejection fraction anymore by the FDA. So that’s also one thing I probably should comment on is the amount of data that we, that we announced in your question list, but we’re constantly building more and more data. We have what’s called our cVAD registry, which is FDA audited data. And we’re constantly adding to that database. I think nearly 4,000 patients are in it now and it’s published upon all the time. That’s how we actually got the additional indication for risk PCI, we submit another 229 patients out of the cVAD registry that were sicker and more hypertensive, more lesions treated, more left main disease. And so the FDA said, we understand that these can be extremely hemodynamically [challenging] patients that are at risk of crashing on the table due to other issues, but their ieps are normal. And so that’s something that we constantly are building more data there. I mentioned 95%of our patients going to the ICU database. So while it’s not FDA audited, it’s our entire field team putting in these patients into the system. We can draw incredible trend information from this 70,000 person database.So that’s where I talked about some of the protocols for cardiogenic shock. You might recall from the earnings call national cardiogenic shock initiative. It was Detroit. Detroit CSI and now it’s gone national. I’m basically taking a big step back here for cardiogenic shock. The survival rate in shock nationwide has been 50% for the last 20 years. And so what happened was basically five hospitals in Detroit band together and said, we need to build a protocol for how to treat these patients because there’s not enough aligned patient care for treating these people as they reached the hospital system. And so they built this protocol and they presented 36 patients at ACC last year and they showed their survival rate had gone from 50% to 84%. And so five months later at there was a call to action on cardiogenic shock. A number of key opinion leaders just that the probiotic shock survival rate has not changed in 20 years. Balloon pumps do not work on a tropes which were drugs, medications do not work. We need a new way of treating these patients. And then they started talking about hemodynamic support, which is Impella. And they are taking Detroit CSI national. Now there’s14 hospitals sites and probably 20 something cities that are now implementing these protocols and they too are seeing their survival rates go up from that 50% to the 70%-75% plus range. So that’s so exciting when you’ve seen a 50/50 shot if you live or die when you’re in that type of a dire cardiogenic shock, having that type of acute event and now it’s, it’s up 20 points, 30 points in a handful of months.
BF: what do you think are the biggest barriers to nine percent to 100%?
IF: I’m sure you’ve heard us say this on earnings calls, but its data, training and time, So constantly building more data, and getting that information out there because the physician might not know that using an Impella reduces your repeat remission rate by 52%. One thing that’s interesting about impella is that it’s been around for a very, very long time, but we’ve only had these PMA approvals from the FDA since 2015 in 2016. So some sell side analysts would say that in 2015 and 2016 it was kind of a relaunch of Impella. Because before that we couldn’t do any education. We only had a 510 k clearance, which means, which we couldn’t even say high risk PCI. So think about handcuffed our field team way. So now we have a FDA stamp of approval that it is safe and effective to use this pump in this type of patient, but secondarily that it’s licensed to us from the FDA to actually do education and training for the very first time. So we’ve taken all this data and put it into something that someone can absorb in a fast way. That’s the data component. Training is always about making things easier for people. Don’t know if you saw the recent press release on smart assist, which is a sensor that’s now going to go on the pump. We’ve talked about now in the future having an iphone app that will basically do a couple of things, like have improved placement for your pump, and it’s going to let people see how their patients are doing remotely on their iphone and then we’re also going to have a new cardiac metrics like on the actual console. And so it’s getting physician feedback or what do they want added to the pump and letting out software and mechanical engineers getting these new features on the pumps. At the end of the day, it’s just a factor of time. Our guys that use it the most had had it the longest, which makes us feel great. Everyone’s kind of moving up the curve, but it just takes time to learn. And so in the future, um, again, making things easier, let’s say that a signal comes on and the nurse doesn’t know what it means because she’s a new nurse in the ICU and she’s not familiar with Impella. The physician can be down the hall or at home and look at the console and say this is what’s going on. And they can check on their patient or I’m a nurse, can call us since offer 24x7 coverage. You probably saw the call center that the nurse can call in and ask the question of our people and our people can now see the patient being supported.
BF: In terms of coverage, Medicare, Medicaid, and pretty much everyone else? I would assume that the limiting factor with opening up new countries is reimbursement
IG: It doesn’t make sense to do that until you have reimbursement. We are very focused on the United States, Germany and Japan, but we have many, many countries that currently make up that remaining one percent of revenue. When we choose our fourth country, it’ll be based on governmental support at an [acceptable] reimbursement rate and also the access to the cath labs to make sure that we can support patients appropriately to get those outcomes. We are approved in China and India but we have not launched.
BF: Your operating margin right now is like 27% and that’s grown significantly. If you look at what Wall Street expects, it looks like they’re expecting extraordinarily high profit growth. Do you think there’s room for that number to continue going home?
IG: Our guidance for the year is 28% to 30%. Our goal in general is to be the one of the, one of the fastest growing GAAP profitable medtech companies globally.
BF: Well, let me ask it a different way. So to me, the hard about wrapping my head about your business right now is your evaluation is generous valuation You’re trading at like 30 times sales, which implies huge continued profit expansion. Once you hit peak operating margin — which I’m not assuming you are there now, though 29% is really high — profit growth is going to track revenue growth. As you know, that number gets harder and harder to grow with each passing year. So the hardest question for me to answer as an analyst is this: is paying your valuation worth it?
IG: A lot of it comes down to this: Do you believe in the size of our patient population?. There are hundreds of thousands of patients that we can treat out there. Today we have talked about our current products and our current geography. We have not talked about our pipeline products which are the Impella 5.5 and the Impella BTR, which stands for bridge to recovery. We could potentially get enough data to submit that to the FDA in the future, which is a big one. We just, doing a feasibility study on STEMI patients right now where we just completed enrollment. If it’s proven safe to use Impella in STEMI patients thats another 200,000 patients every year in the US, essentially doubling our current TAM. And then the Impella 5.5 we’re going to address class three non ischemic heart failure, which we’re conservatively targeting 100,000 patients. And then, of course, is the rest of world. So when you think about, you know, current products, indications, but also future products and indications in geographies that we’re hoping to open up within the next handful of years, I think it’s important to understand that there are so many future levers for growth. So basically, I’m trying to say we have pretty unique financial situation and a unique clinical and regulatory situation. And so now it comes back to data, training, and time.
BF: I believe your growth story, but the hard thing for me as the investor is to say is investing at 30 times sales worth the risk. The risk from my perspective is that you guys at peak margin? And then if so then profit growth will trend towards revenue growth. If thats the case and you guys put up 30% revenue and profit growth, while those numbers are phenomenal in absolute terms, will the investment pay off?
IG: On the profitability, I’ll comment that there’s a lot of leverage in the model. Right now our primary focus is definitely still investing back in the business.
BF: Book recommendations?
IG: Blueprint to a billion is [CEO] Mike’s favorite book. Accelerate. Another one is crossing the chasm.
BF: What’s your customers number one complaint?
?IG: I don’t think there really is number one. We always say there’s not one thing but 40 little things. That really comes down to where they are on the learning curves. I’ll give you an example. So historically some physicians might say this person has chronic kidney disease so I can’t do a complete revascularization on this patient, which is a two or three hour procedure. And so we had a paper come out about a year ago that was actually showed Impella arm there was a 6x less likelihood of seeing acute kidney injury after the procedure and a 6X reduction in the need for dialysis, which is of course extremely expensive. So there’s little things like that take time for our salesperson to get up to speed and to learn about the publication and then be able to talk about it effectively before it just, there’s a whole lot of education has to happen. There’s not like one big pushback. It’s just a bunch of little ones depending on the site.
BF: Does your leadership team get into the field regularly?
IG: Yes. Mike spends a lot of time in the field. How else are you going to learn? Mike spends the majority of the time with physicians. We were at the investor conference on Tuesday and flew in late Monday afternoon so we could go to a doctor dinner with six different physicians before we’re doing investor stuff. He maximizes his time in the field. Absolutely. How else are you going to know the inner workings of what people are saying for better or worse? How else are you going to continue to evolve and continue to learn and improve if you’re not as close to your customer?