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Abiomed Q4 2022 Earnings Call Transcript


Listen to Conference Call View Latest SEC 10-K Filing

Participants

Presentation

Operator

Hello, and a warm welcome to today's Abiomed Fiscal Year 2022 Fourth Quarter Earnings Call. My name is Emma, and I will be coordinating the call today. [Operator Instructions]. It's now my pleasure to hand today's call over to Nicole Nath, Head of Investor Relations, to begin. Over to you, Nicole.

Nicole Nath
Manager of Investor Relations at Abiomed

Good morning, and welcome to Abiomed's Fourth Quarter Fiscal 2022 Earnings Conference Call. This is Nicole Nath, Manager, Investor Relations, and I'm here with Mike Minogue, Abiomed's Chairman, President and Chief Executive Officer; and Todd Trapp, Vice President and Chief Financial Officer. The format for today's call will be as follows: first, Mike will discuss fourth quarter business and operational highlights, and then Todd will review our financial results. which were outlined in this morning's press release. After that, we will open the call to your questions. During the call, we will discuss certain financial information on a non-GAAP basis. This non-GAAP information is provided to enhance your overall understanding of our current financial performance. The presentation of this additional information should not be considered in isolation or as a substitute for results or superior to results prepared in accordance with GAAP. A reconciliation between GAAP and non-GAAP results are presented in the tables accompanying our earnings release. Finally, I would like to remind everyone that today's call includes forward-looking statements. The company cautions investors that any forward-looking statements involve risks and uncertainties and are not guaranteed in the future. Actual results may differ materially due to a variety of factors identified in our earnings press release and our most recent 10-K and 10-Q filed with the SEC. We do not undertake any obligation to update forward-looking statements. With that, let me turn the call over to Abiomed's Chairman, President and Chief Executive Officer, Mike Minogue.

Michael R. Minogue
Chairman, President and Chief Executive Officer at Abiomed

Thank you, Nicole, and good morning, everyone. In the fourth quarter, Abiomed delivered a company record of $270 million in revenue, up 12% year-over-year, with record revenue across the U.S., Europe and Japan. To note, this was a record quarter following a record Q4 last year with 17% growth and a record Q3 last quarter with 13% growth despite COVID and hospital labor shortages. In addition to reaching another record revenue month, in March, we supported more patients than ever before by executing our Abiomed 2.0 playbook. For the full fiscal year 2022, we delivered $1.032 billion in revenue, up 22% year-over-year and delivered yearly record results in a challenging environment. We achieved top-tier gross margins of 82%, revenue growth and operating margins of 22% to 25%, while investing $163 million in research and development, an increase of 34% from the prior year. As a result of our ongoing investment in innovation, our IP portfolio increased to 1,408 Impella patents with 1,416 patents pending. Our balance sheet also strengthened and we ended the year with $979 million in cash and maintain 0 debt, while funding multiple strategic investments. In fiscal year '22, Abiomed invested at record levels in innovation, advanced clinical evidence and further strengthened our premier commercial field team.

Operationally, we received regulatory approval for Impella technology in three countries. We're granted breakthrough device and Category B designation from the FDA for the Impella ECP and saw the guidelines for the treatment of cardiogenic shock patients with Impella upgraded to Class IIa by the European Society of Cardiology. We also generated 279 Impella publications, enrolled over 200 patients in RCTs and early feasibility study, and opened 646 sites globally with Impella Connect. Commercially, we hosted 20 live cases in the U.S. and Europe through our world-class interactive training platform, CAMP PCI, trained over 3,000 customers virtually and in person, launched our patient therapy awareness initiative and added 278 employees to our company. Abiomed has remained on course to become the global standard of care for circulatory support. I am proud of our customers and employees for their grit and dedication. They are the source of these impressive accomplishments during fiscal year '22. At Abiomed, we are helping to solve a health care crisis for the heart, lungs and kidneys, while helping to minimize the disruptions caused by COVID variants and hospital labor shortages. For today's call, I will highlight our leadership and innovation to create the field of heart recovery and our fiscal year '23 strategy and goals. So first, on innovation. The Abiomed product portfolio and pipeline has never been stronger. I will cover highlights on Impella 5.5, Impella ECP, Impella RP and our newest heart pump, Impella BTR. We are expanding a number of conditions and patients we can treat as we simultaneously increased the number of physicians utilizing our technology in the cath lab, surgery suite and ICU. First, the Impella 5.5 is a breakthrough product that grew 95% in the year and transformed our relationships with heart surgeons and heart failure cardiologists, who are embracing this technology around the world.

We recently announced the first Impella 5.5 with SmartAssist procedure in Japan, at Osaka Hospital, when an 82-year-old man suffered cardiogenic shock, but recovered, thanks to the Impella 5.5. In addition, we hit our 5,000th Impella 5.5 milestone when Dr. Tamer Attia at Emory University Hospital in Atlanta used Impella to treat 5.5 -- to treat a 41-year-old woman with cardiomyopathy and helped successfully bridge her to heart transplant. Impella 5.5 with SmartAssist and Impella Connect has changed how we are able to support cardiogenic shock and cardiomyopathy patients, who would otherwise have less of an option for heart recovery. We also received FDA approval for the Impella Bridge-to-Recovery, or Impella BTR early feasibility IDE study, and I'm happy to announce that the first patient enrolled is currently being supported with this breakthrough technology. The Impella BTR will provide patients a minimally invasive, forward flow, smart heart pump with the potential to allow home discharge and durability of over one year. Between the Impella 5.5 and BTR, Abiomed projects a USD four billion total addressable market based on an additional 100,000 U.S. patients. Impella ECP is another breakthrough technology. Its nine French size may enable more physicians to provide critical hemodynamic support to coronary artery disease patients enabling safer PCI procedures and more complete revascularization with an ultimate goal of improving their ejection fraction or heart function, now shown in PROTECT I, PROTECT II, PROTECT III and Restore EF, as well as other papers and studies in Italy, Germany and other parts of Europe.

As a reminder, our investor event on Impella ECP, including presentations from Dr. Amir Kaki and Dr. Chuck Simonton, are now available on our investor website. Turning to the right heart support. Earlier in the year, we launched Impella RP with SmartAssist in the U.S. This smart pump is the next generation of our FDA-approved right heart device with dual sensor technology and exclusive winning capability. Within the quarter, we also filed a PMA supplement for the Impella RP with insertion through the internal jugular vein, or IJ, in the neck. This insertion technique allows patients to get up and walk, while on support, also called ambulation, which improves outcomes and thus is preferred by heart surgeons. Like a flywheel, the excitement and energy from our innovation drives momentum and interest in our products and their clinical data. We have exciting clinical trials underway, including PROTECT IV and STEMI DTU. PROTECT IV will be the most extensive study ever done in the cath lab, not just on high-risk PCI, but on PCI overall, and will lay the foundation with success for a Class I guideline. Each year, there are over 100,000 patients in the cath lab that are staged for multiple PCIs or receive incomplete revascularization or suffer acute kidney injury or are readmitted to the hospital within 90 days. Additionally, there were over 300,000 patients in the U.S. each year that are turned down for CABG surgery and not referred to an interventional cardiologist or PCI. In a 2020 study published in circulation heart failure, authors reviewed testing for coronary artery disease in older patients with new onset heart failure and found that 61% of patients hospitalized with this condition did not receive testing for coronary artery disease, either during the index hospitalization or in the 90 days before or after admission. This data highlights an opportunity to improve care by identifying appropriate candidates for optimal CAD medical therapy and revascularization. As a reminder, our PROTECT II and PROTECT III patients, on average, are 70 years old, so relatively young and many years ahead that can benefit from the quality of life improvements with an improvement in ejection fraction.

We believe data generated from PROTECT IV in combination with educational efforts direct to patients and physicians opens up a $9 billion U.S. market opportunity for Impella-supported high-risk PCI. Finally, I would like to highlight some of our goals for fiscal '23. First, we will continue to innovate smaller, smarter and more connected devices to improve outcomes and ease of use. To be clear, the reason smaller devices are important is because they lower the risk of bleeding and vascular complications, which we believe will increase Impella utilization, especially with the late majority. Second, coming out of COVID, we plan to accelerate enrollment in key clinical studies, prioritizing Impella ECP Pivotal, STEMI DTU and PROTECT IV. And last, in leading the field with clinical publications, like PROTECT III and Restore EF that add to our extensive prospective database of real-world evidence. PROTECT III and Restore EF demonstrate that the new tools and techniques that physicians with expertise utilize allow for a proven improvement in their clinical outcomes with an improvement in their ejection fraction at 90 days. Lastly, we remain focused on commercial excellence, including engagement with the heart team, physician education and patient identification for multiple FDA-approved indications. Our patients-first culture remains the foundation of our success. So before concluding, I'd like to share a patient story. Bobby Goins, 31, a father, husband and sales representatives from Conway, Arkansas, lives an active lifestyle. When he is not working at his computer, Bobby can be found renovating his home, riding bikes with his three kids and playing on his men's softball league. Bobby tested positive for COVID-19 in early January '22, and within days, he experienced shortness of breast and chest pain. He called 911. He was transported by ambulance to the local hospital. Medical teams evaluated Bobby and determined his heart was severely weak. He was transported to St. Vincent in Little Rock, Arkansas, for escalated care.

Upon arrival, physicians identified that Bobby was in cardiogenic shock due to myocarditis with a severely low ejection fraction of below 10%, a life-threatening condition. Dr. Thurston Bauer implanted Impella 5.5 to support his heart and allow it to rest. Bobby's condition improved, and he was able to walk in the unit while on Impella support. After eight days, Impella was weaned and removed. Bobby returned home to his family and today has normal heart function. Bobby is back at work and enjoying time with his wife, Carly, and their children. Just months after this life-threatening condition, I got to meet Bobby as he visited Abiomed Headquarters in early April as a guest speaker to share the story of heart recovery to all our employees at our global annual company meeting. In conclusion, as we start fiscal year '23, Abiomed has flywheel momentum. Our innovation has never been better. Our clinical evidence is established, and we have the premier commercial organization. Our Abiomed 2.0 playbook allows us to adapt and execute and lead and manage and focus on improving patient outcomes as we pursue the ultimate goal of being the global standard of care. I am thankful for our employees and customers' courage, dedication and leadership during fiscal year '22. I will now turn the call over to our CFO, Todd Trapp.

Todd A. Trapp
Vice President and Chief Financial Officer at Abiomed

Thank you, Mike, and good morning, everyone. In Q4, we delivered record revenue of $270 million, up 12% on a reported basis and 13% in constant currency versus prior year, with double-digit growth across the U.S., Europe and Japan. As Mike mentioned, we were able to deliver these results and achieve our innovation, clinical and commercial milestones, despite the ongoing pandemic by executing our Abiomed 2.0 playbook. In the U.S., revenue grew 11% to $218 million. This performance was driven by a 9% increase in cardiogenic shock patient utilization. High-risk PCI grew 1% based on a slow January as we saw an impact to patient utilization due to the Omicron variant and hospital labor shortages. Within the quarter, as we executed our playbook and Omicron cases declined, we saw a positive impact on performance with monthly sequential improvement and delivered a record revenue in patient month in March. Our U.S. surgical business had another strong quarter with 46% revenue growth driven by continued demand for the Impella 5.5 with SmartAssist. As of the end of fiscal Q4, in the U.S., the Impella CP is in 1,588 sites. The Impella 5.0 is in 666 sites. While the Impella 5.5 is now in 396 sites, up 47 sites versus the prior quarter. Lastly, the Impella RP is in 665 sites. As a reminder to investors, details of our product installed base are summarized in our quarterly slide deck. U.S. reorder performance in the quarter was slightly above 100%, an average combined inventory at the hospitals for the Impella 2.5 and CP with 4.9 units per site, consistent with the inventory levels we saw in Q3. Turning to outside the U.S. In Q4, total revenue was $52 million, up 22% in constant currency versus prior year due to strength in both Europe and Japan.

Our European revenue increased to a record $35 million, up 18% year-over-year in constant currency. This performance was driven by solid growth in Germany, Belgium and Italy. Our European business also continues to see a positive benefit from sales mix primarily from the transition to Impella CP with SmartAssist. In Japan, we delivered a record revenue quarter of $14 million, up 34% year-over-year in constant currency. As mentioned during our last call, we saw Omicron cases escalate to record levels in Japan in the month of January, and hospital restrictions were put in place. Despite these headwinds, our Japan business remained resilient, delivering 29% growth in patient utilization versus prior year. In the quarter, we opened four new sites, bringing our total sites to 191. Moving forward, gross margin for Q4 was 80.9%, flat compared to prior year due to higher production volume, which offset investments in operators to support our future growth. R&D expense totaled $44 million, an increase of 37% from the prior year. The increase was driven by strategic investments to advance our clinical evidence through PROTECT IV and STEMI DTU randomized controlled trials and our game-changing technologies, like Impella ECP, Impella RP IJ, Breethe, Impella BTR and preCARDIA. SG&A expense for the quarter totaled $110 million, up 9% versus prior year. The increase was due to targeted investments in our distribution team, our patient therapy awareness campaign, and continued training and education. In the quarter, non-GAAP operating income grew 4% to $65 million, translating to an operating margin of 24.1%. Non-GAAP net income for the quarter increased 8% to $53 million or $1.16 per diluted share versus $49 million or $1.07 in Q4 of '21.

The increase was driven by operational performance and a lower effective tax rate. In Q4, we generated $79 million of operating cash flow and approximately $285 million for the year. As a result, we ended the fiscal year with no debt and $975 million in cash, up $131 million or 15% versus last year, while making multiple strategic investments. Turning to our full year performance. For fiscal year '22, we delivered revenue of $1.032 billion, up 22% year-over-year, which exceeded the high end of our original guidance. Throughout the year, we were able to deliver double-digit growth each quarter and set revenue records in three out of the four quarters despite the ongoing headwinds. By geography, U.S. revenue grew 21%, while Europe and Japan revenue grew, in constant currency, 27% and 28%, respectively. Non-GAAP operating income for the fiscal year was $257 million, up 12% compared to the prior year, which equates to a 24.9% operating margin. As we said at the beginning of our fiscal year, we will continue to be all in, in investments in innovation, clinical research and building a premier distribution team as we continue to pursue our goal of becoming the global standard of care. In fiscal year '22, we invested $163 million in R&D, up 34% year-over-year. Additionally, we added 92 heads to our distribution team and launched our patient therapy awareness campaign. Non-GAAP net income for the year increased 16% to $204 million or $4.44 per diluted share versus $175 million or $3.84 in the prior year. Lastly, turning to guidance for fiscal year '23. As noted in this morning's earnings release, we expect full year revenue in constant currency to be in the range of 13% to 17% growth.

Our foreign exchange assumptions in our forecast are the euro rate at $1.08 and a Japanese yen rate at $1.28, which will impact year-over-year reported growth rates by approximately two percentage points. This translates to 11% to 15% growth on a reported basis. This guidance assumes that COVID moves more to an endemic state and that future ways do not have a material impact on the business. As we typically do when issuing guidance, I would like to provide some color on our expectations to the seasonality of our fiscal year. In Q1, our global finance team came together to celebrate the year and had extensive in-person annual training. Our field team also tend to take their vacations in Q1 after a busy fiscal year-end. As a result, we expect Q1 '23 to be around $277 million, up 12% on constant currency. Q2 is a seasonally slow quarter for cardiovascular devices due to the summertime slowdown in the cath lab and physician vacations. So we expect revenue to be just at or a little bit over the Q1 pace. In Q3, we typically see significant sequential lift based on increased hospital activity and physician engagement. And in Q4, our March quarter, we have our best results as we end of our fiscal year. Turning to operating margin. We expect our fiscal year '23 margin to be in the range of 23% to 24% as we remain focused on innovation, advancing Impella clinical evidence and building out our premier distribution team. In fiscal year '23, we expect to accelerate enrollment in key clinical studies, including Impella ECP Pivotal, STEMI DTU and PROTECT IV, which will drive a significant portion of our investment. In summary, fiscal year '22 was a record year for the company, despite tougher-than-expected macro conditions. We are pleased to have delivered over 20% top line growth, a second consecutive year of growth during the pandemic.

Additionally, we remain fiscally disciplined achieving top-tier non-GAAP operating margin of 24.9% and increasing our cash position to almost $1 billion, all while continuing to make the necessary investments to drive Abiomed's long-term sustainable growth. We look forward to a new year driven by innovation, robust clinical evidence and continued execution as we build the new field of heart recovery. Operator, please now open the line for questions.

Questions and Answers

Operator

[Operator Instructions] Our first question today comes from Matthew O'Brien from Piper Sandler.

Matthew Oliver O'Brien
Analyst at Piper Sandler Companies

Just for starters, Todd, a little bit more on the guidance for the year, on the constant currency side of things. It's better than I think most people were expecting great to see. Can you talk about the components between U.S. and OUS? And is it still primarily a 5.5 growth driver this year? Or are we expecting a little bit more pickup, like we saw maybe at a cardiogenic shock or high-risk PCI?

Todd A. Trapp
Vice President and Chief Financial Officer at Abiomed

Yes. Thanks, Matt, for the question. So I would categorize our growth initiatives this year in fiscal year '23 really into three distinct buckets. First is our core U.S. interventional cardiology business. So you think about our CP and RP products. And we expect to see growth pick up in this area, especially in the second half, given our distribution team expansion, our direct-to-patient campaign, all the training and education initiatives and just more clinical publications, for example, around P3 and Restore EF that clearly highlight the benefits of a complete revascularization in a single setting. We also have some new products, like RP IJ, and some enhancements, like Bicarb and Breethe and ECP in the second half of the year. The second -- I would say the second pillar of growth is really around our U.S. surgical business. And if you remember, three or four years ago, that was about 6% of our business. Today, it's close to 18%, and grew about 60% in fiscal year '22. And we expect continued strong demand for our 5.5 pump from the surgeons in fiscal year '23. Again, we're in only 60% of the 5.0 sites and 36% of the hospitals with surgical suites in the U.S. So we expect to open up more sites. And usage per surgeon is increasing. And then I would say, Matt, our third pillar of growth is really OUS. And so today, that's close to 20% of our business now is outside the United States, and it continues to grow faster than the U.S. And so we're launching 5.5 in Europe and in Japan, which should help augment our growth rates as well as continued penetration within existing products, given our low penetration rates. So the low end of the range factors these growth initiatives in at a more measured pace over the course of the year, and the high end assumes traction earlier in the year from these initiatives.

Matthew Oliver O'Brien
Analyst at Piper Sandler Companies

Got it. And then Mike, the comments you made on flywheel momentum caught my attention. I'm just wondering, you're in a lot of centers, you've got a lot of different products now and more coming. Are you starting to break down -- are you starting to see significant momentum in breaking down barriers with clinicians that historically were opposed to using Abiomed, start to come on board and start to use more product aggressively?

Michael R. Minogue
Chairman, President and Chief Executive Officer at Abiomed

Matt, thanks for the question. This week, I've been at ISHLT, which is the International Site of Heart, Lung and Transplantation, but they've spent a lot of time talking about recovery. And I think the big difference is, today, we are a heart team company, and heart recovery has arrived as the primary goal, whether it's high-risk PCI or cardiogenic shock from heart attacks or myocarditis or even acute on chronic heart failure with cardiogenic shock. And so I've also attended ACC and THD in New York City a month ago. And I've been on the road seeing customers all over the South and West. And we really do have tremendous momentum. And the flywheel, what it means is, we've -- personally, I've worked 18 years to get to this coming fiscal year, where we've got the best products and the most momentum on engineering. We have the most established science in this space and the best studies in process. And we do have a premier field team that is 24/7 bedside support on the phone and in the cloud with Impella Connect. So we feel very confident about the fact that we can enable better outcomes for patients, we can also use our playbook to help hospitals with their labor shortages. So it's just -- it's really a great time for the company.

Operator

Our next question today comes from Marie Thibault from BTIG.

Marie Yoko Thibault
Analyst at BTIG Research

Yes. I did want to ask one more here on sort of the U.S. procedure recoveries, and maybe more specifically on the high-risk PCI cases. It sounded like that was -- what was particularly soft early in the quarter. And I'd love to hear how that exited the quarter, what you're seeing so far in April.

Todd A. Trapp
Vice President and Chief Financial Officer at Abiomed

Yes, Marie, I would say that if you went back and looked at our high-risk PCI volume in January, it was probably the lowest, from a patient perspective, all year. And again, it was highlighted because of what happened with Omicron and the hospital labor shortages. And I think when you looked at it, sequentially from January to February to March, we definitely saw significant sequential improvement over those last two months. Again, given the fact that these patients aren't "truly elective," they're essential. And what we've seen over the last two years really is that when we see these hotspots pick up, these patients come back into the system. Sometimes the timing is tough to call, but we did see them come back into our system, I would say, late February and absolutely in the month of March.

Marie Yoko Thibault
Analyst at BTIG Research

Okay. Great to hear. And then one on accelerating trial time line. We're obviously very excited for Impella ECP. Are you willing to give us any hint at potential time lines for that? And also, a 2-parter here on sort of the larger RCTs that you're running longer term. Do you think the effect of those -- do people need to wait to see that data or do you think that's the sort of thing that, with education and training, some of the learnings are already starting to leak out into the field?

Michael R. Minogue
Chairman, President and Chief Executive Officer at Abiomed

Thanks, Marie, for the question. I don't think people need to wait relative to the fact that Impella is exclusively approved by the FDA, safe and effective for high-risk PCI and all forms of cardiogenic shock. The PROTECT III data shows that the newer contemporary patients are sicker, older, and they're having better procedures. They're leaving less ischemia. They're having lower vascular complications, lower bleeding and a higher improvement in their ejection fraction. So I don't think it's debatable anymore on ejection fraction and the improvements. In fact, if you look at the history of PCI studies with stenting, you see symptomatic relief, but we have now multiple studies, including FDA studies that demonstrate consistently an improvement in ejection fraction, which is how you improve their quality of life. PROTECT III was published and we have some summary on it on the -- summary slides on it in the earnings release. And we also have Restore EF, which has been present in an abstract that's also been accepted for publication. So we think a lot of that information is going to be very helpful. I think anyone on this call that's done research over the years would insist on a high-risk PCI patient having support with Impella, so that the patient doesn't have to be staged or risk acute kidney injury or any type of hemodynamic failure. And the goal of why you get high-risk PCI is so that your EF improves. And so if you're going somewhere and they're not going to do complete revascularization, then you're not going to get the goal and you're better off getting CABG, which is proven to improve your ejection fraction. For cardiogenic shock, we are exclusively approved for that. Hemodynamically, it makes clinical sense. We have best practices that have been published and validated in the U.S., in Germany, in Italy, in Denmark and also now in Japan. So what we have is exclusive FDA approvals. We have exclusive patents. We have the premier field team. The only thing that we're working for the future that we don't have now is a Class I guidelines. But I don't -- I'm not aware of a single medical device in the field that has all of those components at one. So we're going for the gold bar for Class I. But in the meantime, there is tremendous amount of evidence and validation from the FDA that our technology for these patients, that's what makes them safe and effective.

Marie Yoko Thibault
Analyst at BTIG Research

Yes, of course, I understand that. And good for going for the gold medal there. Anything on the ECP time line? Just -- have to ask.

Michael R. Minogue
Chairman, President and Chief Executive Officer at Abiomed

Yes. So the -- we also did a summary slide that's posted on the website because we do have the opportunity to -- we have multiple studies. We're continuing to enroll in ECP. So the IDE pivotal protocol was approved in March. We now have to do the -- we have to get -- I'm sorry, the IDE, the FDA approval was in March. We have to get now IRB approval at the hospitals for this protocol. We also have the final or the latest version of the product. So we're enrolling patients right now in the pivotal protocol, and we're going to transition that to the pivotal study with the IRB approvals of the hospitals. But remember that we're doing up to a certain amount of patients, not a set number of patients, and that will be determined by the outcomes as they go. So we're excited. We appreciate the FDA allowing us to start an early feasibility and transition it. I think it's a great program. We'll give a better forecast as things tie out. But we do think that the momentum will continue even at an accelerated pace. And in April, we saw the best two weeks we've had in enrollment for both STEMI DTU and PROTECT IV, and we think the hospitals are getting back in the flow of enrolling. And once we get a little bit more stabilization of that, we'll give better update or updates. But in the meantime, we give a summary every quarter of every study, where we are on patients for the quarter, total patients and also a number of sites.

Operator

Our next question today comes from Margaret Kaczor from William Blair.

Brandon Vazquez
Analyst at William Blair

This is Brandon, on for Margaret. If we could just kind of go back, I'd like to talk about guidance for a second. And maybe just talk through what gets you to the high end and the low end of the range? And maybe in particular, talk about some of the macro topics that are pretty pertinent today. We've had staffing shortages that other medical device peers have talked about. We've had inflationary pressures, things like that. So what gets you to the high end or the low end? And then how do some of these macro issues play into that guidance?

Todd A. Trapp
Vice President and Chief Financial Officer at Abiomed

Thanks, Brandon, for the question. So as I mentioned earlier on -- again, we have these three areas that we're going after, right? We have our core U.S. interventional cardiology business. We have our U.S. surgical business that we expect to see some nice growth on as well as continued outpaced growth in the U.S. And really, the low end of the range assumes that the factors these growth initiatives come in over the course of the year at a more measured pace. The high end assumes that we just get traction from these investments earlier in the year. And so if you think about our core U.S. interventional cardiology business, I mean, we've made significant investments over the last 24 months, right, in the areas of distribution team expansion and our direct-to-patient campaign and training and education and I'd say more and more of these clinical publications. So it's just really how we phase these in over the course of the year. It depends on whether we get to the low end of the range or the high end of the range. And then your second question around, I think it was around -- was your second question more around inflation?

Brandon Vazquez
Analyst at William Blair

Sorry, go ahead. Yes. I guess just even staffing, obviously, kind of one of the topics in the medical device space today, just dealing with staffing. And then even just inflationary pressures, because even the wage inflation is kind of impacting the staffing scenario as well. So just how those are impacting the business and where that's contemplated in the guidance?

Michael R. Minogue
Chairman, President and Chief Executive Officer at Abiomed

Brandon, this is Mike. Thanks for the question. The labor shortages, we expect to be standard. If you all remember, we were one of the first companies to talk about the labor shortages, independent of the COVID variants. But we have a lot of things to offer them. So we offer them bedside support, we have phone support 24/7 as well, and then we have 95% of our U.S. patients running in the cloud, which makes us more productive. It makes the hospitals more productive. And then we have extensive training for CAMP PCI, which they can do virtually. The physicians can watch live cases or then recorded cases. We have extensive programs, website and virtual training with accreditation for the nursing staff. And I think that what we're continuing to see is kind of a partnership where they work with us and are establishing -- we're seeing a stronger trend now and momentum around the -- especially the U.S. to establish shock protocols because there's been publications showing the improvement in outcomes, reduction of length of stay. And there really is, I think, the COVID protocol mindset is transferring over, and we're seeing more and more hospitals work on shock teams and heart teams for utilizing our technology.

Brandon Vazquez
Analyst at William Blair

Got it, and then just one more, in terms of RP jugular, it sounds like -- yes, go ahead.

Todd A. Trapp
Vice President and Chief Financial Officer at Abiomed

I was just going to answer your question on inflation. That was your second question. So I just wanted to just make a couple of comments on that. As a reminder, we don't have a significantly high material content on our pumps. But with that said, we are seeing some pressure on price increases, mostly in the logistics and electronics areas. But I think our sourcing team overall is aggressively working to minimizing inflationary pressures. They're looking to negotiate some of them in a way. We've locked in prices in certain cases for up to a year. And we've actually pre-bought some raws and components before the price increases went into effect. So we are seeing some pressure as well on wage inflation, but I think have taken that consideration in our operating margin guide for the year based on the visibility of what we see today.

Operator

Our next question today comes from Danielle Antalffy from SVB Leerink.

Danielle Joy Antalffy
Analyst at SVB Leerink

Congrats on really strong into the year, and it looks like great momentum going into fiscal '23. I just had two questions. First, Mike, in the past, you've talked about some building momentum at the spoke hospitals as the hub hospitals manage COVID patients or keep beds open. As COVID surges are waiting, as Omicron came off in the back half of the quarter, did you see what we had hoped to see, which was the spoke hospitals, sort of sustain the volumes? Or anything you can say about the hubs versus the spokes and the growth that you saw in the quarter? And then just one follow-up on the cardiac surgery business.

Michael R. Minogue
Chairman, President and Chief Executive Officer at Abiomed

Danielle, thanks for the question. That's exactly what we continue to see coming out of COVID. The smaller to midsized hospitals picked up the pace a little bit during COVID because the larger hub centers tended to be the COVID hub centers. Also the way we established our distribution is to make sure that we're more regionally based with teams that can coordinate the transfer of patients from the hub and the spoke. And it's really been a great benefit in our distribution, but also in the flow of patients. And just as one last reminder, CMS actually established the network payment. So a spoke hospital can put an Impella in and receive pay, and the hub hospital can accept the patient on Impella support, manage that patient, explant the device and also receive DRG 268, where they're compensated for the management of the patient and the explant of the Impella and the ICU. So it is something that's been very helpful in our growth. But also most importantly, it's improving outcomes in these regional markets for cardiogenic shock patients.

Danielle Joy Antalffy
Analyst at SVB Leerink

Got it. Okay. And then on the cardiac surgery business, I mean, that has just been a phenomenal growth driver over the last two years and even during a pandemic, it's amazing to see. So -- and a $4 billion TAM, I'm just curious, Mike, as you take a step back here and look at the business in three to five years, how -- what -- it's gone from 6% to 18% of the business. What's the mix of the business do you think in five years' time with the potential growth?

Michael R. Minogue
Chairman, President and Chief Executive Officer at Abiomed

Thanks, Danielle. I don't look at percent, because I expect to have significant growth in high-risk PCI and shock and definitely on the surgery business. And being at ISHLT all week, the surgeons will tell you, the heart failure cardiologists will tell you that this is a crisis, heart failure is a crisis, whether it's acute on chronic heart failure, which will address with preCARDIA and Impella, or if it's chronic cardiogenic shock or long-term heart failure itself with the 5.5 and BTR. So we put a slide up on the quarterly series, and you'll see actual scale, how small the Impella BTR pump is and what it means. One, we're seeing with the 5.5 the best outcomes we've seen in these kind of chronic patients. We're also seeing a large percent get back to baseline and have their kidneys recover. And then longer term, what the BTR allows is to get -- not give up on recovery and allow patients to go home being discharged. And remember, these are smart pumps. So the data is running in the cloud. With the BTR pump, we have two sensors. So we're getting actual pressure in the left ventricle and the aorta, which means we can wean the heart back scientifically, which is you're not able to do with any conventional LVAD. So besides the fact that it's smaller, it's smarter and it's more connected, the ultimate goal for these patients that are 70 and above that are not able to get a transplant is to really get them back to baseline, protect their kidneys and go back to quality of life at home.

Operator

Our next question today comes from Imron Zafar from Deutsche Bank.

Imron Shahzad Zafar
Analyst at Deutsche Bank Aktiengesellschaft

Congratulations on a great quarter. First, a quick question on guidance. I'm wondering how contributory clinical trial revenues are in your guidance, both ECP and BTR, and also whether you've had any clarity from FDA regarding continued access registry for ECP?

Todd A. Trapp
Vice President and Chief Financial Officer at Abiomed

Imron, I'll take the first question, in terms of the guidance. I would say we haven't really factored in much from a revenue perspective with regard to BTR or really ECP at this point in time in our guidance.

Imron Shahzad Zafar
Analyst at Deutsche Bank Aktiengesellschaft

Okay. Well, continued access registry? Any clarity there?

Michael R. Minogue
Chairman, President and Chief Executive Officer at Abiomed

Yes. Imron, the product ECP is Category B, so it's reimbursable. We went from early feasibility into this pivotal protocol, which will become the overall pivotal as we ramp up to 217 patients. The continuing access protocol will happen when we're done enrolling or where we lock it down. And yes, then we will continue to keep those centers open and continue to treat patients at those centers. So that's when we get to the tail end of the enrollment, but we're very focused as a priority on getting ECP enrolled.

Imron Shahzad Zafar
Analyst at Deutsche Bank Aktiengesellschaft

Okay. And then my second question is around longer-term margin outlook. First on gross margin, when you look out three to four years and presumably ECP dominating your percutaneous pump business, are there any reasons to think like gross margin profile should change versus the current 2.5 in terms of any differences in manufacturing or componentry or things like that versus the current business?

Michael R. Minogue
Chairman, President and Chief Executive Officer at Abiomed

So Imron, just to point out. So what we think is that the Impella ECP will be an ideal protected PCI product that likely eliminates the balloon pump in the cath lab for many of these patients, especially for those physicians who are uncomfortable with access closure of a 14-French hole with a 9-French catheter on Impella CP. So we think that that's going to help expand the use of Impella ECP for high-risk PCI. Impella CP is probably going to continue to be the best cardiogenic shock patient technology. So a patient that's going to have two to four or five days in the ICU. We see the 5.5 is the best device for that longer-term chronic patient that gets up and walks around. And then, of course, BTR can be a goal of over a year where the patient has the option to be discharged home. So as the new products roll out, you always have a learning curve. So your costs are a little bit higher. And as the other products continue to evolve, you tend to bring the cost down. So I don't see it as a change one way or the other. But what I am saying is that we have the ability to have different price points now whether we're in high-risk PCI or whether we're in cardiogenic shock or whether we're in Japan versus the U.S. versus parts of Europe. So that's the way we're going to manage our gross margins. But we have been, for over the last 10 years, in the top companies as far as best-in-class on gross margins, and we take great pride in that, and it shows the value of this technology overall.

Imron Shahzad Zafar
Analyst at Deutsche Bank Aktiengesellschaft

Awesome. And then, sorry, if I could just ask a follow-up on operating margin. Obviously, this year is going to be a big investment year just given the multiple clinical trials going on in international expansion, etc. When we look at fiscal '24, should we start to see some normalization in operating margin by then, Todd, in terms of moderating R&D and operating expenses in general?

Todd A. Trapp
Vice President and Chief Financial Officer at Abiomed

Well, Imron, I just provided guidance for fiscal year '23. But I think when I look at fiscal year '24, at some point in time, these clinical trials will start to moderate and then start to come down. And so when I look at R&D as a percentage of sales this year, it's going to be close to 18%. Hopefully, if we are able to execute on our clinical trials in terms of enrollment and site openings post-COVID, it's going to be a big year. And then hopefully, starting next year or maybe the year following that, it will start to moderate and come back down. And then longer-term R&D, we'll get back into that 12%, 13% of sales.

Operator

Our next question today comes from Cecilia Furlong from Morgan Stanley.

Fang Chu
Analyst at Morgan Stanley

This is Calvin on for Cecilia. I'm just curious on what you're seeing in terms of potential for deferred protected PCI cases to flow back in from here on out. How much of a case backlog do you see waiting on the sidelines, perhaps not as pronounced as some of the more deferrable med tech names that we've seen, just curious what kind of potential benefit that would have on your recovery?

Todd A. Trapp
Vice President and Chief Financial Officer at Abiomed

Calvin, I would say probably very little. I mean we saw a lot of that come back in, in March. So we had some -- an impact in January. And like we've seen over the last two years, they do come back and it comes back in the next few months. So I would say very little backlog, in my opinion, as we get into fiscal year '23.

Fang Chu
Analyst at Morgan Stanley

Got it. I just also wanted to check in on ECP. So I know based on the government website's update, there's probably at least 1.5 years out until we see some sort of potential approval, but just curious if you have any early thoughts on ECP pricing versus the other models, assuming stable reimbursement. I'm just curious how you're positioning ECP from a hospital profitability standpoint versus the other Impellas down the road?

Todd A. Trapp
Vice President and Chief Financial Officer at Abiomed

Yes. We've -- we're still in the process of finalizing sort of what the pricing is, but it's going to be somewhere around the CP rate from an initial standpoint.

Operator

Our next question today comes from Jayson Bedford from Raymond James.

Pavan Surabhi
Analyst at Raymond James

This is Pavan, on for Jayson. I quickly wanted to ask about number of centers. In the past, you guys have mentioned regions that are above prepandemic levels. Is it fair to assume that exiting March that most of the centers are above pre-pandemic levels? And I have a follow-up about international growth as well.

Todd A. Trapp
Vice President and Chief Financial Officer at Abiomed

Yes. I think it's a safe assumption that most of the sites that we're in right now are absolutely above pre-pandemic levels. We set a record in patients and revenue this quarter. So yes, we're above pre-pandemic levels at this point in time.

Pavan Surabhi
Analyst at Raymond James

Okay. Great. And the 2% FX headwind was a bit higher than we were thinking. So is that fair to assume that we can -- like you guys comment on U.S. versus international growth expectations for fiscal year '23?

Todd A. Trapp
Vice President and Chief Financial Officer at Abiomed

Yes. I guess I'm surprised it's -- 2% is big, because when you look at where the euro rate was last year, it was 1.12% on average. But when we did our forecast, financial forecast, we assumed 1.08%. Today, it's 1.05%. And more importantly, the yen last year averaged 1.16% in the month of April, then went up to 1.28%. So we're seeing significant dollar strengthening against the euro and the yen, and I'm pretty sure we're not alone in seeing that.

Pavan Surabhi
Analyst at Raymond James

Have they updated ECS guidelines for cardiogenic shock? Have they had any impact on revenues outside of Germany as well? Or has that just been mostly a German phenomenon?

Michael R. Minogue
Chairman, President and Chief Executive Officer at Abiomed

So the guidelines are for all of Europe and nearly every country in Europe set a record for the year and for the quarter as well. So there's likely some uptake to it. It's pretty recent, but it's a positive sign. The only thing higher now than a 2a is a Class I and that's not the normal guideline for most medical technology.

Pavan Surabhi
Analyst at Raymond James

Got it. And is that something that you guys expect that to change in the coming years? Or is there like some kind of time frame expectation for that?

Michael R. Minogue
Chairman, President and Chief Executive Officer at Abiomed

For the Class I? Those are -- that's based on the completion of our studies, recent studies.

Operator

Our next question today comes from Michael Polark from Wolfe Research.

Michael K. Polark
Analyst at Wolfe Research

Just two quick ones. Breethe, last quarter, you mentioned working on a console upgrade for your ECMO platform. Curious for an update there. How is the work going? And when might you think you'd be back to more of a commercial posture in the ECMO space?

Michael R. Minogue
Chairman, President and Chief Executive Officer at Abiomed

For the Breethe product, we expect to be second half. We are working on upgrading some of the electronics on the consoles itself. We feel confident and very positive about the clinical outcomes. We're finding a little bit more IP. We're making some improvements to the products as we're waiting to go back through this process. And in Europe, we've already validated the software for Auto ECPELLA, which allows the Impella console to know there's an ECMO device being utilized, so it can differentiate the pressure coming because remember an ECMO device for that VA ECMO is actually pumping retrograde against the heart. So between ECPELLA and Breethe coming out in the second half, we feel like we're going to be well positioned not only to recover hearts and save lives, but to recover hearts and lungs and save lives.

Michael K. Polark
Analyst at Wolfe Research

And for Todd. Todd, what's a reasonable tax rate -- adjusted tax rate input for models this year and the guidance, just to level set there.

Todd A. Trapp
Vice President and Chief Financial Officer at Abiomed

Yes. I would use 25% for modeling purposes.

Operator

Our final question today comes from Chris Cooley from Stephens.

Christopher Cook Cooley
Analyst at Stephens

I just wanted to follow back up on growth. You had very impressive high 20% growth there, both in Europe and Japan, as we were exiting the year. Wanted to touch on the Japanese market, in particular. And Todd, if you could give us any color there in terms of are you at an inflection point or just think about like just the launch of the Impella here in the U.S. in terms of its adoption curve? Or is it just a function of just critical mass in terms of the facilities? Just kind of any additional color you can help us with as we kind of think about driving our international growth expectations for the coming year.

Todd A. Trapp
Vice President and Chief Financial Officer at Abiomed

Yes. As we mentioned in our prepared remarks, we had just another really strong quarter in Japan with record revenues and record patients despite some of the headwinds there. So we delivered $14 million, which was up 34% on a constant currency basis, pretty consistent with what we saw last quarter. Patients were up 29%, 7% quarter-over-quarter. So Chris, it's just been -- Japan has been a wonderful country for us to launch our technology in. Today, we're in 191 sites. There's still over 350 sites for us to get into. So I still feel like we're in the early innings in Japan. And as we know -- as you know, we're excited to really launch the 5.5 there in this upcoming fiscal year. And so we're at 20 sites in LMR. And again, we're really excited to bring this technology to Japan and expect another strong year out of Japan in fiscal year '23.

Operator

This concludes today's Q&A session. I'll now hand the call back to Michael Minogue. Please go ahead.

Michael R. Minogue
Chairman, President and Chief Executive Officer at Abiomed

Thank you, everyone, for taking the time to join our call today. If there's any follow-up questions, please reach out directly. Have a great day.

Operator

[Operator Closing Remarks]

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