AtriCure Inc (ATRC) 2005 Q2 法說會逐字稿

Good morning ladies and gentlemen and welcome to the AtriCure Inc. Conference Call to discuss the 2nd quarter 2005 financial results.

[Operator Instructions]

It is my pleasure to introduce your host for today's call, Nick Laudico from the Ruth Group. You may begin.

Thank you, operator. Joining us on the call today are David Drachman, President and Chief Executive Officer and Tom Etergino, Vice President and Chief Financial Officer. By now you should have received the copy of the earnings press release. If you have not received a copy, please call Zach Cubelle at 646-536-7020 and he will fax or email you a copy.

Before we begin I would like to remind everyone on the call today that the United States Food and Drug Administration has not cleared or approved two products included in AtriCure's bipolar ablation system for the ablation of cardiac tissue or the treatment of atrial fibrillation or AF. These products include the ablation sensing unit or ASU and the isolator clamp. The company and others acting on its behalf may not promote these two products for the surgical treatment of AF or train doctors to use the products for the surgical treatment of AF.

However, these restrictions do not prevent doctors from choosing to use the products for the treatment of AF or prevent AtriCure from engaging in sales and marketing efforts that focus only the general attributes of the products for the approved indicated uses and not on the ablation of cardiac tissue or the treatment of AF. Although AtriCure educates and trains doctors as to the general skills involved in the proper use of the products and the related technology, the company does not educate or train doctors to use the products for the ablation of cardiac tissue or the surgical treatment of AF.

The FDA has cleared AtriCure's isolated pen device for the surgical ablation of cardiac tissue. As such, the company may promote this device to doctors and provide an education and training on the use of the pen device for that use. The company's remarks today also may include forward looking statements within the meaning of the private securities litigation and reform act of 1995.

Forward looking statements include statements that address activities, events or developments that AtriCure expects, believes or anticipates will or may occur in the future. Such as earnings estimates, other predictions of financial performance, launches by AtriCure of new products, and market acceptance of AtriCure's products. Forward looking statements are based on AtriCure's experience and perception of current conditions, trends, expected future developments and other factors it believes are appropriate under the circumstances and are subject to numerous risks and uncertainties, many of which are beyond AtriCure's control.

These risks and uncertainties include the rate and degree of market acceptance of AtriCure's products and other risks and uncertainties described from time to time in AtriCure's SEC filings. AtriCure does not guarantee any forward looking statement and actual results may differ materially from those projected. AtriCure undertakes no obligation to publicly update any forward looking statement, whether as a result of new information, future events or otherwise.

With that, I would like to turn it over to AtriCure's President and CEO, Dave Drachman.

Thanks, Nick. It is a real pleasure to welcome all of you to AtriCure's 1st quarterly conference call to cover our 2nd quarter 2005 results. I want to extend my thanks to our new shareholders for their commitment and support and to the analysts for taking the time to understand our technology and the advantages we believe it offers for the treatment of atrial fibrillation.

I look forward to talking to you each quarter to update you on our progress and the strategy that we will outline today. I will start with our overview of our corporate strategy and our overview of our markets and technology as well as some highlights for the quarter. I will then turn the call over to our Chief Financial Officer, Tom Etergino, for a detailed review of our 2nd quarter numbers. Finally, I will provide some additional comments on our upcoming milestones and then we will open the call to questions.

As you know, AtriCure is focused on the large and rapidly growing atrial fibrillation or AF market. AtriCure products are currently being used by surgeons in two segments of the atrial fibrillation market. The open heart market and the mentally invasive sole therapy market. Now, first, I would like to discuss the open heart market opportunity and our 2nd quarter highlights.

We estimate the open heart market opportunity to be 200 million in the U.S. with an equal opportunity in the rest of the world. Despite recent entries into in already existing market, we are the market leader with a 50% market share in the U.S. For the 2nd quarter 2005, we reported domestic open heart revenues of $5.5 million and international open heart revenues of $500,000. The open heart market is approximately 20% penetrated and is growing at a rate of 20 to 25% annually.

During the 2nd quarter our average selling price for our bipolar ablation clamps was approximately $2,400 an increase of 2.3% when compared to the 1st quarter average selling prices. The isolative pen was cleared by the FDA for cardiac tissue ablation during the quarter. We are planning to launch our pen in the 3rd quarter of 2005. Approximately 25% of the open heart market is comprised of single pole pen like technologies. Up until now, we could not compete in this segment of the market. We expect to launch of our pen to increase our open heart sales and have a positive impact on market share.

Now I would like to discuss our open and minimally invasive sole therapy market opportunity and our second quarter results. We estimate the minimally invasive market opportunity to be $2 billion in the U.S., with an equal opportunity in the rest of the world. As a result of the adoption of our system by surgeons, AtriCure is the leader in the minimally invasive market. Consolidated sales from minimally invasive products were $1.7 million for the 2nd quarter 2005, compared to $1.2 million for the 1st quarter 2005.

During the quarter we performed minimally invasive procedures in 33 accounts and sold 234 procedure kits. This is a 39% increase in the number of kits sold and a 38% in the number of centers performing procedures when compared to the 1st quarter 2005. Our revenue per procedure was relatively constant compared to prior quarters at $7,000. Because of our dominant position in the open heart market and the strength of our technologies we are appropriately positioned to take advantage of this large and emerging opportunity.

Now, moving on to product development. During the 2nd quarter we released our new isolated long product which is an improved derivative clamping product designed for thicker and longer ablation lines. Our initial feedback has been very positive and we are seeing significant trends toward the use of this product as compared to our standard clamps.

This will have a favorable impact on our average selling prices since our long clamps can demand higher prices. Additionally, on June 24 we successfully completed our first unit case using the isolator pen. Our initial performance evaluations exceeded our expectations and we are on track for a full launch during the 3rd quarter of 2005.

The isolative pen provides surgeons the flexibility of a conventional ablation pen with the advantages of our bipolar technology. In terms of our minimal invasive endoscopic device a design development is completed and we anticipate filing our 5 Pen K in the 3rd quarter of 2005. This positions us to meet our objective for a full release during the 1st quarter of 2006. The endoscopic ablation platform is expected to simplify our minimally invasive procedure, making the procedure adoptable to a larger number of surgeons.

Laex (ph) is our left atrial appendage exclusion product which is designed to exclude the left atrial appendage in an effort to reduce the risk of stroke related atrial fibrillation. We have completed our designs for the open heart product and we are in process of verifying the design through pre-clinical testing. We plan to complete the pre-clinical testing during the 1st quarter of 2006 and file our 5 Pen K during the 2nd quarter of 2006. We are on schedule for initial cases in the 3rd quarter of 2006.

Additionally, we entered into a development agreement for an ablation probe with the USG. We are working with USG to develop a product which will expand our allegiance set during our minimally invasive procedures.

Now, for a brief summary of the progress that is being made on our OUS and US clinical trials and regulatory affairs. Our products like other ablation products which are being used to treat atrial fibrillation are being used by physicians off label.

No ablation product whether a catheter or surgical technology is FDA approved for the treatment of atrial fibrillation. As with our competitors, our products have been cleared for commercialization through a 5 Pen K process for either soft tissue or cardiac tissue ablation.

We are also conducting two clinical trials to extend our labeling to include injunctive treatment of atrial fibrillation during open heart surgery and treatment of atrial fibrillation as a minimally invasive sole therapy procedure. Most recently, we received conditional approval from the FDA to begin a 10 patient feasibility study at 3 leading medical centers to evaluate the safety and feasibility of our bipolar ablation system as a minimally invasive sole therapy AF treatment. Enrollment in the clinical trial is expected to begin in the September, October time frame.

If early results from feasibility study are encouraging. We intend to expand this phase to include 5 centers and approximately 25 patients. And to continue to work with FDA to obtain approval of a landmark pivotal trial to demonstrate the safety and efficacy of our bipolar ablation system for the sole therapy minimally invasive treatment of atrial fibrillation.

Now, for a brief recap of our 2nd quarter results. We reported consolidated revenues of $7.7 million up 51% year over year. This translates into open heart procedure revenues of 6 million and minimally invasive revenues of 1.7 million. International sales were 7.2% of consolidated sales.

Comparisons of the 1st and 2nd quarter 2005 were impacted by an exceptionally strong 1st quarter which our CFO, Tom Etergino, will discuss in detail. Gross profits increased from $5.8 million up 53.8% year over year. We completed a successful initial offering of 4.15 million common shares at $12 per share for gross proceeds of $49.8 million. Simultaneous with our IPO, we completed the acquisition of Enable Medical for a total purchase price of $7 million. Enable Medical was the sole supplier of all our disposable products. We believe this acquisition will secure our product supply during an accelerated period of growth, increase our gross margins, shorten our product cycles, and enhance our engineering capabilities.

Now, I would like to turn the call over to our CFO, Tom Etergino, for a review of our 2nd quarter financials.

Thank you, Dave. Let me add my welcome and thanks to our new shareholders. As Dave mentioned, we appreciate your support and interest in AtriCure. The financial results for the 2nd quarter ended June 30, 2005 reported today preceded the closing of our initial public offering in August.

For the 2nd quarter 2005 we reported revenue of $7.7 million. This is comprised of $5.5 million in domestic open heart revenue, $1.6 million in domestic sole therapy minimally invasive revenue, and $600,000 in international revenue. The corresponding revenue contribution was 72% domestic open heart, 21% domestic sole therapy minimally invasive and 7% international. Second quarter 2005 revenue increased 51% over the $5.1 million in revenue for the 2nd quarter of 2004. $1.7 million of the year over year increase corresponds to strong demand for the new products for the sole therapy minimally invasive treatment of AF.

Following the launch in 4th quarter of 2004. Open heart revenue accounts for $900,000 of the year over year increase. On a sequentially quarter basis, 2nd quarter 2005 revenue increased 3.1% over the $7.5 million in revenue in the 1st quarter of 2005. With the continued strong demand following the 4th quarter launch of our domestic sole therapy minimally invasive products, revenue increased sequentially $500,000 or 39%. From $1.2 million in the 1st quarter 2005 to $1.7 million in the 2nd quarter of 2005.

Domestic open heart surgery revenue grew a modest 2.6% on a sequential basis, from $5.4 million for the 1st quarter 2005 to $5.5 million in the 2nd quarter 2005. International revenue was down on a sequential quarter basis from approximately $927,000 in the 1st quarter of '05 to $554,000 in the 2nd quarter of '05. This decline is due to strong international orders in the 1st quarter of '05 from new distributors in additional countries including China. And increase orders from existing international distributors.

As a result of certain stocking orders for our minimally invasive sole therapy procedures in the 1st quarter of '05. And the addition of the new international stocking distributors, 1st quarter 2005 revenue exceed plan by approximately $1 million. Without the impact of these stocking orders on the 1st quarter revenue, sequential revenue grew for the 2nd quarter would have been approximately 18%. Gross profit for the 2nd quarter 2005 was $5.8 million with gross margins of 74.4%.

Compared to the 2nd quarter 2004 gross profit of $3.7 million and gross margin of 73%. Gross profit for the 1st quarter of 2005 was $5.6 million with a gross margin of 74.4%. Research and development expenses were $2 million for the 2nd quarter of '05, compared with $768,000 for the 2nd quarter of 2004.

The year over year increase is primarily attributable to recruitment of additional full-time engineers, the expansion of our product development activities and the expansion of our clinical trials.

Selling, general, and administrative expense were $5.1 million for the 2nd quarter of 2005 compared to $3.2 million in the 2nd quarter of '04. The year over year increase is attributable primarily to increased headcount, higher facility related charges, increased marketing expenditures and an increase in unrestricted grants and training expenditures.

The company reported a net loss available to shareholders for the 3 months ended June 30, 2005 of $2.3 million. Compared to the net loss available to shareholders of $1.2 million for the 3 months ended June 30, 2004. Our 2nd quarter loss per share numbers take into account the 1 to 3.8 reversed stock split which occurred in late July as required by generally accepted accounting principles.

Based on this our net loss per share for the 2nd quarter of 2005 was $1.24 on a basic and full diluted basis with weighted average shares outstanding of 1.9 million. For comparative purposes, the net loss per share for the 2nd quarter of '04 was $0.65 on a basic and fully diluted basis, with weighted average shares outstanding of 1.8 million. Pro forma basic and diluted loss per share and related pro forma weighted average shares as shown on the face of the statement of our operations have been adjusted.

To give effect to the conversion of all outstanding shares of redeemable preferred stock into shares of common stock. This presentation does not reflect the acquisition of Enable or any adjustments to eliminate preferred stock interest expense that has been reported in the past, but will not be recorded in the future. Due to the preferred stock conversion to common stock as of the IPO date. Based on this pro forma view, our basic and diluted loss per share was $0.30 for 2nd quarter of '05 and $0.15 for 2nd quarter of '04.

Next, I will provide a 2nd quarter results on a pro forma basis after giving affects of the acquisition of Enable Medical as if it had occurred on January 1, 2005. We believe these figures will serve a more accurate basis of comparison going forward. On a pro forma basis combined on a pro forma combined basis, 2nd quarter 2005 revenue was $7.8 million. Thus remains similar to AtriCure's actual results as our purchases represents substantially all of Enable sales during the quarter. Pro forma gross profit was $6.4 million with gross margins of 81.3% and increase from AtriCure's actual gross profit of $5.8 million and gross margins of 74.4%. This 690 basis point increase in margin reflects Enable's actual costs of production and the reclassification of $680,000 of R&D expenses.

Pro forma research and development expenses were consistent with AtriCure's actual results. SGA expenses on a pro forma basis where $5.5 million, with a $347,000 increase primarily due to the addition of Enable's operating expenses.

Second quarter 2005 pro forma net loss was $1.1 million, as compared to AtriCure's $2.3 million net loss. On a per-share basis after factoring in the conversion of all of AtriCure's shares of preferred stock into common stock, a 4.15 million common shares issued in the initial public offering, and the 1 for 3.8 reverse stock split, the basic and fully diluted net loss per share was $0.09, utilizing weighted average shares outstanding of approximately 12.1 million.

Now, looking forward, we expect the third quarter 2005 revenue to reflect historic seasonality, as the third quarter attends to the slower than other quarters. Looking at the revenue for the third quarter 2004 as compared to the second quarter of 2004, we experienced a seasonal decrease in quarterly revenue of approximately 12%.

With that, I'll turn it back to day for his final comments.

Thank you, Tom. Now I will summarize our highlights. We achieved our strongest life to date quarter, with revenues of 7.7 million, up 51% year over year. Our minimally invasive sales were 21% of consolidated sales for the quarter, and up 39% over the previous quarter.

Our business continues to demonstrate strong gross margins, at 74.4% for the quarter. The Isolator pen was cleared by the FDA for cardiac tissue ablation and the initial user feedback has met expectations. We received conditional approval from the FDA to begin a safety and feasibility study of our bipolar ablation system as a sole therapy, minimally invasive AF treatment.

Additionally, we completed the Enable medical acquisition, which will secure our product supply during an accelerated period of growth, increased gross margins, shorten our product cycles, and enhance our engineering capabilities. And we entered into a development agreement for an ablation probe with UST.

We are working with UST to develop a product which will expand our ablation set during our minimally invasive procedures. Once again, we appreciate your interest AtriCure, and we will now take your questions.

Thank you sir.

[Operator Instructions]

We will take our first question from the line of Tom Gunderson, with H-Care.

Actually, I'm with Piper Jaffray. Good morning.

Good morning Tom.

First, just to start with a clarification, I don't think I wrote it down correctly from Tom's comments. Tom, could you repeat what the exceeded expectations or exceeded plan by $1 million? What I wrote down was you had 900,000 in sales, and you exceeded plan by 1 million, but somehow I don't think that's right.

I said that as a result of certain of our stocking orders for our minimally a invasive sole therapy procedure in 05 and the addition of new international stocking distributors first quarter 05 revenue exceeded plan by $1 million.

And what we're sales in Q1 05 internationally?

Q1 05 international sales -- that million dollars is not just international.

Ah, okay.

Minimally invasive sole therapy procedure, which is domestic, as well as the international stocking distributors.

OK, so ...

There's 2 things there.

That's where I misunderstood. So it's probably more like 400 or $500,000?

That's correct. It's about 550,000 for the minimally invasive, and about $450,000 for the international.

OK. Now, the second thing is, again, a clarification. Dave, on the Isolator pen, there are no revenues from the Isolator pen in Q2, and there will be revenues from the Isolator pen in Q3, is that correct?

That's correct, Tom.

And has that launch begun?

It has begun. In -this month our user preference evaluation has begun.

And you mentioned that it would help because you haven't been in this particular niche of the market--it would help expand market share. It will also expand revenues per procedure, is that right? And can you tell us what the list price for the pen is?

Yes, the list price for the pen is $2100, and currently, during the user preference evaluation, we sold products for about $1800. Now, what will occur, Tom, is some of our clamp users will also use the pen procedure. The pen is actually designed in the open-heart procedure for certain lesions, specifically the mitral valve annulus lesion.

So we anticipate that many of our clamp users will also choose to use the pen along with the clamp. And then additionally, will look to target centers that are using pen technologies only.

OK, thanks. And then you mentioned summer seasonality. And I'm wondering, as with many of the companies, with Katrina closing down hospitals, was there any unusual activity from AtriCure down there? Should we just assume that its average with other med-tech companies?

I think you can probably assume that its average. That would be our first estimates. We don't have our runs around the full situation right now down there. We do have some people based in that location and we haven't had a lot of communication with them over the past couple of weeks.

OK, And then last question, you mentioned the ASP's for the open. Can you give us the ASP for the close?

The ASP for the close is approximately $7000, and has been consistent in the $7000 range for the past 2 or 3 quarters.

OK. Thank you.

Sure.

Thank you sir. Our next question comes from the line of Kevin Reeder (ph), with Silver Day Capital.

Yes, hi guys. Can you give us some clarity on how many physicians you're training this quarter? If you have 32 accounts doing procedures, how many physicians -- the count that's representing?

Yes, where actually not communicating in terms of the metrics of how many physicians we're training on an ongoing basis. It hasn't been information that we've been disclosing.

OK. And have you really had a full launch of MIS right now? I'm under the impression that you're still having a sales representative or clinical representative in every case that's being done. Is it planned to continue with that, or at some point do you move on to kind of a really full launch where positions are -- it'll just go on and do this on their own?

That's an excellent question. There's certainly an evolution process involved. Right now, physicians generally come to a seminar to get exposed and trained with didactics. They may participate in cadaver labs, where they can use the advanced technologies and understand how to perform the procedure on cadavers.

At that point when they're ready to do cases at their new -- at their institution, proctors will support the initial cases to ensure safety in their first 2 or 3 procedures. Now remember, this is an evolution process. As we develop new technologies, for example like the endoscopic ablation platform, and other technologies which will make the procedure more adoptable to a broader group of surgeons, the training requirements will go down, but especially initially with the existing technologies which haven't been specifically designed for minimally invasive at this point.

What we want to make sure is that our initial results are as strong as possible, so we're taking every possible caution, especially in the first 1000 procedures, to ensure the best possible outcome. But yes, what you'll see from us is late in 2006, and as we get into 2007, this will become much more of a general commercial sell versus a very controlled release.

OK, and I think you said the endoscopic approach you are hoping for Q1 06 launch. Now, is that -- can you talk about just the benefits in terms of, you know, your expectations for induction, average procedure time, or size of incision, what are the main benefits there?

Yes, the endoscopic ablation platform will slightly reduce the size of the incisions, but most importantly, the name of the product internally is the glider because it actually glides into position underneath the pulmonary veins in a much more simple fashion.

Additionally, there's some exchange techniques which need to be done to actually facilitate the procedure. So for example, first we have to mobilize the pulmonary veins with a dissection tool. Then we have to exchange the dissection tool for the ablation tool. The primary purpose for the dissection tool is to create the pathway underneath the pulmonary veins for the ablation product. Now, not only have we released -- or are we releasing the endoscopic ablation platform in the first quarter, but we're also releasing a guiding system that will simplify that exchange.

So I think the major aspects of our endoscopic ablation platform are the fact that it's specifically designed for endoscopic use. The system itself will slide into position with much more ease, and the exchange between the dissection tool which creates the pathway for the ablation device is simplified, and those are some of the more challenging aspects of the procedure. Currently, the procedure in new accounts is approximately three hours. We believe it's a procedure time, and we've seen the procedure time be reduced to approximately 2 hours in some of the more mature centers.

OK, great. And the length of stay may be reduced a little bit with that as well?

Length of stay is actually anywhere from 1 to 3 days. I think it's fairly comparable with a catheter approach, quite honestly. The patients often stay more than a day because of titration of medication and other cardiovascular comorbidities. It's not necessarily because of the operation.

OK.

We certainly have had patients go home, you know, the following day. On an average we see patients stay in the hospital for 3 days, and a lot of that is, once again, it's the titration of medications, and it's the stabilization of other comorbid cardiovascular circumstances.

OK, And then final question on the international and I guess you kind of referred to the MIS; some of the MIS's that's being stocking as well-I just wasn't understanding there--in Q1. Do you have any way of tracking this? You've pretty much burned through that. Have your accounts that you sift through in Q1 all reordered for Q2? And is there someone to estimate that you've already pretty much gotten through that initial stocking?

One of the things that's really impressive about our results in the second quarter is we basically performed -- you know, we sold 38% more kits, but yet our accounts were 24 accounts in terms of where we performed procedures in the first quarter versus 33 accounts in the second quarter, so we clearly burned up inventory in terms of the result. When you look at the result of 1.1 million in the first quarter, versus 1.6 million domestically, in the second quarter, and you look at the 24 accounts which stocked up on product versus 33 accounts which actually performed procedures in the second quarter, I think it's clear that our procedure volume is moving in the right direction.

OK, good work guys.

Thank you very much.

Thank you.

Thank you, sir. Ladies and gentlemen, this does conclude the question and answer portion of today's call. I'd like to turn the presentation back to Mr. Drachman for any closing remarks.

Well, thank you for your participation in today's call, and we look forward to speaking to each of you each quarter and continuing to update you on our progress. Thank you very much.

Ladies and gentlemen thank you for your participation in today's conference. This does conclude the presentation and you may now disconnect. Have a wonderful day.