AtriCure Inc (ATRC) 2005 Q4 法說會逐字稿

Good day, and welcome, ladies and gentlemen, to the AtriCure, Inc. to discuss the fourth quarter full year 2005 financial results conference call.

[OPERATOR INSTRUCTIONS]

I would now like to turn the call over to Mr. Nick Laudico from The Ruth Group. Please proceed, sir.

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 a copy of the earnings press release. If you have not received a copy, please call [Zach Kubo] at 646-536-7020, and he will fax or e-mail you a copy.

Before we begin, I'd 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 AtriCare's bipolar ablation system for the ablation of cardiac tissue for the treatment of atrial fibrillation or AF. The 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 on 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 product 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 Isolator Pen Device for the surgical ablation of cardiac tissue. As such, the Company may promote this device to doctors and provide education and training on the use of the pen device for that use.

The Company's remarks today may also include forward-looking statements within the meaning of the Private Securities Litigation 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 of new products and market acceptance of new 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 statements, 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'd like to turn the call over to AtriCure's President and Chief Executive Officer, Dave Drachman. Dave.

Thanks, Nick, and thank you all for joining us today for our fourth quarter and full year 2005 conference call. We are extremely pleased with our full year 2005 results. During the year, our products were further established as the market leader for the surgical ablation of atrial fibrillation. To date, we have exceeded 25,000 open-heart procedures worldwide.

As use of our products continues to grow in open-heart procedures, we also see progress and growing acceptance of our minimally invasive procedure. Since the initial release of our minimally invasive products during the fourth quarter 2004, surgeons have completed approximately 800 minimally invasive procedures. Based on the initial experience, we continue to believe that our minimally invasive products will significantly contribute towards our mission of expanding atrial fibrillation treatment options.

Before getting into our operational results and recent developments, let me briefly summarize our financial results. For the full year 2005, consolidated revenue was $31 million, a 62% increase over the prior year. Worldwide minimally invasive product sales accounted for $6.4 million or a 21% increase or 21% of consolidated revenues.

Fourth quarter consolidated revenue was $8.6 million, a19% sequential increase over the prior quarter and a 49% increase over fourth quarter 2004. Worldwide minimally invasive product sales accounted for $2.2 million in the fourth quarter 2005, a 62% sequential increase over third quarter 2005.

Minimally invasive procedures were performed in 55 U.S. medical institutions during the quarter, compared to 45 medical centers in the previous quarter. In terms of new product developments, we have made progress in three broad areas.

First, our new minimally invasive platform will improve ease of use and is expected to increase the speed at which our products are adopted. Additionally, the new minimally invasive product platform will enable surgeons to perform procedures through smaller incisions. Second, we've made significant advances toward our regulatory submission in support of our left atrial appendage device. We continue to anticipate release of this product on schedule in third quarter 2006. Third, we've made progress with our HIFU project as it relates to the development of the transducer and the ablation science for this new product.

First, an update on our new minimally invasive platform, the Isolator Endoscopic Ablation system. The system includes the Isolator clamps and the Glide Pass transfer guide. We have completed our user preference evaluation of 20 human procedures using the new system. Based on the initial 20 procedures, we believe the system has met our product requirements and user expectations.

The system simplifies the minimally invasive procedure in several important ways. First, the rounded, low profile shaft and jaws is designed to eliminate device cast points, allowing the surgeon to glide the clamp into position. This design also enables the surgeon to introduce and manipulate the clamp through smaller incisions, facilitating thorascopic procedures.

Second, the glide path transfer guide simplifies one of the more technically challenging maneuvers, the exchange between the dissection tool and the ablation clamp. These benefits are expected to decrease procedure times, increase the speed of adoption and simplify the procedure. Ultimately, we believe this platform will expand our target population of surgeons. We are fully releasing the endoscopic product today on schedule.

Next I would like to discuss the potential benefits of using the Isolator endoscopic platform in open-heart procedures. We believe that the low profile design, enhanced ergonomics and improved ablation mechanics may be developed into a superior ablation clamp for use during open-heart procedures. As a result, we are developing a derivative of the Isolator endoscopic ablation platform for potential use during open-heart surgery. We anticipate releasing this new open platform during second quarter 2006.

Now I would like to update you on our Cosgrove Gillinov clip. During our fourth quarter, we completed our FDA pre-clinical study in support of our 510-K submission for the clip. The clip is intended to exclude the left atrial appendage during open-heart surgical procedures and MIS procedures. It is also intended to provide an option for high-risk patients as a stand-alone procedure following catheter ablation or pacemaker implantation.

The initial pre-clinical results using the clip were published in the December edition of the Journal of Thoracic and Cardiovascular Surgery. The conclusion of the authors was that our device enables rapid, reliable and safe exclusion of the left atrial appendage, and that the device provides a new therapeutic option for reducing the risk of stroke in patients with atrial fibrillation.

We anticipate filing our 510-K for an indication that includes left atrial appendage exclusion during the second quarter 2006. Based on our own internal reviews and input from consultants, we anticipate this product may receive FDA clearance during third quarter 2006. As a result, we are planning for a limited release of the clip in the U.S. for use during open-heart procedures during the third quarter, and for minimally invasive procedures by year end.

Turning now to our bipolar pen. Based on the successful reports of our pen being used during minimally invasive procedures, we are further developing and licensing products in this area that could potentially improve patient outcomes. Our objective is to facilitate the use of the pen to identify and ablate the ganglionic plexi during minimally invasive procedures.

As a review, the ganglionic plexi are neurons located on the epicardial surface of the atrium. Current data suggests that ablation of these ganglionic plexi could be an important factor in eliminating AF triggers. The pen has been successfully tested to deliver high frequency stimulation to the ganglionic plexi in order to evoke a vagal response. Locations in which stimulation evokes a vagal response correlate with locations which are thought to be potential AF triggers.

Once the surgeon identifies a location as being responsive to high frequency stimulation using the pen, the pen is then used to ablate these locations in order to eliminate these sites as potential AF triggers. In order to simplify and facilitate the use of the pen for high frequency stimulation and ablation, we have developed a switch box, which will enable the surgeon to toggle between functions.

It is also important to note that we also plan to use the pen for conventional pacing and sensing tests in order to confirm pulmonary vein isolation. In the second quarter of 2006 we anticipate FDA clearance for the expanded indications of our pen and switch box to include pacing, sensing and high frequency stimulation.

Lastly, an update on the development of our HIFU project. We are making progress toward the development and miniaturization of the transducer and our first generation HIFU probe is expected to be released during the second quarter of 2007.

Now for a brief update concerning the progress of our RESTORE-II clinical study and other regulatory initiatives. Our RESTORE-II feasibility study is designed to investigate the use of our bipolar ablation system as a minimally invasive, sole therapy treatment for atrial fibrillation. A total of 17 out of the 25 treatment patients have been successfully treated in this study.

Pulmonary vein isolation was achieved in all veins in all patients and the left atrial appendage was excluded in all patients. Additionally, ablation of the ganglionic plexi was achieved in all patients. Each of the 17 patients was discharged from the hospital free from atrial fibrillation.

We anticipate completing enrollment and treatment of the 25 patients during second quarter of 2006. We've had initial discussions with FDA concerning the clinical trial study for our pivotal design and we will announce additional progress of this important clinical program throughout the year.

As it relates to the expanded indications in Europe of cardiac arrhythmias, we received confirmation from TUV that two of the three reports needed for CE Mark approval have been accepted. We anticipate approval in the second quarter 2006.

Now let me turn to our recent involvement in an Ohio AF research and education initiative. During the fourth quarter, a $23 million grant funded by the State of Ohio was approved. The grant is designed to support an AF innovation center. AtriCure will be working with the Cleveland Clinic, the University of Cincinnati and Case Western to provide surgeons with expanded AF treatment options.

The surgical program currently has three primary initiatives. First, the development of an epicardial mapping system with protocols that may provide insights into the mechanisms of atrial fibrillation and potentially customize ablation treatment on a patient-by-patient basis. Second, the initiation of clinical programs, which will answer crucial patient management questions, such as the impact of left atrial appendage exclusion on atrial transport and the impact of left atrial appendage exclusion on the reduction of AF-related strokes.

Lastly, the centers plan to develop more advanced training programs and systems to facilitate progress toward the advancement of MIS clinical studies and general clinical use. We anticipate that the grant and the initiatives will lead to landmark publications and have a positive impact on the advancement of AF treatments and further establish AtriCure as an innovation leader.

Now I will address current conditions facing AtriCure. During the fourth quarter, there was an expansion of the use of our products in open-heart and minimally invasive procedures. However, we believe our current operations and sales are being negatively impacted by two articles published in the Wall Street Journal. These articles focused on two pioneering institutions, which have been proponents and investigators of our products.

The first article of December 12 discussed the Cleveland Clinic and raised concerns of conflict of interests between the Cleveland Clinic and AtriCure. Additionally, the article discussed four deaths which occurred during procedures performed with AtriCure products.

The second article of December 28 discussed disclosure issues surround Dr. Wolf, who is associated with the University of Cincinnati. The concern raised was the completeness of Dr. Wolf's disclosure of his financial relationship with AtriCure relative to the submission of a manuscript to a peer review journal.

First, I would like to briefly summarize our relationship with the Cleveland Clinic. As many of you know, the Cleveland Clinic is a pioneering institute in cardiac surgery. We believe that the clinic uses AtriCure products based on our technology and the patient benefits that our products provide. Although the clinic continues to use AtriCure products, based on the recent events, we have been informed that they have suspended training programs involving our products and withdrew their IRB submission for a RESTORE-II clinical trial.

Next I will address our circumstances related to Dr. Wolf and the University of Cincinnati. Dr. Wolf is an innovation leader in minimally invasive cardiac surgery and has made significant contributions toward patient care. Over the past 18 months, Dr. Wolf has established the largest series of minimally invasive AF procedures in the world. Based on Dr. Wolf's broad experience and commitment to minimally invasive treatment, the surgical program at the University of Cincinnati has developed training seminars, proctoring programs and published data, which has been significant -- a significant factor in pioneering the minimally invasive procedure.

Based on the concerns raised by the Wall Street Journal, there are plans to validate Dr. Wolf's data by independent reviewers. We believe that the validation of Dr. Wolf's data is an important step. Based on our insights regarding the initial 800 minimally invasive procedures performed in approximately 55 U.S. medical institutions, we remain highly confident in our data. Pending resolutions, the University of Cincinnati's training seminars, physician proctoring programs and the AtriCure clinical studies are currently on hold.

Let me outline for you some of the internal and external initiatives we've identified, which we believe will address our challenges. First, as noted earlier, in the December 12 Wall Street Journal article, there was a question about four deaths and whether or not AtriCure complied with the FDA regulations for medical device reporting.

We engaged the FDA in discussions surrounding these deaths and our medical device reporting procedures. Based on these discussions, we remain comfortable with our reporting procedures. Additionally, we published a white paper in response to the article. The white paper was shared with FDA and is posted on our website. If you haven't read the paper, we encourage you to do so.

Two, through independent publications and our RESTORE-II clinical trial, we will continue to build the evidence base for our minimally invasive procedures to become a standard treatment alternative.

Three, as we discussed earlier, there are plans underway at the University of Cincinnati in order to validate the Wolf data through independent reviewers. This is a critical and important milestone.

Four, there are other influential institutions with established training and proctoring programs. We believe these institutions will accelerate their expansion plans.

It is important to note that the suspension of training and proctoring programs has slowed the expansion of our minimally invasive products into new centers. However, the experienced surgeons performing MIS procedures stand behind the MIS procedure end results.

With the understanding that these issues are recent and fluid, we want to give you some indication of the impact. Our current revenue estimates for the first quarter range from $8 million to $8.6 million. We will continue to validate and evaluate the impact of these recent events and plan to provide full year 2006 revenue guidance on our first quarter earnings call.

Moving forward, our initial assessment is that the current conditions are impacting sales and represent a short-term challenge. Our product offering is rapidly improving and expanding. Our customer base remains in place. We have a world class sales organization and management has the confidence, capability, resources and resolve to manage our business through these issues.

I would now like to turn the call over to our CFO, Tom Etergino.

Thanks, Dave, and good morning, everyone. First, I would like to review our full year and fourth quarter revenue results. For the full year 2005, consolidated revenue was $31 million, a 61.6% increase over the prior year. Domestic minimally invasive products accounted for $6.2 million or 20% of consolidated, full year 2005 revenue.

International sales were $2.7 million or 9% of consolidated full year 2005 revenue and increased 89% year-over-year. Our domestic open clamp sales were $21 million or 68% of consolidated full year 2005 revenue and represented a 23% year-over-year increase. And finally, our Isolator bipolar pen, which was released for sale in August 2005, is being used in both open-heart and minimally invasive procedures, accounted for approximately $900,000 or 3% of consolidated full year 2005 revenue.

Our fourth quarter 2005 revenue was $8.6 million, an increase of 49.4% over fourth quarter 2004 and a sequential increase of 19.4% over third quarter 2005. The corresponding revenue contribution for the fourth quarter 2005 was approximately 61% domestic open-heart, 25% domestic minimally invasive, 7% domestic bipolar pen and 7% international. Let me point out that domestic minimally invasive revenue increased 63.5% sequentially.

And a note regarding our pen -- our current estimates are that fourth quarter pen sales are currently evenly distributed between open-heart and minimally invasive procedures. However, based on the attributes of the pen, we anticipate that pen sales will grow more rapidly in minimally invasive procedures compared to open-heart procedures.

Now I would like to update you on some key performance indicators. Average domestic selling prices were relatively stable quarter-over-quarter. Our open clamp ASP for the fourth quarter 2005 was $2,469 and our minimally invasive procedure kit was approximately $7,000. The ASP for our bipolar pen was $1,817.

Minimally invasive procedures were performed in 55 U.S. medical centers in the fourth quarter 2005, a sequential growth rate of 22%. And for full year 2005, AtriCure's total active domestic customer base increased 23% over prior year.

Now for an update on gross margin trends. Gross profit for the fourth quarter 2005 was $6.4 million with a gross margin of 75%, including a $266,000 write-off related to production equipment for discontinued products. This compares favorably to fourth quarter 2004 gross margin of 72.7% and to third quarter 2005 margin of 71.9%. This increase is primarily the result of our acquisition of Enable Medical.

Next an update on operating expenses and EPS. Research and Development expenses were $2.8 million for the fourth quarter 2005, compared with $1.5 million for the fourth quarter 2004 and $2.6 million for the third quarter 2005. The increases were attributable to two primary factors. First, the hiring of additional full time engineers, including engineers acquired as a result of the Enable acquisition and second, the expansion of our product development efforts and patient enrollment in our RESTORE-II clinical trial.

Selling, General and Administrative expenses were $7.9 million for the fourth quarter 2005, compared with $5.2 million for the fourth quarter 2004 and $6.3 million for the third quarter 2005. These increases were attributable to three primary factors. First, an 8-person, sequential expansion of our sales and marketing organization; second, as we discussed in our last earnings call, costs associated with the opening of our European subsidiary; and third, an overall increase in expenses associated with being a public company.

The net loss for the quarter was $4 million or $0.33 per share. In terms of the balance sheet, we ended the year with cash, cash equivalents and short-term investments of $33.8 million. We had total debt outstanding of $1.4 million and total working capital of $35.9 million. With that, I'll turn it back to Dave for his final comments.

Thank you, Tom. In summary, 2005 was a pivotal year, positioning our company for sustained, long-term growth. Revenues grew 63% year-over-year. Significant strides were made in establishing the MIS procedure, with sales of MIS products growing to $6.4 million worldwide.

We launched our bipolar pen with a cardiac tissue indication. We raised $43 million of net proceeds through our IPO. We acquired our supply partner, Enable Medical, and we initiated our RESTORE-II clinical trial. With that, we'd now like to open the call to questions.

[OPERATOR INSTRUCTIONS] Our first question will come from the line of David Lewis with Thomas Weisel Partners.

Good morning, guys. A couple questions here. I want to, of course, focus here initially on just order patterns in light of these situations you discussed, David. If we just look at Cleveland Clinic in Cincinnati, you mentioned that training and implementation were suspended. What about existing use of the device in both centers?

At the Cleveland Clinic they continue to use our product. The University of Cincinnati has been set back a little bit. They still have access to our product. Unfortunately, Dr. Wolf had emergency back surgery and will be out for almost two months.

Given how important Dr. Wolf was in terms of total procedure volume, I'm trying to ascertain how much of the first quarter guidance is really simply linked to Dr. Wolf or University of Cincinnati more broadly because, at one point, I think he was 10 to 15%, if not 20% of historical procedures.

There is some connection there, David, but we've gotten beyond Dr. Wolf. As we pointed out, we perform procedures in 55 centers. There will be some impact. Dr. Wolf still remains our highest volume MIS customer. However, again, we do have a broad base of 55 centers performing the procedure. We just performed procedures in three centers outside the U.S., so we're confident that we can overcome Dr. Wolf in terms of his impact to our overall number of procedures.

Okay. So, in terms of the issues we're seeing, just in the short-term in the first quarter, what percent would you say are linked to sort of a more national effect and what are linked to just Cleveland and Cincinnati proper?

Well, one of the issues is that Dr. Wolf and his program, both from a seminar's perspective as well as from a proctoring point of view, really helped us to expand into new centers. And with a small base, expansion into new centers and new stocking orders still remains to be a significant percentage of revenue.

What has really slowed is our ability to basically facilitate progress in new centers. Also centers that have performed one or two cases sometimes continue to need additional support in terms of proctoring. And Dr. Wolf and his colleague Bill Schneeberger performed about 75 to 80% of our proctoring. So, we are realigning ourselves and working with other centers that can perform both training seminars as well as proctoring.

Great. I'm sorry to belabor the point. So, in the [concominate] market, obviously you are the market leader. Any evidence that competitors have used this information to try to take some share back from you in the concominate market outside of the areas you talked about?

Whether or not the competition has exploited these issues, I have no comment.

Okay. But in terms of weakness in the concominate market on a more national basis, have you seen any weakness there? Is that also part of the issue or is this principally novel training around MIS?

Well, we believe that the bulk of our concominate users are committed to our products. We have new products that we plan to release in the April/May timeframe that leverage off the technology platform for the endoscopic platform that will also help facilitate progress in the open concominate markets. In general, we believe that our concominate install base is still committed to AtriCure products.

Okay. And Dave, we talked a lot this morning about epicardial use of atrial fibrillation. There has obviously been a lot more competitive chatter about endocardial solutions, specifically imaging modalities, either in the first quarter and heading into the back half of the year. Any impact that that sort of competitive chatter is having on your sales or do you think, at this point, it is totally related to the articles you mentioned?

We're talking about endovascular approaches?

Yes.

It's interesting, David. Initially we thought we would be competing more directly with endovascular approaches, but I think that even centers that perform AF ablation, moderately so, see a place for both the catheter as well as surgery. For example, we have performed a high percentage of procedures on patients that have failed catheter ablation. So, I think the issue is that the more ablation that is performed for AF treatment, the greater we expect our products to perform.

Okay. And then lastly -- I'll jump back in line -- on the validation results from Cincinnati, and maybe I missed this, David, but when do you expect that validation to be complete?

We plan to begin the process of the independent review with the University of Cincinnati during next month, during next month, during the month of March. It is not clear to us at this point in time. I would rather come back to you later on in terms of when we would anticipate the validation process to be completed.

Okay. Thank you very much.

Thank you, David.

Our next question will come from the line of Pat Pace with UBS. Please proceed.

Good morning, guys. Just to follow-up on some of those questions. So, obviously with Dr. Wolf being laid up after his surgery, so Dr. Sshneeberger, at least on his regular cases, can still use the products right now?

Dr. Schneeberger has some relatively unusual circumstances at the University of Cincinnati right now. Dr. Schneeberger was also involved in terms of the disclosure issue and he is undergoing discussions with the University of Cincinnati and he is currently not operating.

Okay. So, fair to say there are almost no cases there ore -- except for regular cases at Cleveland Clinic. Those are pretty much the only ones being done at those two centers.

That is correct, Pat.

Okay. And in terms of training, it seemed like the majority of the demands at the training courses came -- were directed at the University of Cincinnati. How long will it be before you guys get really ramped up in terms of developing some other training centers? I know you have the one in Oklahoma as well, right?

Right, and the Medical City of Dallas, which is a major center. And actually the Medical City of Dallas, Michael Mack is a very well-known cardiac surgeon. So is his colleague, Jimmy Edgerton, and they are actually going to be the principal investigators moving forward on our RESTORE-II clinical trial with Dr. Jackman. So, they have lots of capability for training.

We have also done training in other centers across the country, in Oregon, California. So, we have been developing a base of training centers over the past 12 months to get to a more regional level and really grow beyond just the University of Cincinnati. So, we are fairly confident that we can accelerate these plans.

Okay. And then just to switch over to open procedures, the overall demand -- should we still expect around 20%, 20% plus growth in your open-procedure growth for the full year? I know you are not giving guidance, but it seems like most of this effect is more on the minimally invasive training side.

Well, last year, as Tom pointed out, we grew 23% year-over-year. We are coming out with new products. This endoscopic platform being leveraged for the open concominate procedure. We are very enthusiastic about that. We also talked about the clip procedure and the Cosgrove Gillinov clip being released in the third quarter. We think that will facilitate and stimulate progress in open, although at this point we are not giving guidance.

Okay. And then Tom, just some expense questions. It looks like gross margins, if you pull out that chart, were closer to 78%. Is that a fair number to assume, going forward?

Again, Pat, we are not giving guidance right now.

Okay. So, I can't ask about your general budget considerations for R&D and SG&A either?

Well, okay, we'll give you a little color here. We believe that, in the long term, you should expect margins to be in the mid to upper 70 range.

Okay. And I wouldn't expect your R&D budget to change that much given all these extracurricular issues. Is it fair to say that R&D would be up about 50% from '05 levels?

We are not giving specific guidance on R&D or on operating expenses at this point.

Okay. Fair enough. And then just in terms of first quarter hospital penetration, if you guys were at 55 hospitals, is that going to be relatively flat by the end of '06 or should we expect a marginal increase -- I mean the end of first quarter, sorry?

There will be -- Pat, I tell you what, we are really sort of looking under the hood right now in terms of the number of centers, in terms of growth in new centers. We want to make sure that we do this carefully and we want to make sure that we have proctors in place. And we don't want to push the system to the point where we put patients at risk. So, I would rather not comment on the number of new centers in the first quarter yet. We are still sort of gathering ourselves in terms of putting additional proctors in place.

Okay. So, it feels like we are kind of in a holding pattern for a couple of months. All right. Thanks, guys.

[OPERATOR INSTRUCTIONS] Our next question will come from the line of Jim Nelson with Piper Jaffray. Please proceed.

It's Tim Nelson. Could we dissect Q4 a little bit? The 800 MIS procedures you said had been performed, was that through current time or was that by the end of the year?

That was a to-date number.

To date. What was the number by the end of the year and how much did it grow in Q4?

We actually are not giving guidance and giving numbers in terms of procedures quarter-over-quarter. We have not been giving those numbers, Tim.

Okay. Well, could you give us some flavor for how many of those procedures were at the University of Cincinnati?

Anticipate about -- of the 800 procedures that we talked about, about 125 of those procedures came from the University of Cincinnati.

Okay. So, not as bad as I thought. Then, in the open chest, as we look to reduce our Q1 revenue projections here, I would assume, given all we have just talked about, that almost all of the reductions should come in the MIS arena versus the open chest procedure.

We anticipate the bulk of it coming from MIS. So far we seem to be holding ground on the open. I will tell you that we will be challenged from a competitive point of view. There was leverage -- a bi-directional leverage. The advanced endoscopic and platform and minimally invasive procedures certainly helped in terms of facilitating growth on the open.

So, we are looking for a more competitive first quarter, but we also have new products in the second quarter that we are releasing, and we are encouraged by the endoscopic platform and being able to leverage that in the open procedures. We think that is going to have a significant impact in the second quarter.

I saw all those products at the SCS. I was pretty impressed with them. Can you comment on how you are going to price them and, particularly on the open side? What will it do to ASPs assuming they are accepted?

We believe that currently our endoscopic ablation platform, we're pricing a single product at 4200, is where we think we will come in with actually a list price of closer to 4900. So, on the open side, we actually want to see how those products are received in the minimally invasive before we commit ourselves to an open price point.

Okay. So, the single product at 4200, is that -- at some point you are going to have a rotatable one that will allow you to replace -- use one product instead of two on the MIS side.

The universal product is under development. However, one of the things that we have discovered, Tim, is that the new Isolator endoscopic platform, it's possible that centers may use a single device for both sides. Now coming in at, let's say 4200, with the dissection tool, the average selling price for the dissection tool is $1700.

The other factor that we have not really included -- we have kept it separate because it is difficult to track -- is our bipolar pen. But currently we believe our bipolar pen is being used on about 50% of our minimally invasive procedures and we are putting a switch box out to market to really facilitate the concept of toggling back and forth between high frequency stimulation and ablation, as well as just general pacing and sensing capabilities.

So, we believe that the pen is going to become a standard over the course of the next several months for use during our minimally invasive procedures. Our average selling price for the pen is about $1700.

So, that would say that you don't really expect on a per procedure basis ASPs to decline.

We are very confident that we can hold our $7,000 revenue per procedure in the MIS and we believe that there may be some upside in the short term.

And I assume it would be the same thing given on the open side if this endoscopic platform is accepted?

There may be some open upside in terms of ASP, that's correct. And we have actually done very well, Tim, over the last year. We continue to see increases on our own LHP2 and LHP4, the regular Isolator and the Isolator long. We continue to see price increases in the open. So, we do believe that there is some upside on leveraging the endoscopic platform to develop an open derivative.

And what is your projected clip pricing point?

Well, the clip is a situation, Tim, where we are going to launch the clip on a fairly limited basis and do trials with the clip in the open segment of our business. So, in the third quarter, assuming that we are on schedule and release the product, we will have a small group that will actually do some clinical investigational work, even though the product is approved, looking at the clip in the open environment.

So, we will test it, validate it and also study it in the open. And then we will release the product really for commercial sale, more on the minimally invasive side. We want to set the price point for the minimally invasive procedure first before we back into the open market.

The minimally invasive segment of our business will allow us to price it at a more premium product. We view it as a technology that is a fully implantable system, much like a valve ring and we think we can get a premium price. But it behooves us to basically release it first in the minimally invasive market and then back into the open market once we set our price points for MIS.

Okay, good. Just a couple more questions here. On the customer and demand side, particularly for the MIS procedures, how have the customers reacted to the unavailability of Dr. Wolf and Dr. Schneeberger from a training perspective? I know they were in high demand and everybody wanted them. Is your backlog of people wanting to be trained building or are they going to wait for those two guys to come back online or do you think most of them will accept alternatives?

It is difficult to say. We do have a backlog of people waiting to be trained, and certainly Dr. Wolf and Dr. Schneeberger were very highly thought of and two of our best proctors, but we do have people like Jimmy Edgerton, Michael Mack, Marvin Peyton, [David Duke]. We have a lot of other physicians who have done some proctoring. One of the challenges we face is that Wolf and Schneeberger had a lot of protected time.

It is difficult sometimes to organize around other physicians' schedules that have less protected time. But we believe we have a good stable of experienced proctors that are capable of doing the job. It is a logistics issues and we are just starting to get into it and understand it.

And then finally, on the expense side, at what point -- you guys have ramped up expenses recently to pursue some new clinicals and new product development, et cetera, et cetera, man your sales and marketing organization. If this issue continues, at what point do you start thinking about reversing some of those investments?

I think at this stage in the process we are still in a discovery mode. I think we want to move in inches. We believe very strongly in our long-term business model and we have got a great pipeline of products. We have got important clinical programs and a very strong world class sales organization.

We are going to be very focused on maintaining those initiatives and maintaining the high caliber of people that we have in the organization because we are committed and believe so strongly in our long-term opportunity. So, we want to evaluate it, move in inches, understanding that we may have some cash issues. But right now, again, we are still in a discovery mode.

So, at least as far as Q1 guidance goes, there are no changes to projected expense levels given the reduction in expected revenue?

Tim, we have not given any guidance there.

All right. I'll get back -- I guess I won't get back to you. I'm done. Thanks.

Our next question is a follow-up from David Lewis with Thomas Weisel Partners.

Thanks guys. Just three quick ones here. First of all, on market share in the concominate, it is your best data that right now you are still holding at 50%, but obviously that could shift here in the next two months?

Our best sense is that our market share has not changed.

Okay, perfect. And then I know you can't give guidance, but I wonder, can you update us on the number of sales people and, given this short-term disruption, are you forecasting an increase in sales, the same number of sales people, any reason to believe there is some sort of broader sales restructuring that could come post this particular disruption?

No. What we tried to do, David is, once we were aware that the Company was going to be able to raise the proceeds for the initial public offering was to begin to really go out and hire a world class sales organization. We think that that organization is required to compete against the major medical device companies.

We have got 25 world class regional sales managers in place. We intend to retain those people. We do not think that the downside is going to create a really significant challenges in doing so, but it is important, based on our belief in the long-term model, that we continue to retain the best possible people in sales. So, that is an important initiative.

Great. So, you will spend to the issue, and obviously we would agree with that strategy. On the endoscopic front, just kind of walk me through how you are positioning this endoscopic launch, which obviously begins today in the midst of this sort of short-term disruption. Was there any kind of thought of pushing out the endoscopic launch or was this kind of an interesting opportunity to go back to your customers with an improvement in the system?

We think we need to press on. Again, we have other proctors. We have other training centers. And we have a world class clinical applications team, one thing that we have not talked a lot about, but we have got a group of eight people that are PAs, nurses, engineers, that work as clinical applications to support the proctoring and support the training and support the clinical studies.

This group is very competent, and they will be taking, along with the sales representatives, these new endoscopic products to market. And we think it is important for us to respond aggressively in the market with new products.

Great. That's very helpful, thank you.

And our final question will come from the line of Bob Koshgarian with Kairos Partners.

Hi, Dave. A couple of quick questions. Could you just quickly run through, how many proctoring sites do you have right now in addition to the University of Cincinnati?

We have about 10 centers -- 10 physicians, I should say, that do proctoring.

Okay. And that is roughly 10 centers or- -?

Well, it's basically 10 proctors.

Okay.

Ten physicians that can do proctors, that can do proctoring programs for us and go out and support physicians with their initial cases.

Okay. And that is in addition to any physicians or proctors at the University of Cincinnati.

Correct.

And also at the Cleveland Clinic? Excluding those two, it is still 10?

Correct. The Cleveland Clinic really has never gotten involved with proctoring. Their training programs were more focused on the open concominate procedure because of the abundance of mitral valve surgery they do. They have never really embraced the training side from a minimally invasive perspective.

Okay. Could you also -- your 25 patient study that you're doing, that you are 17 patients through on, how many centers is that across in addition to the Cleveland Clinic -- I'm sorry, UC and Cleveland Clinic?

Actually it is 3 centers. There were 4 centers that treated patients. There were 5 centers that we started off with. As we talked about, the Cleveland Clinic withdraw their IRB submission, we are left with basically 3 centers that are actively enrolling. The University of Cincinnati actually treated 5 patients, but as we discussed, they put the study on hold. They are just following their patients longitudinally. So, we have basically 3 centers that will complete the enrollment from 17 to 25 patients.

Okay. So, if I can just understand, you started with 5, Cleveland Clinic went out. The University of Cincinnati is the fourth one and that went out, but they had done 5 of the 17 patients already?

Correct.

And that leaves 3 others besides UC and Cleveland Clinic actively enrolling.

Correct. I want to make it clear, Bob, that Cleveland Clinic actually never enrolled patients. They never actually got IRB approval. They withdrew the IRB approval.

Okay. So, out of the 17, UC did 5. The 3 other centers who are continuing to be active did the other 12 and they will also complete the balance of the 8.

Correct. We also sent out an IRB package to another major center to replace the Cleveland Clinic. It is possible that they may get their IRB submissions in time to make a contribution to the population of 25 patients.

Okay. Dave, with the University of Cincinnati, can you just help me understand a little bit, what does it mean to have somebody do an independent review? Does that mean physicians at the University of Cincinnati just kind of review outcomes, data and procedure logs and things like that or does it somehow go outside the institution? Just help me understand what that means.

Well, there are actually two phases. That is a really, really good question. There are two phases of that. One actually is some controls that the University of Cincinnati put in place to have a clinical trialist that actually works at the University of Cincinnati and another cardiac surgeon to basically monitor, review and validate the existing data.

The second phase of that is actually -- what we want to do is go back and look at the original 27 patients that were treated and the original manuscript that was published in November of 2004. This is the initiative that we are taking on with the University of Cincinnati where an independent clinical research organization comes in and basically follows those 27 patients a year, year and a half later so that we can report on the same 27 patients.

The original study said that there was a 90% efficacy rate and what we want to understand clearly is what the efficacy rate is a year, year and a half later. And we think that is going to be a very important publication and also help to adjudicate any of these issues that have been raised.

Okay. In terms of the, both the proctoring and the feasibility study, just from your experience in the medical device industry over a number of years, is it kind of high, medium or low risk that the challenges you are facing at UC and Cleveland Clinic kind of spread to your other proctoring or feasibility sites even though there is no question at those other sites? Do they kind of tend to put things on hold, waiting for things to unfold at the principal site or anything like that?

I think what is fairly clear to us at this stage, Bob, is that the centers that have treated, for example, 5 to 10 or more patients, they are very confident in the results and the procedures. We could get a little wait and see from people that have done one or two procedures and we will need to work through that process because of the buzz in the industry. But as other centers begin to publish data, we build more confidence and we get more proctors and other training programs up and running, we think that that is a short-term situation.

Okay. But on your feasibility study, in general, those other three sites have done three, four kind of procedures. You don't have any indications at this point that they are expressing reservations about continuing?

No. In fact, I think the other three sites are extremely committed. It is interesting that Sonny Jackman, who many of you know may be the world's most popular, famous and accomplished electrophysiologist, he came into this as one of the principal investigators of the overall study, and he told us up front that he wanted to look at the feasibility data, get a sense of the investigators and the process before he would commit to being one of the PIs of the overall pivotal study. And he is actually more enthusiastic than ever. He has committed to be, again, one of the PIs on the pivotal study.

Another key center, the Medical City of Dallas with Michael Mack and Jimmy Edgerton, they have agreed to be the other co-investigators or other PI for the overall trial. So, we have a surgeon PI and we have an electrophysiology PI for the overall study. I can tell you that the centers, again, that have done a number of these procedures are highly committed to the treatment, feel very strong about the procedure and the results. We are very confident that we have people in line that can pick up the pace from a proctoring point of view.

The biggest challenge we have, again, was that Randy and Bill had significant protected time, so it is challenging for us, sometimes, from a scheduling perspective.

Okay. Just one last question, if I may. Just going back to the independent review that will be done at the UC. You said that an independent organization will kind of pick up and review the long-term results that the first 27 patients had. It seems like that is a little bit of apples and oranges, right? Because the results they might have one or one and a half years out from the study are not really the original end points you were after, right?

Well, no, I think they are. I think what we want to know, as a company, and we want to make a contribution to this disease state and we want to know if the treatment works. So, the first 27 patients were treated. The follow-up data in the first publication was at six months. So, now we will get a chance to really look at that data and see how well the treatment worked over a longer period of time.

Okay. Thank you very much. That is very helpful.

Ladies and gentlemen, this does conclude AtriCure's presentation. Thank you all for joining us, and you all may disconnect and have a wonderful day.