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Operator
Good day ladies and gentlemen and welcome to the second quarter 2006 AtriCure Inc. earnings conference call.
My name is Amanda and I'll be your coordinator for today.
[OPERATOR INTRUCTIONS]
I'd now like to turn the call over to Mr. Nick Laudico from the Ruth Group.
Please precede, sir.
Nick Laudico - Investor Relations
Thanks, operator.
Joining us on the call today are Dave Drachman, President and Chief Executive Officer;
Tom Etergino, Vice President and Chief Financial Officer.
By now you should have received a copy of the earnings press release.
If you've not received a copy, please call Zack Kubow at 646-536-7020 and he'll fax or e-mail you a copy.
Before we begin let me remind you that the Company's remarks today may include forward-looking statements.
These statements include but are not limited to those 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 subject to numerous risks and uncertainties, many of which are beyond AtriCure's control including, but not limited to, 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 results may differ materially from those projected on today's call.
And AtriCure undertakes no obligation to publicly update any forward- looking statements, whether as a result of new information, future events or otherwise.
I would also like to remind everyone on the call today that the Food and Drug Administration has not cleared or approved the Company's Isolator Bipolar Ablation clamps or its ablation sensing unit for the ablation of cardiac tissue or the treatment of atrial fibrillation.
The Company and others acting on its behalf may not promote any of its products for the surgical treatment of AF or train doctors to use the product for the surgical treatment of AF.
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 current cleared uses and not on the ablation of cardiac tissue or the treatment of AF.
AtriCure educates and trains doctors in the proper use of its products and related technologies and does not educate or train doctors to use any of its products for the surgical treatment of AF or to use its Isolator Bipolar Ablation clamps or its ablation sensing unit to ablate cardiac tissue.
The FDA has cleared AtriCure's Isolator Transpolar 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 Isolator Transpolar Pen device for that use.
With that I would like to turn the call over to AtriCure's President and Chief Executive Officer, Dave Drachman.
Dave Drachman - President and CEO
Thanks, Nick and thank you everyone for joining us on our second quarter 2006 conference call.
We are extremely pleased with our financial and operational results during the quarter.
I want to commend our entire management team, who have provided the leadership and direction for advancing our strategic initiatives across all operational functions.
Before reviewing the achievement of several key operational milestones, let me briefly summarize our financial results.
Second quarter revenues were $9.6 million, a 12% sequential increase exceeding the high end of our guidance.
Domestic minimally invasive revenues were strong at $2.7 million, a 21% sequential increase and a 65% year-over-year increase.
As the number of university sponsored educational programs is expanded, this has led to increased adoption of our minimally invasive platform.
Physicians in 65 domestic medical centers performed minimally invasive procedures during the quarter.
This is a 41% increase sequentially and an 18% increase versus our previous high.
International sales were also strong at $1.3 million for the quarter or 13% of consolidated sales.
AtriCure Europe BV also penetrated its targeted European markets with our minimally invasive products during the quarter with procedures being performed in Germany, the United Kingdom, Italy, the Netherlands, and Sweden.
Additionally, our world-class style team continues to apply skill, resolve, and passion.
This has been a primary reason that our business is gaining momentum.
Our focus for the remainder of 2006 is to build on this momentum to reach our full-year financial and strategic goals.
Now for an update concerning our product pipeline, the second quarter was the first full quarter of commercial release of our minimally invasive Isolator endoscopic ablation system.
The release of our endoscopic system stimulated minimally invasive growth during the quarter.
The system's features has resulted in increased ease of use, decreased procedure times, and enabled physicians to perform fully thorough scopic procedures in several major medical centers.
We continue to receive favorable reports from the field about abbreviated minimally invasive procedure times.
In certain centers, procedures are being performed in less than 2 hours.
We believe the continued acceptance and further development of this minimally invasive platform will be a significant catalyst for long-term growth.
Turning to our recent product launches, the new Isolator Transpolar open clamp and the multifunctional Isolator Transpolar Pen system.
In July we launched our new Isolator Transpolar open clamp.
This new clamp leverages the design benefits of our endoscopic platform.
The new low profile stealth design allows surgeons superior access to key anatomical structures while enhancing the ablation mechanics and device ergonomics.
The new open clamp also isolates more tissue, which is an important clinical benefit.
During the first quarter of 2007 we plan to release another new open clamp that incorporates a new and innovative ablation method that we expect will drive further adoption of our open products.
Additionally, we recently announced a 510(k) clearance of our new multifunctional Isolator Transpolar Pen system.
The new system is the first product cleared for cardiac tissue ablation as well as temporary pacing, sensing, stimulation, and the evaluation of cardiac arrhythmias.
The expanded capability of our multifunctional Pen allows surgeons to identify potential triggers on the heart that may cause atrial fibrillation using high frequency stimulation.
Using the same device, the surgeon simply toggles to the ablation mode and ablates the targeted area.
When the pen is in the pacing and sensing mode, the system is used to confirm electrical isolation of cardiac tissues.
Additionally, we have plans to evaluate this system and derivatives of the system for expanding our leasing set during minimally invasive procedures in order to enhance the results of our procedure for the more permanent patients.
We believe that the catalyst for minimally invasive growth are validation of superior results in the parasysmal and persistent patient population, the expansion of our lesion set for the more permanent patients, and the implementation of our left atrial appendage exclusion device.
Considering that catheter therapies are generally not used to treat permanent patients, offering a solution for these patients is expected to rapidly expand the market for our minimally invasive products.
The multifunctional capability of our Pen system is expected to make important clinical contributions and expand procedure revenues in both the open and minimally invasive markets.
We believe that our new Isolator Transpolar open clamp combined with the launch of our multifunctional Isolator Transpolar Pen system, as well as the integration of the new ablation method, will fuel continued procedure growth and lead to market share gains in the first half of 2007.
Turning now to our appendage exclusion system and HIFU probe.
There is a manuscript describing our appendage exclusion system published in the August edition of the Journal of Thoracic and Cardiovascular Surgery.
This prestigious journal serves as the main academic journal for the Society of Thoracic Surgery.
This manuscript describes a chronic, pre-clinical evaluation of our appendage system.
The conclusion of the investigators was that our appendage system enabled rapid, reliable, and safe exclusion of the left atrial appendage.
Based on encouraging results from several pre-clinical studies, we're planning the first human cases outside the United States during the fourth quarter.
And plan to submit our 510(k) by year-end.
We currently estimate the commercial release in the United States during the second quarter of 2007.
We believe that our pioneering left atrial appendage exclusion platform has the potential to contribute significantly to patient outcomes and become a franchise business within our Company.
In terms of HIFU, we plan to initiate chronic animal studies using our HIFU probe in the first quarter of 2007.
We anticipate that the HIFU probe will expand our ablation capabilities and strengthen our product offering.
Now for a brief progress update on RESTORE SR-II and other important clinical development initiatives, we are pleased to report that all 25 patients have been enrolled and treated in our RESTORE SR-II feasibility study.
The clinical investigators are encouraged with the initial results.
And we are considering filing an extension for additional patient enrollment to include an expanded lesion set.
We expect announcing the initial results from these 25 patients during the first quarter of 2007.
As we have previously stated, our vision for AtriCure is to develop the epicardial frontier.
Meaning advancing our technologies from an epicardial open [cancomonent] procedure to an epicardial minimally invasive procedure and then finally offering epicardial treatments, which can be performed by electrophysiologists in the EP lab.
To assist us with our vision, we are at the initial phase of developing a program to perform pioneering research in this area.
If successful, we plan to provide new approaches and products for electrophysiologists to treat arrhythmia disorders and diseases in the EP lab.
Now for a brief update on the Ohio state-funded Atrial Fibrillation Innovation Center.
We have signed the final grant documents and anticipate initiating research activities this year.
We are participating initiatives like this in supporting pioneering research activities because we are committed to staying at the forefront of innovation to enhance, expand, and facilitate treatments for atrial fibrillation.
Now, before I turn the call over to our CFO Tom Etergino, I would like to address Tom's recent resignation.
Tom has been instrumental in building a strong staff and effective accounting and financial reporting systems.
I would like to thank Tom for his many contributions and his friendship.
In terms of Tom's replacement, we have retained a search firm to fill the CFO position with a world-class financial executive.
Now I will turn the call over to Tom.
Tom Etergino - VP and CFO
Thanks, Dave.
I would like to thank the AtriCure family for the privilege of being the Company's Chief Financial Officer.
I would like to comment on my resignation.
This decision was based on my family's desire to move back to the East Coast.
This was a difficult, personal decision due to my strong belief in AtriCure's business model and my competence in the management team.
Now, I would like to review the second quarter revenue results.
Our second quarter 2006 consolidated revenue was $9.6 million, an increase of 24.8% over second quarter 2005 and a sequential increase of 11.7% over first quarter 2006.
The corresponding revenue contribution for the second quarter 2006 was $5.6 million or approximately 59% of total revenue from domestic open procedures and $2.7 million or approximately 28% of total revenue for domestic minimally invasive procedures.
International revenue for the second quarter was $1.3 million or approximately 13% of total revenue.
Let me point out that revenue from our Isolator Bipolar Pen, which is used in both open and minimally invasive procedures, is allocated between minimally invasive and open revenue based on our best estimates of the Pen's actual usage.
Now I would like to update you on some key performance indicators.
The average domestic selling price for our open clamps was relatively stable quarter-over-quarter at $2,463.
Our quarter-over-quarter average selling price for our minimally invasive kit, which currently includes 2 clamps and a dissection tool, was constant at $7.398.
The ASP for our Pen decreased approximately 4% due to second quarter Pen promotions.
Minimally invasive sole therapy procedures were performed in 65 U.S. medical centers during the second quarter 2006 compared to 46 medical centers in the first quarter of 2006 and 55 in the fourth quarter of 2005.
Now for an update on gross margin trends, gross profit for the second quarter 2006 was $7.9 million with a gross margin of 81.5% compared to second quarter 2005 gross margins of 74.4% and to first quarter 2006 gross margin of 81.5%.
The year-over-year increase is primarily attributable to our third quarter 2005 acquisition of Enable, the manufacture of our disposal hand pieces, as well as the launch of our Isolator Bipolar Pen in the third quarter 2005, which typically commands a higher gross margin.
Next, an update on operating expenses and EPS, research and development expenses were $2.9 million for the second quarter of 2006 compared with $2 million for the second quarter 2005 and $2.9 million for the first quarter of 2006.
The year-over-year increase was attributable mainly to the expansion of product development initiatives and clinical trials.
Selling, general, and administrative expenses were $8.5 million for the second quarter 2006 compared with $5.1 million for the second quarter 2005 and $7.5 million for the first quarter 2006.
Selling, general, and administrative expenses increased year-over-year primarily due to increase in headcount and higher general corporate expenditures as a result of us being a public company.
The sequential increase to SG&A expenses was primarily attributable to increased selling related expenses and higher general corporate expenditures including expenses associated with Sarbanes-Oxley compliance initiatives.
The net loss for the quarter was $3.2 million or $0.26 per share.
This includes the after tax impact of approximately $300,000 or $0.02 per share of non-cash stock-based compensation related to FASB 123R.
In terms of the balance sheet, at June 30, 2006 cash, cash equivalents, and investments were $26.8 million.
We had total debt outstanding of $1.2 million and total working capital of $28.3 million.
Now turning to third quarter and full-year 2006 guidance.
For the third quarter 2006 we expect revenue to be in the range of $8 to $8.6 million.
We are reconfirming our full-year revenue guidance between $36 and $38 million.
And full-year net loss per share of between $1.30 and $1.50 of which we estimate $0.08 to $0.10 will be a result of non-cash compensation charges.
With that, I'll turn it back to Dave for his final comments.
Dave Drachman - President and CEO
Well at this point we'd like to open the call up for questions.
Operator
Thank you, sir.
[OPERATOR INSTRUCTIONS]
Your first call comes from the line of Tim Nelson of Piper Jaffray.
Please proceed.
Tim Nelson - Analyst
Good morning, Dave, morning, Tom.
65 accounts on the MIS, could you give us a little color on how many of those were newly trained during the second quarter?
Dave Drachman - President and CEO
About 20 of those accounts were newly trained during the second quarter.
Tim Nelson - Analyst
The full increment were new accounts?
So you didn't have any accounts from 4 to 6 active counts last quarter go inactive?
Dave Drachman - President and CEO
Actually, Tim, the activity of these accounts is fairly well managed.
The accounts have been active for the most part we've seen activity in the started up.
We've been very careful to target the appropriate accounts.
If you remember our philosophy is to send in a surgical specialist who understands the capabilities of the surgeon from a minimally invasive perspective and then to also send in a market development specialist who understands the landscape of the referral development.
The combination of those 2 individuals and that strategy has led us to very calculated targeting and increased penetration over time.
Tim Nelson - Analyst
Great.
Well that's super progress.
And how about proctors?
Can you tell us how you're coming in terms of active proctors?
Dave Drachman - President and CEO
Tim, that's also a very good question.
We talk about education and the scalability of our business.
Currently we have university programs and approximately 15 proctors.
Our goal is we talk about in the past is to exceed 100 procedures being performed across different accounts within a quarter by year-end.
If you look at 15 proctors at university seminars for the remainder of the year, we could get the appropriate training.
Anything above that would be difficult to manage.
So once again we feel very comfortable with our capacity in terms of education throughout the remainder of the year.
Tim Nelson - Analyst
Great.
And how many training center sessions did you hold in Q2?
And maybe you could give us a little color of how many you're planning for Q3?
Dave Drachman - President and CEO
Well typically we hold in terms of university seminars, we typically hold 1 to 2 seminars per month.
Tim Nelson - Analyst
Okay, great.
And that trend was consistent for last quarter and you expect it to be the same for this coming quarter?
Dave Drachman - President and CEO
We have 4 very solid training programs on board.
They're available on a monthly basis.
And it's really a matter of getting them filled with the right targets.
It's not a matter of capacity.
Tim Nelson - Analyst
Okay, great.
The, one of the big issues has been the RESTORE II pivotal trial.
Can you give us any color on the plans for that protocol and when it might be finalized?
Dave Drachman - President and CEO
Well the pivotal trial and the feasibility trial, the Company has developed the upside.
And the upside of the business is that we've used our to make more of a set of adhesions, hoping it mimics more of a classic procedure for a minimally invasive approach.
That's actually happened sooner in the development stage than we originally anticipated.
We've done over 10 full sided lab amaze light procedures that we've make the roofline and the mitral valve line in over 10 patients.
And that's gone extremely well.
In terms of spatial relationships, which are more favorable than we anticipated, as well as visualization and the ability to safely remove the lesion to the mitral valve analyst.
We're evaluating that lesions or some right sided lesions.
In our current process is because we've been more able to rapidly accelerate to an expanded lesion set is to expand our feasibility to include that expanded lesion.
We can permanently change our pivotal trial.
Including permanent patients in a pivotal trial will not only increase enrollment, but may actually impact the clinical trial design.
We think the FDA may be more likely to allow us to run a single arm study to patients who have more permanent AF patients who have failed several drugs.
Tim Nelson - Analyst
And those 10 patients that you've done so far were permanent AF patients?
Dave Drachman - President and CEO
They were a combination of persistent and permanent AF patients.
They've been done over the past 60 days.
We're evaluating the results as well as evaluating whether or not our current Pen technology is actually the right technology to make these lesions.
Once we have a better understanding of whether or not this generation Pen is the right technology or not and how well these patients respond, we can make a decision on our pivotal plans for 2.
If the Pen is not consistently making full thickness lesions, we already have several technologies, which are derivative technologies of the Pen that we believe will resolve that issue.
Tim Nelson - Analyst
Great.
So all the expanded lesions right now are being done with the Pen versus the clamp, is that right?
Dave Drachman - President and CEO
That's correct, the minimally invasive procedures.
Tim Nelson - Analyst
Right.
Very interesting.
That would be a great coup if you got a non-randomized trial approved.
Turn to P&L a little bit, can you tell us how to think about gross margins as we go forward?
I know that somewhere in '07 you're planning to introduce a clamp that may allow the minimally invasive procedure to be done with one clamp versus 2.
Can you talk about the impact that that may have on gross margins and how should we think about that going forward given the strong performance of the last 2 quarters?
Dave Drachman - President and CEO
First of all, Tim, the clamp technology that's going to be the next generation perform is more of a mid-year 2007 thing.
Some people have used this generation to perform the one clamp procedure but it hasn't been widely adopted.
In general, sticking with the 76 to 79% range on margins, because of the amount of new product development we have over the next 6 months to a year.
So we want to maintain that guidance between 76 and 79 for now.
Tim Nelson - Analyst
And that assumes a stable average selling price across both procedures?
Dave Drachman - President and CEO
Correct.
Tim Nelson - Analyst
Okay.
And then finally you made some comments on your strong OUS performance.
But if you could either expand a little bit on that.
And then is there any stocking going on there?
Is there any, how should we think about the ability to sustain this level of sales on a go forward basis?
Dave Drachman - President and CEO
Well if you remember during the fourth quarter call we talked about the European BV being one of our strategy and having a stronger presence in Europe.
And really the for the increase in international sales it's the best that we've had in Europe.
Overall we would anticipate the remainder of the year that international sales as a percentage of consolidated sales will remain between 10 and 13%.
Tim Nelson - Analyst
Great.
All right.
That's all I have.
I'll get back in queue.
Thanks.
Dave Drachman - President and CEO
Thank you, Tim.
Operator
Your next question comes from the line of Steve Ogilvie of ThinkEquity.
Please precede, sir.
Steve Ogilvie - Analyst
Thanks.
Maybe just explain the seasonality in next quarter.
It seems like your guidance is allowing for a seemingly very low quarter compared to last year, the difference.
Dave Drachman - President and CEO
A good point, Steve, and thanks for the question.
In terms of seasonality there are several different aspects that we like to sort of review.
First is the concept that the minimally invasive sales has grown significantly as a percentage of consolidated sales.
For example over the past year it's grown from 20 to 30%.
Because atrial fibrillation is not acute disease, which is life threatening it's a highly elective procedure.
And because the number of highly elective procedures is a larger number of our total procedure volume, seasonality we believe has a bigger impact at this point.
The other issues are just geographic.
For example, if you look at Florida, Florida has been a stronghold for the Company.
Florida is generally slowed between July and Labor Day.
Europe as we just discussed has become a bigger part of our international presence.
And Europe generally slows between July and Labor Day.
The other issue is that with new innovative procedures it requires a specialized team to be in place to perform these procedures.
That's more challenging to do during the summer months.
And generally speaking your educational programs slow during the summer months.
So some, these are some of the reasons that we would anticipate a more pronounced seasonality effect during the third quarter this year.
Steve Ogilvie - Analyst
And then the other question I had, if you could just talk about the RESTORE II.
I mean you're making some important decisions about how you line up the trial and trying to get a single arm trial.
What's your basic timeframe for when those decisions will be made?
Dave Drachman - President and CEO
I would think we would have a very good sense of technology in the expanded lesion set by the end of the year.
What we don't want to do is rush into a decision.
As you know, nobody's been able to execute a pivotal trial for atrial fibrillation with the exception of Cardema, which got the panel and got unanimously disapproved.
So we think it's worth a little bit more time.
And the concept of permanent atrial fibrillation treatment as a minimally invasive treatment not only has important clinical trial implications, but it has important market development implications because the electrophysiologist normally have AF patients.
So for those 2 reasons we want to take a closer look at this expanded lesion set and make sure that we get it right so we get the best possible clinical results.
And then if we can got back to FDA with a solution that we're confident that can treat permanent atrial fibrillation patients, then the reality is that the FDA will have to make a decision.
Because patients that have permanent AF have generally failed several drugs and have no other option.
It would make much less sense to have to randomize that patient population.
Steve Ogilvie - Analyst
Okay, and then the, thank you.
Finally you answered this before but you're kind of breaking up.
Your goal of a, did you say you had a goal of 100 minimal accounts by the end of the year?
Is that what I understood?
Dave Drachman - President and CEO
Correct.
Steve Ogilvie - Analyst
Okay.
Great.
That's all for me.
Thanks.
Operator
Your next question comes from the line of [Cari Hall] of Thomas Weisel.
Please proceed.
Cari Hall - Analyst
Hi, guys.
Dave Drachman - President and CEO
Hey, Cari.
Cari Hall - Analyst
I was wondering if you might be able to comment on the competitive landscape in the open market?
And when you expect to see some material share gains?
Dave Drachman - President and CEO
Good question.
We really haven't seen anyone surface in terms of being a stronger competitor in the open market.
I think the critical issue in the open market, first of all is about 30% penetrated.
So there may be some slowing in terms of the year-over-year growth.
The second issue is it's just gotten more crowded.
There are more companies and more products.
The other issue is that over the past several years or past 18 months to 2 years AtriCure has really focused on designs and developments to advance our minimally invasive product offering.
We're currently now leveraging those designs and developments.
For example we just released our new Transpolar open clamp.
And with its expanded capabilities we'll have more of a presence in the open market.
And we're developing this new ablation method, which we plan to release in the first quarter on an open platform.
Additionally the clip will have an impact in the open market.
So if you look at the new ablation clamp platform, the new ablation science that will be added to that, the ability to sell a multifunctional Pen in the open marketplace, and you take a clip and add that, those are the products that we believe will fuel growth and take back market share points during 2007 in the open market.
Cari Hall - Analyst
Great and then just one last question.
You mentioned I believe that you expect to launch a HIFU product in the first quarter of '07.
How do you see that your strategy with energy source is evolving?
Do you plan on using HIFU technology more often?
Or do you expect to stay with RF energy?
Dave Drachman - President and CEO
Just as a clarification, what we said was the HIFU product would go into chronic animal studies in the first quarter of 2007, which means that we'll have a fair amount of confidence in our design.
We got in to HIFU in a large part because we wanted to have a backup technology for making full thickness lesions on beating hearts so that we could expand the lesion set in minimally invasive procedures to offer a solution for permanent patients.
How the HIFU technology actually plays out is not crystal clear in terms of a minimally invasive procedure at this point because our radio frequency technologies have made more progress than we originally anticipated.
And we have other designs and developments for radio frequency, which are derivatives of the Pen, which we think will also be very suitable for making connecting lesions during minimally invasive treatments in order to treat more permanent AF patients.
So the HIFU probe is really a back pocket technology for us right now, which will be complimentary.
And our strategy with that will evolve over time.
Cari Hall - Analyst
Okay, thank you.
Dave Drachman - President and CEO
You're welcome.
Operator
Your next question comes from the line of Larry Haimovitch of HMTC.
Larry Haimovitch - Analyst
Good morning everyone.
Dave Drachman - President and CEO
Hey, Larry.
Larry Haimovitch - Analyst
Very solid quarter, Dave.
Congratulations.
Dave Drachman - President and CEO
Thank you very much.
Larry Haimovitch - Analyst
On the minimally invasive side, you reported $2.7 million in revenue.
I think Tom said the ASPs were just about $7,400.
That comes up to about 365 cases in the quarter if my math at this early hour is accurate.
Does that sound about right?
Dave Drachman - President and CEO
It does sound right.
Larry Haimovitch - Analyst
Okay.
So that means you're probably tracking about I don't know, 1,400, 1,500 minimally invasive procedures for the year, give or take.
Is that kind of in the ballpark?
Dave Drachman - President and CEO
Probably in the ballpark.
Larry Haimovitch - Analyst
Okay.
So I just, I know I want to talk about the open market a little bit.
But on the minimally invasive side, I'm curious.
You haven't talked much about market share, at least not that I recall on conference calls.
I'm guessing that you guys have two-thirds, three-quarters of the market.
Are you comfortable talking about that on the call in terms of kind of what market share you currently have in terms of minimally invasive?
Dave Drachman - President and CEO
I wouldn't say that we have a really strong understanding of market share because we don't see other companies out there with any significant presence.
Certainly Guidant day affects and sold some cases, but we haven't seen a tremendous amount of traction.
We've converted several of their customers.
St. Jude really hasn't to date really surfaced as a real competitor in minimally invasive.
So in terms of market share there's really not a company that we feel like is a trailing company to AtriCure right now with any significant share.
Larry Haimovitch - Analyst
Right, so what you're saying is your share could be even maybe higher than I was speculating.
Dave Drachman - President and CEO
Could be.
Larry Haimovitch - Analyst
Yes.
Now talk a little bit more about overseas, David, the training and the progress overseas.
You talked on the call a little bit about how you're doing over there, could you expand on that little bit overseas?
Dave Drachman - President and CEO
Sure.
We put a European BV together and actually hired a managing director who's got a tremendous background in sales and marketing throughout Europe.
We have 11 stocking distributors and we've performed minimally invasive cases in 6 different countries.
And actually have developed one training center in Spain.
We've been a little cautious about our ability to grow our minimally invasive business in Europe because of reimbursement issues.
We've been pleasantly surprised actually at some of the penetration that we've been able to gain in Europe in a relatively short period of time.
And Europe actually currently is the fastest growth area on the international front.
So we're fairly optimistic that we can continue to grow the European market.
We're very pleased with our managing director.
And we've able to really assemble a strong group of stocking distributors.
Larry Haimovitch - Analyst
Good.
And then on reimbursement, you touched on that just now and it was a question I was going to ask you.
And that is it looks to me like the proposal for DRG 108 for the coming year is pretty positive for the atrial fibrillation stand-alone cases.
Was that your impression, too that there was minimal cut in the number?
Dave Drachman - President and CEO
Yes, I'm not sure that there was a cut in the number.
I didn't see DRG 108 specifically.
I did see DRG 104 and 105, which we use for our cancomonent procedures when they're done in the setting of a valve operation.
And they actually increased by 2 or 3%.
My interpretation was that CNS was friendly to surgery in general.
Larry Haimovitch - Analyst
Yes.
And then finally on the open market, can you talk?
There was a question about the competitive landscape.
I'm curious who you view as the top competitor?
I would assume it's Medtronic.
And how you view the overall competitive landscape in open.
And specifically are you maintaining or increasing share there?
Dave Drachman - President and CEO
Certainly I think Medtronic is the, our number 1 competitor.
I think that we fairly well stabilized our market share.
We still would estimate a 40% market share.
We talked about 40 to 45.
I believe our market share has settled in at about 40%.
I do believe that these 2 new products are stabilizing our market share, the open clamp that we just released and the new multifunctional capabilities of the Pen.
We believe that the new ablation method on the new platform for open will be a first step in terms of regaining some market share points.
And then when we come out with a clip, we'll have a new open platform with a new ablation science.
We'll have a multifunctional Pen, and we'll have a clip.
And we think that that product offering is going to be very competitive in the open and likely take back share points.
Larry Haimovitch - Analyst
Is the open market growing much, Dave, in terms of overall procedures?
Not so much for you, but just the market in general.
What's your feeling on that?
Dave Drachman - President and CEO
I think the market is slowed.
I wouldn't want to give you an estimate right now.
We're trying to come up with a good calculation.
We talked about 20 to 25% year-over-year growth.
I think that was very consistent for 2004 and 2005.
I don't think that the market is growing at a 20% growth rate right now.
We do believe that the progress that we make with minimally invasive, as minimally invasive literature gets published especially in the cardiology journals that that will stimulate some progress and additional growth on the open as well.
Larry Haimovitch - Analyst
Thanks, Dave.
Dave Drachman - President and CEO
Thank you, Larry.
Operator
Your next question comes from the line of Bob Koshgarian of Kairos Partners.
Please proceed.
Bob Koshgarian - Analyst
Hey, guys very nice quarter.
Dave Drachman - President and CEO
Hey, Bob.
Thank you very much.
Bob Koshgarian - Analyst
A few detailed questions if I can then on to some general ones.
And I'll apologize in advance.
I don't know if it was my phone or the first caller's but a lot of that cut in and out quite significantly.
I'm sorry if I missed it.
Can you say what Pen revenues for the quarter and how that broke down in open heart versus minimally invasive?
Dave Drachman - President and CEO
Well, Bob, we haven't really broken out Pen sales specifically.
But what we do is we take our best estimates in Pen, which are basically that Pen sales are 45%.
We break them out into open and then 55% into minimally invasive.
Bob Koshgarian - Analyst
Minimally invasive, okay.
And any top line number for what the Pen sales were or no?
Dave Drachman - President and CEO
Pen sales were $900,000 for the quarter.
Bob Koshgarian - Analyst
Okay.
And just the Pen ASP you said was down 4%.
Did you mean sequentially or did you give an ASP number for the Pens for the quarter?
Dave Drachman - President and CEO
Sequential.
Bob Koshgarian - Analyst
Sequential.
So could you give a number or no?
Dave Drachman - President and CEO
Yes, we'll give you the number.
Tom's looking for it, but it was just under $1,700.
Tom Etergino - VP and CFO
$1,650.
Dave Drachman - President and CEO
$1,650.
Bob Koshgarian - Analyst
Okay, terrific.
Thank you.
And it's useful to have the ASP information.
So thank you for giving it.
Dave, I heard what you said about kind of margins long term.
I'm just wondering kind of for the balance of this year you've had a couple of strong quarters up above 80%.
You still expect for this year that margins would kind of settle down in the 76 to 79%, which is what was talked about in the last call?
Dave Drachman - President and CEO
We want to look at it very carefully, Bob.
Currently our thinking is that we just released our endoscopic platform.
We just released this multifunctional Pen.
We just released our open platform.
And we had some new products coming like clips and additional ablation products, which again as new products enter the market we think that they'll have an unfavorable impact on gross margins.
So we still want to maintain our guidance between 76 and 79%.
We'll continue to look at it and update it over the next several quarters.
Bob Koshgarian - Analyst
Okay.
Dave, you mentioned expanding the feasibility study.
Could you give a sense of how much so?
I mean would you do another 25 patients or less or more?
What do you have in mind there?
Dave Drachman - President and CEO
I think we'd be inclined to do 50 in additional patients.
The issue is that we've already, the current feasibility trial includes patients.
So what we'd really be testing from a safety perspective is the additional lesion sets within the clinical trial.
And customers have already adopted these additional lesion sets, as I said.
In one center they've done about 10 procedures over the past 2 months successfully.
And the big upside there just to reiterate is really that the visualization, spatial relationships, and the use of the Pen is simpler than what we anticipated through minimally invasive incisions.
Also come up with a very innovative and clever way to take the mitral valve lesion, which has always been the most challenging aspect of the extended lesion set.
So we're actually very confident that we can do this.
And if the Pen performs well and if we can compete with this reliably Transpolar, then we'll have a solution that we can move forward more quickly.
If not, we have some derivatives and technologies of the Pen that are developing as we speak.
And we can move very rapidly with those derivatives to make more full thickness lesions.
But we'll look at that very carefully over the next couple of months.
We continue to be believe that permanent AF treatments are a rapid opportunity for us to expand the minimally invasive platform because electrophysiologists do not generally perform those procedures.
The patients don't have good alternatives.
And we also believe that from a clinical trial design, a permanent AF solution would make it very difficult for the Agency to want to randomize because these patients would have had to fail several drugs and have no other alternative.
And the reason why no other company has come up with a permanent trial design, the catheter companies just can't treat permanent atrial fibrillation.
The results aren't good enough for them to offer that trial up for the FDA.
Bob Koshgarian - Analyst
Okay.
Is this whole shift towards permanent something you're kind of in the throws of deciding right now?
You feel pretty confident that's a, that's kind of a good mild strategic shift to make and go towards the permanent population?
Dave Drachman - President and CEO
Well first of all I don't want to underestimate what we believe will be the published results for the parasysmals and persistents.
We believe very strongly that we have the best treatment for atrial fibrillation for parasysmal and persistent patients.
And if I had a family member, I would have no decision.
I would clearly send them for a minimally invasive AtriCure procedure for the treatment of parasysmal or persistent atrial fibrillation.
The current procedure was not designed to treat the more permanent AF patients.
We've always known that we've had to expand the lesion set.
The issue is that we thought it was going to be more complicated.
It seems to be less complicated in part again because visualization and spatial relationships are more favorable than we thought in working behind the heart.
And we've come up actually through [Sonny Jackman's] guidance we've come up with a very clever way to make the mitral valve lesion, which has always been the most challenging lesion in the extended lesion set.
Bob Koshgarian - Analyst
Okay.
Again, I apologize if I missed it through the thing cutting in and out.
Did you say that you were considering entering into the more mainstream EP lab procedures as you move forward looking past '06?
Could you elaborate on that a bit?
Dave Drachman - President and CEO
Well, Bob, as we may have talked about in the past, we've always talked about division of the epicardial frontier.
In other words, epicardial treatments for arrhythmia disorders and diseases, the advantage of the epicardial frontier is that you have more favorable spatial relationships, better access to key anatomical structures, superior visualization, and with clamping technologies you have better control over the key anatomy.
In the arrhythmia treatment, anatomy is destiny.
And the interpericardial, epicardial approach actually offers you superior anatomical treatments.
So from AtriCure's perspective, we've always had a vision of moving from cancomonent epicardial to minimally invasive epicardial.
And then the final frontier for us is actually developing percutaneous interpericardial solutions to certain arrhythmia disorders that electrophysiologists could perform in the EP lab.
And we are just beginning to pioneer some of that research.
And if successful, we think that will have a big impact on our business and the treatment of atrial fibrillation.
Bob Koshgarian - Analyst
Okay.
So it's percutaneous interpericardial.
Dave Drachman - President and CEO
Correct.
Bob Koshgarian - Analyst
Okay, I get it, just a couple more quickly.
How's the sales force doing following the announcement of Tom's resignation?
And through the difficulties you had in the first quarter you very successfully kept everybody on board.
Is that still the case?
Dave Drachman - President and CEO
We did lose 1 salesperson during the quarter.
I can tell you that sales management is pleased with the replacement.
The sales organization I think is very enthusiastic, very passionate.
We really believe that that's one of the major assets of the Company.
And fundamentally that asset has not changed.
Bob Koshgarian - Analyst
Okay.
Seems like very normal kind of turnover.
Okay, I think that's it for now.
I'll get back in queue.
Thank you.
Dave Drachman - President and CEO
Okay, thank you Bob.
Operator
[OPERATOR INSTRUCTIONS]
There are no more questions at this time.
I'd like to turn the call back over to management.
Please proceed.
Dave Drachman - President and CEO
We'd just like to thank everybody for their confidence and support.
And we look forward to reporting back to you on the third quarter results.
Thank you very much.
Operator
This concludes today's presentation.
You may now disconnect.