AtriCure Inc (ATRC) 2006 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the fourth-quarter 2006 AtriCure, Inc. earnings conference call. My name is Melanie, and I will be your coordinator for today.

At this time, all participants are in a listen-only mode. We will conduct a question-and-answer session at the end of this conference. (OPERATOR INSTRUCTIONS) As a reminder, this call is being recorded.

I was now like to turn the call over to Mr. Nick Laudico from The Ruth Group. Go ahead, sir.

Thanks, Operator. Joining us on the call today will be Dave Drachman, President and Chief Executive Officer of AtriCure, and Julie Piton, Vice President of Finance and Administration 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 Kubom at 646-536-7020, and he will 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 risk and uncertainties described from time to time in AtriCure's SEC filings.

AtriCure's 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 and Sensing Units for the ablation of cardiac tissue or for 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 products 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 that are current, cleared uses; and, except for the Isolator bipolar pen, not on the ablation of cardiac tissue or, in the case of any product, for 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 and Sensing Unit to ablate cardiac tissue.

The FDA has cleared AtriCure's Isolator bipolar 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 bipolar pen device for that use.

AtriCure has provided research grants to institutions for the purposes of conducting certain studies referred to on this call. All of the primary authors of the papers referred to on this call are consultants to AtriCure.

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

Thanks, Nick, and thank you, everyone, for joining us on our fourth-quarter and full-year 2006 conference call.

Looking back at our first full year as a public company, we would like to thank our shareholders for their support, which is allowing AtriCure to make important clinical contributions while building a world-class medical device company.

Additionally, I would like to commend our management team and employees for their steadfast commitment to our core values of patient first, pursuit of innovation, commitment to excellence, and corporate integrity. Our employees have demonstrated an unwavering commitment toward our mission of expanding the treatment options for those patients who suffer from atrial fibrillation, to the advancement of innovative products, and customer education aimed at preserving and improving human life. As a result of our dedication to innovation and commitment to customer education, our Company is demonstrating promising growth trends, and is on course for long-term profitability.

During 2006, we further expanded our position as the leader in the surgical ablation markets. Since the release of our first-generation Isolator Bipolar Ablation System in 2003, surgeons have performed approximately 35,000 ablation procedures in more than 700 medical centers worldwide using AtriCure products.

Now, turning to revenue highlights from the fourth quarter, later in the call, Julie Piton, our newly appointed Chief Financial Officer, will review our financial results and key metrics in detail.

Based largely on the commitment, knowledge and passion of our world-class sales organization, fourth-quarter consolidated revenue of $10.6 million exceeded estimates and was a 24% year-over-year increase. Importantly, revenue from domestic open products of $6.3 million was a record-breaking performance and a 14% year-over-year increase. Based on a series of new product launches throughout the year, we believe the momentum and favorable trends in our open business will continue throughout 2007.

Fourth-quarter domestic minimally invasive revenue of $3.3 million was also a record-breaking performance. Minimally invasive procedures were successfully completed in 71 domestic medical centers during the quarter, compared to 64 in the previous quarter. This is an 11% increase over our previous high.

Based on a growing pipeline of evidence developing in the peer review literature, presentations at the major meetings from key opinion leaders, and targeted new product launches to support important procedure development activities, we believe our minimally invasive business will continue to demonstrate strong growth trends.

International revenue of 1 million was a 65% year-over-year increase. This growth largely resulted from the maturation and performance of our European subsidiary, as well as strong market presence in Japan.

In terms of continued growth in the international markets, we are entering 2007 with momentum fueled primarily by a series of new product launches and sales executive leadership.

Now turning to the growth initiatives that we expect will further stimulate our performance, beginning with our open business -- we recently released our open dissection tool and transfer system which leverages of the design of our minimally invasive dissection tool and transfer guide. Physicians are challenged in both open and minimally invasive procedures to mobilize pulmonary veins from the pericardial tissues in order to create space and a pathway for ablation systems.

We believe that our open dissection tool and transfer system will simplify procedures, as the minimally invasive dissection system has for our minimally invasive procedures. We anticipate that this result in further penetration into the open market, as well as increasing our average revenue per procedure.

In terms of the multifunctional pen, an important reason for the momentum in our open business is the increased adoption of our multifunctional pen. The use of our pen platform is in line with our commitment to improving patient outcomes by integrating electrophysiology methods with the advantages of open and minimally invasive procedures. We have a significant opportunity to sell our multifunctional pen along with our Isolator ablation clamps in the open market, creating pen penetration in the open market that approaches pen penetration that we have achieved in our minimally invasive market.

As a direct result of the technical leadership and passion for innovation of our product-development team, combined with the experience and commitment to excellence of our manufacturing team, along with the good, orderly direction from our quality team, we believe that we are introducing the most exciting new ablation technology since the original Isolator Bipolar Ablation System -- the new Isolator Synergy platform.

Importantly, on January 29th, we received FDA clearance for our new bipolar ablation technology, the Isolator Synergy platform. And we have successfully completed our initial human procedures. Based on the initial customer feedback, we continue to believe that the Isolator Synergy system is a pivotal advancement and will further enhance our position as the industry innovator and technology leader. The Isolator Synergy incorporates our new ergonomic open ablation platform recently released during the third quarter of 2006, with superior ablation technology.

This unique ablation technology provides more reliable full-thickness lesions in thicker and more diseased tissues. Currently, patients are more frequently being treated with stents and other products which can delay surgery. As a result, many patients who undergo elective open procedures have more advanced structural disease and present with thicker and more diseased tissues.

Furthermore, patients referred for minimally invasive procedures in some cases have hypertrophic tissues which are thicker and more challenging to ablate. Hypertrophic tissues are generally contraindicated for catheter ablation, due to the thickness of the tissues and the limitations of catheter technologies to make deep lesions. Because of the Isolator Synergy, we have another potential clinical indication where our products can make a unique contribution to the patients and customers we serve.

Another important advantage of the Isolator Synergy platform is that the new system creates a more effective ablation by enhancing the geometry of the lesion. Conventional bipolar ablation clamps form lesions that are shaped like an hourglass -- widest on the surface of the tissue and thinnest in the center of the tissue.

Unlike clamps, unidirectional ablation systems can create ablation lesions shaped like a "V" -- widest closest to the ablation element and thinnest furthest away from the ablation element, creating a potential weak point. We believe the Isolator bipolar ablation clamps are the most reliable ablation products in terms of safety and transmurality. However, there are ablations that challenge us in the growing population of patients with thicker and more diseased tissues.

The Isolator Synergy system crates a uniform, full-thickness ablation lesions shaped like a column, which we believe will result and more durable ablation lines. This is an important advancement, because it has been well-established that electrical impulse can propagate across narrow lesions, even if full thickness is achieved, due to the weak connection of conduction across the ablation line. We believe that the ablation column created by the Isolator Synergy system will produce superior technical endpoints resulting in improved long-term patient outcomes, because the reconnection of conduction is less likely to occur, and the system is expected to perform in a more reliable and durable manner in thicker and more diseased tissues. For these reasons, we believe the Isolator Synergy platform will further distinguish AtriCure as the innovator and market leader.

We believe that the Isolator Synergy platform is breakthrough technology, and will position AtriCure to gain market share during 2007.

Continuing with our open business, in terms of publications and presentations, we have plans to build on an already strong body of evidence which includes over 800 successfully treated patients reported by leading medical centers in the peer review literature. We expect that our clinical investigators will submit a manuscript reporting on approximately 40 patients with greater than one year follow-up from our open concomitant FDA-regulated clinical investigation focused on permanent AF patients.

Furthermore, we are pleased to announce that Dr. John Mehall, an up-and-coming arrhythmia surgeon from the University of Cincinnati, was the first author of a manuscript published in the January 2007 edition of the Annals of Thoracic Surgery, the primary journal for the Society of Thoracic Surgeons.

The manuscript reported on 41 patients undergoing minimally invasive procedures using both our endoscopic Isolator Bipolar Ablation System and our multifunctional pen. This manuscript reported the feasibility of identification of active ganglionic plexi and ablation of these ganglionic plexi using our multifunctional pen.

Additionally, an abstract authored by Dr. Nicholas Doll of the Leipzig Heart Center in Germany highlighted the successful use over multifunctional pen during open procedures for the identification and ablation of ganglionic plexi, and this information was recently presented at the German society of thoracic surgery.

In terms of the ganglionic plexi, this growing method of denervation through search-and-destroy techniques using our multifunctional pen, is in line with our FDA clinical trials, and represents a growing opportunity for our multifunctional pen to become more widely adopted in open procedures, as it has in minimally invasive procedures.

Moving forward with our 2007 product plans, we expect to submit our 510(k) in support of our clip platform in the second quarter of 2007, and anticipate clearance of our [clips] during the second half of 2007. This assumes that our 510(k) clearance will not require human data.

In terms of publications supporting a clip, a third chronic preclinical manuscript was published in the January 2007 edition of the Journal of Thoracic and Cardiovascular Surgery, highlighting the use of our clip to successfully exclude the left atrial appendage. The authors of this chronic animal study concluded that the appendage was safely and effectively excluded, and that due to the reduction in left atrial size by removing the appendage, there was some mid-term impact on left atrial reservoir. However, stroke volume, cardiac output, end-diastolic volume and injection fraction were unaffected. We believe that this initial data supports a building concept in the physician community that the left atrial appendage is the most lethal human attachment and should be excluded in a broad range of patients.

Additionally, we are planning our initial human implants of the clip in Zurich during the second quarter of this year to support a multicenter European clinical trial. We plan to use the data from this clinical trial to support the launch of the clip in the U.S., and to file for CE Mark approval. The clip is expected to provide significant new momentum across our business.

In summary, through the first three quarters of 2006, our open business grew at a rate of 4% year over year. Our fourth quarter growth accelerated to a 14% year-over-year increase. This growth was fueled by the release of our new Isolator open clamp and multifunctional pen during the third quarter of 2006.

Looking forward, we believe the first-quarter launch of our open dissection tool, the continued acceptance and expansion of our multifunctional pen, a second-quarter release of our Isolator Synergy platform, the anticipated release of our clip in the second half of the year, and unparalleled body of evidence in the peer review literature supporting the use of our open products, and the continued drive and determination of our world-class sales and marketing organization are the key catalysts that we expect will increase our open business trends in 2007.

Now, turning to our minimally invasive business, the growth catalysts include -- additional peer review publications and presentations at major meetings which we believe will further validate the successful use of our products for paroxysmal patients, as well as a new product launches which are aligned with procedure-development activities that are intended to facilitate minimally invasive maze-like procedures.

In terms of the current publications and presentations, on our last call we reported that the October 31st supplement to Circulation, the official journal of the American Heart Association, published a single-center abstract of 47 patients who underwent a minimally invasive procedure using our products. The overall success rate in this abstract was reported at 92.3%. This data was updated to include a total of 72 patients, and was presented at the American Heart Association meeting in November.

The presented results from the larger patient cohort were consistent with the published abstracts and superior in comparison to reports of catheter ablation. We are aware that the results from this single-center experience are being prepared for submission as a seminal manuscript to a major peer review cardiology journal. We are also aware of an abstract submitted to the Heart Rhythm Society which reports the results from a multicenter registry of 111 to 150 patients highlighting the use of our minimally invasive products. If published, we believe that this multicenter effort will confirm superior clinical outcomes with the use of our minimally invasive products.

Additionally, Drs. Ellenbogen, [Caulkins] and Jackman, all pioneering electrophysiologists, are participating in a clinical symposium at the Heart Rhythm society this coming May, sponsored by the Medical College of Virginia and supported by AtriCure. The theme of the symposium is "What electrophysiologists need to know about surgical ablation." Dr. James Edgerton has been invited to present an update on his minimally invasive single-center and multicenter registry results, along with initial results from a 30-patient pilot study evaluating the minimally invasive maze-like ablation procedures designed for the persistent and permanent patients.

Although patients from the 30-patient pilot study are still undergoing follow-up, the feasibility of this minimally invasive maze-like approach was presented at the American Heart Association meeting in November, and once again at the society of thoracic surgeons in January of this year. This initial pilot study demonstrates the feasibility of performing a minimally invasive maze-like ablation procedure using AtriCure products. This pioneering minimally invasive work will also be evaluated in our FDA-regulated Restore-II clinical trial which we will review later in the call.

Moving forward with our minimally invasive publications, the Annals of Thoracic Surgery has accepted a manuscript highlighting the use of our minimally invasive products to perform a fully thorascopic ablation procedure. The author of this publication is Dr. John Puskas, Associate Professor of Cardiothoracic Surgery at Emory University School of Medicine. We anticipate that this manuscript will be published during the second half of 2007.

Additionally in November of 2006, [Dr. Hughlin Jackman] submitted a 55-patient multicenter registry to the Journal of Cardiovascular Electrophysiologists, and we believe that they are currently in the process of addressing the first round of reviewer comments. If published, we believe that the reported results from this pioneering electrophysiologist will be consistent with previously reported results and play a role towards increasing acceptance of our minimally invasive products and procedures as a standard alternative.

Turning now to our 2007 product and procedure development plan, which is another key catalyst towards further stimulating minimally invasive growth -- for background purposes, paroxysmal events are spontaneously triggered episodes which spontaneously start and spontaneously terminate. Therefore, limited ablation which isolates the triggers can prevent the initiation of paroxysmal episodes. Because the disease is progressive, over time the chamber enlarges, and fibrillation often becomes a continuous, permanent condition.

In permanent patients, the mechanism is thought to change from isolated, triggered activity to the coexistence of multiple circuits or rotors. The ability for these multiple rotors to coexist is dependent upon the mass of the chamber. This is commonly referred to as the critical mass hypothesis.

Therefore, in order to provide an adequate alternative for the permanent patients, it's often necessary to compartmentalize the chamber, thereby limiting the available mass which enables multiple rotors to coexist -- hence, the maze.

Now, for an update on our new, expanded lesion set ablation platform and integrated mapping system, as well as our new endoscopic Isolator Synergy platform.

The expanded lesion set ablation platform and integrated mapping system is expected to facilitate the minimally invasive maze-like ablation procedure designed for persistent and permanent patients, as well as the subset of those patients who fail catheter ablation. The new expanded lesion set ablation platform will enable surgeons to more easily create the additional lines that replicate a maze-like procedure.

Our new custom integrated system and mapping system will enable physicians to more effectively confirm that the ablation lines being created are forming lines of conduction block. Additionally, together, the new integrated expanded lesion set platform and mapping systems will also simplify and facilitate the identification ablation of active ganglionic plexi. We expect to launch these two new platforms during the fourth quarter of this year. Additionally, we plan to fully release the endoscopic Isolator Synergy platform during the third quarter of this year.

In terms of the minimally invasive ablation opportunities for the persistent and permanent patients, it's important to review the key issues and strategic elements. First, the feasibility of an expanded minimally invasive ablation procedure using AtriCure products has been demonstrated.

Second, the use of our isolator Bipolar Ablation System has simplified the maze during open procedures. The reported results comparing the classic cut-and-sew maze to a similar procedure using our isolator Bipolar Ablation System have been shown to be equivalent in patients undergoing open procedures. Since patients undergoing open procedures generally present with more advanced structural disease and comorbidities, it is reasonable to expect that replicating the maze-like lesion set that has been shown to be effective in open procedures will also have high efficacy rates in minimally invasive sole-therapy procedures.

Third, the persistent and permanent patients account for almost half the diagnosed populations, and are often the most symptomatic patients and have the fewest options. Therefore, referrals are expected to rapidly increase because physicians and patients are seeking more promising alternatives. Additionally, it has been reported that catheter ablations can fail more than 30 to 40% of the time, providing a potential clinical indication for minimally invasive procedures.

Fourth, the ablation technologies and procedures we are developing to address the more persistent and permanent patients are well within our core competencies.

Lastly, the safe and effective exclusion of the left atrial appendage is an important clinical problem, especially for those patients who present with other risk factors, or patients who are resistant or intolerant to (indiscernible), and AtriCure has a solution.

In summarizing, our minimally invasive opportunity, we are the dominant leader in a growing market for minimally invasive procedures. There is a building body of peer-review literature and presentations at major meetings supporting the advantages of our minimally invasive products for paroxysmal patients.

Furthermore, we are releasing a series of new products during 2007 which are designed to provide promising options for the persistent and permanent patients as well as the subset of patients who have failed catheter ablation. We also believe there is a large and growing opportunity for the use of our clip.

Additionally, in terms of the market dynamics, the reimbursement landscape for minimally invasive procedures is attractive for hospitals and physicians. Furthermore, there is an excess of capacity for surgical ablation procedures, both in terms of surgeon time and available operating rooms, compared to catheter ablation, where the economics are inefficient -- reports of suboptimal patient outcomes, safety concerns, significant constraints in terms of physician time, as well as a limited number of adequately equipped labs for complex ablation procedures.

Lastly, in general, catheter ablation is not an option for the more persistent and permanent patients.

Now for an overview of our Restore-II feasibility study and recent meetings with the FDA aimed at obtaining a cardiac tissue clearance for our isolator Bipolar Ablation clamps.

Starting with Restore-II, as we previously reported, all 25 patients have been enrolled and treated in our minimally invasive FDA-regulated Restore-II clinical trial, and we currently have a mean follow-up on these patients of approximately one year. We're working with our investigators to submit the results for publication. We believe that the results from this study, along with the leadership of our clinical department, working with doctors Jackman, Ellenbogen, [Mack] and Edgerton will begin to set new standards for efficacy which are based on rigorous patient follow-up, including automatic continuous event monitoring to account for both symptomatic as well as asymptomatic events.

As previously mentioned, leading surgeons at the Medical Center of Dallas, with the support of Dr. Warren Jackman, have independently investigated a minimally invasive maze-like ablation procedure using our products. Based on these initial promising results, we plan to file an extension to our IDE to expand our Restore-II feasibility trial in order to treat an additional 25 patients with a maze-like ablation procedure using our new endoscopic Isolator Synergy system and our current multifunctional pen.

The submission is scheduled for the second quarter, and we anticipate starting enrollment in the second half of this year. We expect to supplement the IDE to include our new expanded ablation lesion set platform and integrated mapping system. During 2007, we plan to meet with FDA to discuss a single-arm pivotal study designed for permanent patients and minimally invasive sole-therapy procedures.

Now for an update on our efforts to obtain a cardiac tissue ablation indication for our Isolator bipolar clamps. As a direct result of our tenacious and strategic regulatory team, we entered into a well-planned series of discussions with FDA. The agency has indicated that it will reconsider our Isolator bipolar ablation clamps for receiving a cardiac tissue ablation indication. We are currently working with the agency to submit safety and effectiveness data from our FDA Restore clinical trials to support this 510(k) clearance.

We plan to submit data to FDA in support of a cardiac tissue indication during the first half of 2007. And we believe that the Company will receive 510(k) clearance during the second half of this year.

Now for an overview of the recent 2007 Society of Thoracic Surgeons meeting. The Society of Thoracic Surgeons Annual Meeting is the pivotal meeting for surgical ablation companies. As a direct result of our dedicated and talented marketing team, we believe that AtriCure was simply the talk of the town. Our sales and marketing organization received feedback from physicians that our new products, including the Isolator Synergy, were one of the major highlights of the meeting.

We began the meeting with a Northwestern Memorial Hospital symposium supported by AtriCure. This symposium, entitled "A View to a Cure" -- and it was attended by approximately 290 surgeons and was led by distinguished faculty including Drs. Patrick McCarthy, Ralph Damiano, James Edgerton, Marc Gillinov. And Dr. McCarthy chaired the symposium and presented a rationale for increasing penetration into the open concomitant market from approximately 30% to up to 80%, while Dr. Damiano presented a variety of different lesion sets emphasizing the use of our Bipolar Ablation System's.

Dr. Edgerton presented his minimally invasive results, highlighting the use of our product to successfully treat paroxysmal patients and progress towards this maze-like lesion set to more effectively treat [persistent] and permanent patients.

Dr. Gillinov presented persuasive evidence for excluding the left atrial appendage in a broad population of patients, highlighting his confidence in preclinical experience with the use of our clip products.

Following the widely attended Northwestern symposium, more than 140 physicians attended an AtriCure-sponsored program. The title of the program was "The Science of Synergy," and Drs. Roger Millar and Ralph Damiano presented a history of bipolar ablation technologies. Additionally, a former colleague of Dr. Damiano's and our very own Dr. Sydney Gaynor presented the new Isolator Synergy platform.

In another presentation, Dr. Ben Sherlock, a world-renowned researcher in the field of electrophysiology, presented to a standing-room-only audience. Dr. Sherlock reviewed the roles of the ganglionic plexi in initiating atrial fibrillation episodes. This procedure development strategy which we have been investigating and developing with leading researchers, includes partial denervation of the left atrium and is becoming part of a trend toward a more comprehensive approach to atrial fibrillation treatment. We are investigating and pioneering this method of denervation in our FDA-regulated clinical trial, Restore-II.

Furthermore, during the scientific sessions, Dr. Edgerton presented on 52 patients on whom our minimally invasive system was used, demonstrating an overall efficacy of 86.5%. Freedom from atrial fibrillation was 91.7% in paroxysmal patients using standard follow-up mechanisms.

During the same scientific session, a group of well-known surgeons presented minimally invasive results using the Boston Scientific microwave technology. These results were reported on 100 patients with an overall success rate of 42% at six to 12 months, based on standard follow-up mechanisms.

The conclusion of the authors was that the microwave technology studied does not produce reliable lines of conduction block. In terms of market share, this microwave system has been second to our products in the minimally invasive market.

Turning out to our international markets, we are entering 2007 with significant momentum in Europe. This is based on the maturation of our European subsidiary; our Isolator ablation clamp fourth-quarter CE Mark labeling approval, which includes atrial fibrillation; the release of our pen platform; and the leadership of our international sales executives. We anticipate this momentum will be fueled by the planned release of the Isolator Synergy products in the second quarter of this year.

We also expect continued performance in Asian markets based on the release of our current pen platform and endoscopic Isolator Bipolar Ablation System in Japan during the second half of this year. Additionally, we plan to release our endoscopic Isolator Bipolar System and current platform in China in the second quarter of this year.

Now for a reimbursement update beginning with hospital reimbursement. In 2007, hospital reimbursement for surgical ablation increased by approximately 1%. The surgical ICD-9 procedure code 3733 for a transthoracic or minimally invasive modified maze procedure, remains in DRG 108, with hospital reimbursement ranging from approximately 24 to $45,000 per procedure. The minimally invasive procedure remains one of the most profitable procedures performed in the cardiac suites.

In terms of physician reimbursement for minimally invasive procedures, on January 1st, several new CPT codes for physicians for minimally invasive sole-therapy surgical ablation procedures were published by the American Medical Association in the CPT coding book for 2007.

The one-size-fits-all maze CPT code was deleted, effective January 1st, 2007. In its place, surgeons now have a choice of five different codes for physician reimbursement to use for minimally invasive sole-therapy procedures. These codes better describe how they are surgically approaching sole-therapy ablation.

There are now two new endoscopic ablation codes, one for limited ablation and the other for extensive ablation. We believe that the minimally invasive procedures will be reimbursed between $1,400 and $2,000 per procedure, compared to the previous reimbursement of approximately $1,800. For reference purposes, surgeons are reimbursed approximately $1,800 to $2,200 per procedure for more extensive surgical procedures such as a valve operation or a bypass procedure.

Turning to physician reimbursement for open, concomitant procedures -- when the ablation is performed with open concomitant procedure, the surgeon will use CPT code number 33999, which is a miscellaneous code. The procedure for using miscellaneous codes is well-established and requires the surgeon performing the procedure to submit documentation describing the necessity for the ablation and to the extent of the ablation procedure, and to compare it to a listed code in terms of work units. We estimate that surgeons will be reimbursed between $400 and $900 per procedure, compared to the $900 per procedure in 2006.

In terms of impact, many specialties do use minimally invasive or miscellaneous codes successfully. And we expect that the ablation, which takes approximately 15 to 20 minutes, will account for approximately 20 to 30% of the total reimbursement for the entire open procedure. In general, we view this as a back office issue, and we are prepared to support customers in implementing these changes through a reimbursement hotline to help them become knowledgeable of these new coding changes and requirements.

In addition, we are aware that the Society for Thoracic Surgeons has already met with CMS this month to discuss the need for an independent code for open concomitant procedures during 2008, and we believe they will be successful.

In summary, we do not expect that these changes will have a noticeable impact on market trends.

Now, for an update regarding organizational developments. Steve Cambridge, our former Vice President of Sales, recently retired in order to fulfill a lifelong ambition of serving in the Peace Corps. Although Steve contemplated retiring at the end of 2005, based on his strong allegiance to AtriCure, he remained throughout 2006. This provided us adequate time to plan for Steve's replacement.

It's an important part of our philosophy and culture that our sales executive team is expert with the technology and highly involved in the customer development process. As such, we divided Steve's position into an eastern and western vice president of sales, and promoted two highly competent, committed and experienced sales executives who personify the AtriCure culture. We believe that this structure will allow our sales executives to balance their planning and administrative responsibilities with the field leadership required for us as an emerging growth medical device company to continue to build momentum in developing markets. We are confident that this decision is the most effective structure for this phase of the Company.

During 2008, we plan to promote or add a global vice president of sales to support the additional planning required of a significantly larger company. Additionally, we recently hired Julie Piton as Senior Financial Executive with a track record of proven financial expertise. Julie is already making important contributions to the Company, and we look forward to her leadership and financial stewardship.

Now, I would like to turn the call over to Julie for a detailed overview of our fourth-quarter and full-year financial results.

Thank you, Dave. Before turning to the financial review, I would like to express my excitement about becoming a part of such a growing and innovative company, as well as being part of the AtriCure team. I have already had the opportunity to meet some of you, and I look forward to meeting and working with our shareholders and analysts in the coming months.

Now for a review of our 2006 financials and key metrics. 2006 consolidated revenue was $38.2 million, a 24% increase over the prior year. Domestic open revenue was $23.1 million, representing growth of 7% over 2005.

Revenue from domestic minimally-invasive products was $11 million, a 66% increase over 2005. International revenue was $4.2 million, a 55% increase over 2005. Minimally-invasive revenue accounted for 32% of total domestic revenue, and international revenue accounted for 11% of consolidated revenue.

Now moving to fourth-quarter 2006 revenue. Our fourth quarter of 2006 consolidated revenue of $10.6 million was a 24% increase over the fourth quarter of 2005 and a 13% increase over the third quarter of 2006.

Revenue from domestic open procedures was $6.3 million, representing 14% growth over the fourth quarter of 2005 and 16% growth compared to the third quarter of 2006. Revenue from domestic minimally-invasive procedures was $3.3 million or 34% of domestic revenue, representing 38% growth over 2005's fourth quarter and 20% growth as compared to the third quarter of 2006. International revenue for the fourth quarter was $1 million or 9% of total revenue.

As a reminder, revenue from our pen, which is used in both open and minimally-invasive procedures, is allocated between open and minimally-invasive revenue based on our best estimate of the pen's actual usage. The average quarter-over-quarter domestic selling price for our open clamps and our minimally-invasive kit -- which to remind you includes two clamps and a dissection tool -- remained relatively consistent with the third quarter at $2486 and $7528, respectively. The average selling price for our pen decreased approximately 6% quarter over quarter from $1771 to $1670. This was primarily due to fourth-quarter sales promotions.

Moving to gross profit. Full-year 2006 gross profit was $30.6 million, representing a gross margin of 80.1% as compared to $22.9 million or 74.0% gross margin for 2005. The increase in gross margin year-over-year was primarily due to the acquisition of Enable Medical Corporation, the former supplier of our disposable products.

Gross profit for the fourth quarter of 2006 was $8.2 million, reflecting a gross margin of 77.8%, a 280-basis point improvement over 2005's fourth-quarter gross margin of 75%. This increase was primarily due to the acquisition of Enable.

Third-quarter 2006 gross margin was 79.8%. The 200-basis point decrease in the fourth quarter of 2006 as compared to the third quarter was primarily attributable to an inventory valuation adjustment of $0.2 million in the fourth quarter of 2006.

Next, an update on operating expenses and EPS. Research and development expenses in 2006 were $12.2 million, representing a 34% increase over 2005. This increase was primarily attributable to personnel costs to support our aggressive product-development plans. Selling, general and administrative expenses were $33.2 million, a 35% increase over 2005, due primarily to increases in headcount, selling and marketing activities, public company expenses, and employee stock-option expense associated with the adoption of FAS 123R at the beginning of 2006.

For the fourth quarter of 2006, research and development expenses were $3.2 million compared to $2.8 million for the fourth quarter of 2005 and $3.2 million for the third quarter of 2006. The year-over-year increase was attributable primarily to an increase in personnel-related expenses to support our aggressive new product development plans.

Selling, general and administrative expenses were $9.5 million for the fourth quarter of 2006 compared to $7.9 million for the fourth quarter of 2005 and $7.7 million for the third quarter of 2006. Selling, general and administrative expenses increased year-over-year, primarily due to increased headcount, selling and marketing activities, and employee stock-option expense. The sequential increase in selling, general and administrative expense was primarily due to increased selling expenses, driven by an increase in headcount and incremental incentive-based selling expenses associated with the achievement of certain performance goals.

The net loss for 2006 was $13.7 million, or $1.13 per share, as compared to a net loss of $12.7 million or $2.10 per share in 2005. The net loss for 2006 includes $1 million or $0.09 per share of non-cash, stock-based compensation expense.

The net loss for the fourth quarter of 2006 was $4.3 million or $0.35 per share, as compared with $4 million or $0.33 per share for the fourth quarter of 2005. The fourth quarter of 2006 includes $0.4 million or $0.04 per share of non-cash, stock-based compensation expense.

Moving to the balance sheet. We ended the year with cash, cash equivalents and investments of $19.5 million. We had total debt outstanding of $1.1 million, and total working capital of 23.2 million.

Now turning to 2007 guidance. For the full year 2007, we anticipate revenue to be in the range of 48 to $50 million. For the first quarter, we expect revenue to be in the range of 10.6 to $11.1 million. For full year 2007, we expect our net loss per share to be between $0.95 and $1.05.

At this point, I'd like to turn the call back to Dave.

Thank you, Julie, and welcome aboard.

Thank you, Dave.

In summary, we believe that our business is building momentum across all areas. First, in terms of products, we successfully launched three new product platforms during 2006, including the Isolator Bipolar Endoscopic Ablation platform, the new open Isolator Bipolar System, and the multifunctional Isolator Bipolar Pen system.

Additionally, we recently released our open dissection tool and have successfully completed our initial cases with our Isolator Synergy system. Furthermore, we have plans to launch our expanded lesion set ablation platform and integrated mapping system, along with our clip from the second half of this year.

In terms of publications, there is a robust pipeline of clinical papers and presentations which we believe will further validate the superiority of our open and minimally-invasive products.

In terms of procedure development, with the use of our products, investigators have developed a maze-like minimally-invasive procedure which we believe will become a standard alternative for persistent and permanent patients. And we are rapidly developing new ablation and mapping technology to support this emerging opportunity. We believe AtriCure is positioned to pioneer a paradigm shift in the management of symptomatic patients who have limited options.

In terms of regulatory process, we received clearance for our Isolator Synergy platform. We expect to receive clearance for our cardiac tissue indication later this year, and we are planning to initiate yet another arm of our RESTORE-II study to investigate a maze-like ablation procedure for persistent and permanent patients in an FDA-regulated clinical trial. Additionally, during the second half of this year, we are planning to file our 510-K for our clip and initiate our European multi-center clinical trial.

Lastly, because of the ongoing attention to detail and rigor and the leadership from our quality team and based on an extensive FDA audit, we have validation that our clinical studies, promotional practices, medical-device reporting procedures, design control processes and overall quality systems comply with FDA regulations.

At this point, Julie and I would like to open the line for questions. Thank you.

(OPERATOR INSTRUCTIONS). Tim Nelson, Piper Jaffray.

Guys, you certainly do have a lot going on. Just one technical point I missed on the financial piece of the quarter -- the pen revenue split between open and closed was what?

Look, traditionally what we've done is we've estimated from a bottoms-up perspective. On the open side, it was 57.25. And on minimally-invasive side, it was 42.25.

That's a percent?

Yes.

Okay.

But that was for the quarter. For an annual basis, Tim, it was 56.5 and 43.5.

Given all the new products you've got coming, how should we think about what happens to gross margin? And the sequential trend downward I assume is a one-time thing. But maybe with all the new products coming, it's -- help us think about how we should think about gross margins as we go through the year.

Well, I think that's a good setup, Tim. I think in terms of the pipeline of new products, if you look at the open dissection tool, the synergy -- what we didn't talk about is if there is a matrix router box, which is a new switch box system, the clip, the plumbing tools with the clip, mapping system.

We certainly have an aggressive pipeline of products, and our goal as a company is speed-to-market. We want to design the right products and speed-to-market. We believe getting the right products to market is clearly the most important part of our business model. The efficiencies over time, from an operations point of view, will be built into our gross margins.

So it could be that we have a slight shift downward. But we generally think that we've guided the Street in the range of 76 to 79, and that's the way that we should be looking at gross margins over time.

And is that improving throughout the year, or as you bring in new products with maybe lower volumes at first maybe decelerates throughout the year?

Again, once again, Tim, as you pointed out, the first quarter open dissection tool, second quarter synergy. There's multiple derivatives of the synergy including the endoscopic ablation platform for the synergy. There's the clip. There's multiple derivatives of a clip. There's new hardware in terms of this matrix routing system that cleans up the connectology from a switching perspective. And then, there's the expanded ablation lesion set, a new mapping system. These are all going-forward products.

But we feel fairly confident that we can maintain the range of 76 to 79. And considering the aggressive nature of the pipeline of products that we plan to launch in 2007, we think that's a respectable performance.

All of those new products, what are they going to do for pricing? You've got the -- from the get-go, you've got the dissection tool that you're bringing into the open procedure. Is that going to improve the price-per-procedure, and how should we think about pricing for both open and closed as we go on through the year?

Well, to answer that question in a broader way, any world-class sales organization has what we would refer to as a displacement strategy and a distribution strategy. So distribution we refer to as kitting or bundling and displacement is that we want to own as much shelf as we can and have physicians pull as many different products per procedure as is necessary.

So for example, when we're looking at selling the pen and the Isolator Synergy together but yet the open dissection tool will be on the shelf for people to also pull maybe for certain situational cases. Overall, I think that it's a little early to tell in terms of how much average selling price we can expect with the new products, and that's one of the reasons for the swing in the gross margin between 76 and 79.

I will tell you that we have been successful in the past in receiving incremental -- incremental average selling price increases, and we are trending toward increasing the number of procedures as well as increasing the number of products used in procedures. So for example, we talk a lot about our kit for minimally-invasive that -- a range of about $7500. But in fact, 80 to 90% of our minimally-invasive cases also use the pen which has an average selling price of over $1650. And once again, we think the pen is going to be highly adopted in the open cases, and we think that the open dissection tool over time will be used more frequently.

I'm hoping I'm getting at your question.

In a vague way. I was impressed with the number of new accounts that are doing the closed procedures this quarter and the increase there. What's your target for the number of new accounts you hope to have by the end of the year in your guidance? And do you have the proctor capacity to get you there?

We are actually not prepared to give guidance for the full year on the number of accounts. Right now what we're trying to really balance is traction versus going wide. As you know, it's really critical in any new developing market that we gain traction. And I think one of the things that the Company has done really well, we've gotten out and we've gotten to 70-plus centers in the U.S. And now, we are also leveraging those centers and building traction and building partnerships with EPs and developing referral patterns that are lasting referral patterns. I think it's important for the Company to move systematically in the marketplace and not to get too wide too fast and to continue to focus more on deep.

The other critical issue is that we have a very significant opportunity in the first half of the year in the open business. So we will divert more resources than we have in the past because of the open dissection tool and the synergy product, as well as this new switching system that we are launching in the first half of the year. There will be a slight shift in terms of hunting and opening up new accounts in the open, and a slight shift in terms of farming the current accounts and developing those accounts from an adoption perspective, to gain more traction in the minimally-invasive area.

Last question is on the balance sheet and your cash position. Do you think you have enough to get you through the year with again all the substantial new product activity, and requirements for inventory and all of that?

We have enough cash to get us through the year, Tim. We've burnt $14 million worth of cash, just under 14 million in 2006, and we are certainly leveraging the infrastructure that we've put in place in 2006.

If we all remember, when we did the IPO in August of 2005, the Company really had zero cash on its balance sheet and was working on a debt facility. We used 2006 to build the infrastructure, and we anticipate that operating expenses as a relationship to sales, that that relationship will improve as we get into 2007.

So we certainly have enough cash. The question is, at what point do you want to go out and potentially raise money? And how do the markets look in terms of the different dynamics in terms of rebuilding your capital structure for the long-term?

I'll get back in queue. Nice quarter.

Steve Ogilvie, ThinkEquity.

A question on your growth and you kind of hit at it. I was just wondering if you would be more specific on where you see the growth coming. Is it procedure-per-doctor? Is it putting more boxes into getting new open accounts? I mean, is there one specific place where you're going to see your incremental growth in '07?

I think certainly new products and new momentum driven by new products, is a big part of it. If I look at the open business, we're going to get out into new accounts, and we believe that we're going to take share based on a lot on the heels of this synergy technology which we have a lot of confidence is a real advancement in technology.

On the minimally-invasive side, we're going to really be monitored very carefully. We are not going to make -- we want to make the best possible decisions for building the traction in the market over the long-term. And that means that we don't want to get into a situation where we are devoting resources too rapidly to getting too wide.

Now, if you look at catheter ablation, in the course of the last 15 years, you and I know, Steve, that last year there were 25,000 catheter ablations performed in the United States. I think we both know that about 70% of those procedures were performed in less than 60 accounts. So, with our business model, we also don't want to rush as some people have in catheter ablation, startup accounts, be very inefficient, get complications and basically withdraw back to a small number of accounts.

We feel a deep responsibility to train and to get traction, and to build the market really from a traction perspective versus getting wide too fast and then retracting to a small number of accounts.

Then a couple of questions on expenses in '07. First, you talked about some higher-up hires in terms of the sales hierarchy. Are you planning to expand your sales force at all or is that kind of a set number?

And then second on R&D, I mean AF is a very complicated disease. There's an indefinite number of projects and studies and trials that a company could undergo. At what point do you scale back the R&D looking toward profitability, or do you keep striving to get the next hurdle in A-Fib? You know, how do you find that balance?

Well certainly from a sales perspective, we actually recently and consistently with our plan, we actually increased our sales organization by five heads in the fourth quarter. But I think you'll notice that our earnings per share were actually lower than what we projected, and that has a lot to do with the culture of the Company in terms of maintaining financial disciplines.

In SG&A and with sales organizations, it's always difficult to say that you're not going to add any new heads. But we don't have any significant expansion. We generally believe that the headcount, which is now 55 in the field, is adequate to achieve the guidance that we've given the Street.

We also generally believe that if you look at research and development and product development, we can't put any more products out in a year and make them really efficient. We're putting out the open dissection tool, the synergy, the endoscopic synergy, the clip, multiple versions of the clip, an expanded lesion set, a mapping system. I mean, these are all products in the pipeline in 2007.

So I think R&D -- generally speaking, I would look at it to be relatively flat and as a percentage of sales to improve fairly significantly as we ramp up sales fundamentally because there's only so much we can do on the R&D side.

Clinical studies -- also as a part of R&D, we already have two clinical trials opened. We're running a European clinical trial for our clip. There's not much more activity that we can take on. There may be some modest increases in headcount to support all these activities, but modest. So I would look at it as flat to slightly up, based on the amount of activities that we currently have in the Company.

Larry Haimovitch, HMTC.

Congratulations on a really terrific quarter and a really good year. Questions for you, just a couple of them. International is still quite small. Most medical device companies have much smaller international operations in domestic. But I'm wondering if there's any plans to ramp that up. Is it more your lack of putting effort into that business, or is it just that the markets are a lot tougher?

Well, it's a little bit of both. I think as a venture-backed company, looking at the history of the Company was only founded November of 2000. So as a venture-backed company, as you know, venture capitalists are often concerned about spending money outside the U.S. because there is a bigger impact for your dollar inside the US. So it wasn't really until we became a public company that we got serious about the international markets.

We are getting more serious about the international markets. And we just heard today in Europe that there's likely to be reimbursement increases for concomitant and sole-therapy procedures. We've made very good strides in Japan. And we've put one of our top executives here in the Company, who's working with a very strong director of international sales, who's hiring some additional European people.

So we are building the infrastructure in Europe. We received the approval in Europe for the arrhythmia treatment including atrial fibrillation. We've got a series of new product launches.

I would expect that international sales as a percentage of consolidated sales should modestly increase over the next several years, and there could be an upside depending upon how the reimbursement works out for minimally invasive.

Okay, and then next question, I would assume with the 14% gain in open and the strong gains in minimally invasive, that you've gained share in both categories in Q4. Would you comment on that, Dave?

We went from 5.6 to 6.3 million in the quarter. In terms of real share points, honestly, Larry, I'm not sure that we really move the ticker in any significant way in terms of market share. I think we're still on the low 40 range in terms of market share.

In terms of minimally invasive, we are just a very dominant player there, so it's also a little bit difficult to gauge. This Boston Scientific microwave is a far second. We seem to be taking business from them from what we can tell, and this STS was a very positive meeting based on -- I think was their biggest user, Crayton Pruitt, who presented on their 100 cases, 42% success and said at the meeting that they couldn't achieve full-thickness ablation in any reliable way with the technology.

We've been seeing an uptick from that. And I would assume that in the quarter if I had to just really try to answer your question, that we may have picked up a point or two but just a point or two on the open side, and on the minimally-invasive side that we probably did trend upward.

Matt Dolan, Roth Capital.

Just a couple questions here. On the guidance as we look at the open business, the growth rate obviously came up nicely in Q4 and as we look at these new product introductions into '07. Dave, could you help us characterize what you're expecting there and how that specific product line should grow the next year or so?

Well, without giving guidance on the open business, which we're not prepared to do, but just to look at it in terms of -- last year, really 4% through the first three quarters. As you pointed out, Matt, 14% in the fourth quarter and the series of new products and the concepts at the market is really only about 30% penetrated.

The way that I would characterize it is, we believe that AtriCure will return to emerging medical device growth trends in the open business in 2007. And that 2007 that we will dedicate more resources to achieving those growth trends, and that's going to be a bigger portion of our overall revenue than some people are anticipating. We also believe that minimally invasive is going to be very strong and continue to have strong growth trends there.

I do think there is a significant inflection point coming with minimally invasive, with the new products that we're going to release in the fourth quarter. So that's generally how we would sort of try to characterize the differences between the two segments of our business.

And then on the reimbursement front, you talked about the miscellaneous code. Can you give us any feedback there? Has that been at all either a distraction for sales reps or procedure volume? Any feedback you've gotten from clinicians there would be helpful.

We've gotten some feedback that's of mild concern. We have a hotline that we are supporting. And once we educate the physicians -- and it's not a broad concern but I think once we -- the physicians that have come to surface and ask questions and have been concerned about it, once they understand specifically what they have to do, which is very simply, in their notes, they just have to dictate the necessity, the clinical necessity of the ablation procedure, specifically what they did, what the ablation procedure included, and then they have to walk it over really to one of the minimally-invasive codes.

There are five minimally-invasive codes. And based on work units, they just walk it over to one of the minimally-invasive codes. And it's a secondary procedure to get to 50%. That's why we say, basically 500 to 900 -- it's because the minimally invasive as a sole therapy is anywhere from, let's say, 1400 to 2000. So, you generally get 50% for the secondary procedure.

Overall, we don't see this being a noticeable impact. You and I had this discussion fairly recently and I think you were right. It seems to be more of a back-office issue, and we seem to be able to handle it with our hotline and with our representatives in the field.

And I think I missed this, but ASP on the minimally-invasive procedure or revenue per procedure?

(multiple speakers) The kit was 75.26.

75.26, okay. And then one more -- on the synergy, we understand there's been a couple of early procedures. Do you have any anecdotal response from either handling characteristics or acute results out of those procedures?

We do. The feedback has really been outstanding. In fact today, we have a world-class product development vice president who called me today and said that we had a case with one of our naysayers, and they mapped and paste and looked all different -- used many different EP methods to try to see after the first ablation, if there was any unablated tissue. Fundamentally, it was very clean conduction block after one ablation in a tissue that had -- in tissues that were very fatty and very thick.

And that's been the case in the first seven -- we've got about seven or eight cases under our bill now. Each one has gone like that, and we are developing more and more confidence that the technology is really meeting the requirements and the vision that we had for it.

Kari Hall, Pacific Growth Equities.

Guys, congratulations on the quarter. Julie, welcome aboard!

You touched a little bit about how you were working to develop relationships with the electrophysiologists. Have you already started to see some referrals from EPs, in particular as it relates to permanent patients or those patients that have failed catheter ablation?

We are -- I think about 10% of the overall cases that we perform now are from failed catheter replacement procedures. You know, one of the really well-known electrophysiologists, Dr. Ken Ellenbogen, down at the Medical College of Virginia, Ken has been early in ablation. He has written many of the cardiac pacing books.

I spent time with him about two weeks ago. We had dinner. He told me that 20% of his patients now are being referred to surgery -- that he sees, he's referring 20% of his patients to surgery. I will tell you that still most of these cases are the paroxysmal patients.

The expanded maze-like procedure that we are developing is really a procedure development activity between the Medical City of Dallas and Sonny Jackman, a famous electrophysiologist, who's helping them with the mapping side of the procedure. And it's really not ready to be generalizable yet. We will systematically move into a clinical trial. We will expand in a very systematic and slow way because the current pen technology, it's not ideal for creating some of these connecting lesions. It can be done, but it's challenging and not ideal.

We're going to wait to fully commercialize this expanded lesion set until we have the newer second-generation technology that's specifically designed to make these connecting lesions, which will replicate the maze-like procedure through a minimally-invasive approach.

Then on the minimally-invasive side, I think you mentioned you had 71 active accounts. Are there accounts that purchased the device are really not up and running yet that you can comment on?

Well, the 71 accounts, that metric is basically based on -- within the quarter, there were 71 accounts that actually did procedures. So when we say active, we mean they did procedures within a quarter. That's our boundary for active.

But you're right. There are accounts out there that have purchased product that haven't started. And there's a cycle time. Generally speaking, we like to get a commitment for an order before they come to training, before we commit to cadaver labs and proctors. So there is a cycle time. And one of the areas in the Company that we're going to expand and reorganize is professional education. We're going to have a stronger focus on cycle times for training.

I think it was Tim Nelson that asked the question about capacity. We have capacity, but we have room to compress the cycle times, and that's what we will focus on on a going-forward basis.

And what's the current cycle time?

It varies, but it's generally about three months from the time the physician comes to his first training to the time you organize the whole process and have a credentialed proctor. Remember, the Company is trying to support credentialed proctors, which means the proctor has to [scrub] in on the procedure. And that requires getting local hospital and state licenses and things of that nature in place before we can do that.

We are committed to doing that. We think that's in the best interests of the patients and as well as in the best interest in building the markets in terms of gaining traction. Obviously, the worst thing that you can do from an ethical perspective is have a patient complication and also from a business perspective that sets us back considerably.

So again, we want to maintain controls. We are a little bit less -- getting into this at 75 accounts, and looking at a catheter ablation procedure that's generating 25,000 procedures in roughly 60 or 70 accounts, we believe that going deep and developing tertiary centers is really the first phase of the evolution. And if we try to revolutionize this too quickly that we're going to have to retract and we will have complications and other problems and potentially lose some credibility along the way.

Makes sense. And then did I hear you correctly that you think you can have cardiac arrhythmia indication by the second half of '07?

We believe that we will have it by the end of '07. We're going to submit our 510-K in the second quarter of this year, and we are optimistic that we're going to have the cardiac tissue indication by year-end.

We've had some very good discussions with FDA, and I have to give our Vice President of Regulatory a lot of credit. She was very tenacious and just very strategic about her approach, and we brought in many consultants. And also the FDA, I must give them credit as well. They were very collaborative in the process and reopened the discussions, and we had a conference call as recently as a week ago and had got some very clear direction.

So we feel like we've got a good command of what's required and that we can submit that in the second quarter with the thought process that we will receive the indication in the second half of the year.

That's great. And are there any other companies that have a cardiac arrhythmia indication currently?

Well, this is a cardiac tissue indication; it won't be cardiac arrhythmia.

Okay.

Cardiac tissue indication.

But any other companies with cardiac tissue?

No clamps. We would anticipate to be the first clamps. There are the uni-polar technologies and even our own bipolar pen. But there's no clamping technology. This is the big change, is that the FDA was really fixed in their position that clamping technologies were specifically designed for pulmonary veins, and pulmonary vein ablation is specifically designed for AF treatment.

So they weren't willing to give consideration to clamps for cardiac tissue ablation indication. So this is really a major turnaround, so we think we will have the first clamp with that cardiac tissue indication.

That's great. And then just one last question -- on the open heart market, you had indicated that you believed synergy allowed you to gain some share in the market. Can you give us any color as to where you think your share can get to by year-end?

I'd rather wait until the next conference call. We haven't released the products yet. I think it would be maybe a little irresponsible for me to give you color on that without having gotten out launched the product.

I think with a full quarter under our belt in the second quarter, I will come back to you. A commitment between you and I, I will come back to you and give you a better sense of where we think the open market share will play out.

Fair enough and congratulations again.

Bob Koshgarian, Kairos Partners.

Congratulations on a nice quarter. At the risk of beating the open heart business to death, let me just ask a couple of quick questions.

Can you talk -- give any detail about -- you know, you had quite a significant jump sequentially in that business. And I'm wondering -- you had a new product out, the Isolator clamp with the endoscopic features. And did you get more traction by going into competitive accounts and saying -- hey, look, we've got this new thing; why don't you try it? And if so, I am kind of wondering what your stick rate was in those accounts. Just generally help me understand what leads to such a large sequential jump.

I think it was more -- it was some taking back some territory within accounts that we had maybe given up. You know, part of the concept was that we released the new products. The other part of the concept to think about, Bob -- I know that you and I have probably talked about this -- but we didn't release a new product in the open market place since we first released our products in 2003. We focused our designs and developments on the minimally-invasive side. And a lot of research and development went into that, both in terms of procedure development as well as product development.

So this new platform that we released really midway through the third quarter, this new ablation technology, was the first new really open technology that we have released since we began commercializing in 2003. And the multifunctional pen as well had a big impact and is having a big impact and has a big opportunity to continue with that in the open procedure.

So I think it's a combination of, we sort of retook some landscaping accounts that had our products on the shelf but we're using other competitive products -- give us some more wind in our sails in existing accounts.

We did open up some new accounts. And also the pen, having that multifunctional pen to be able to sell along with the Isolator clamp, the new clamp design, was a major benefit on a going-forward basis in the fourth quarter.

Okay, so it sounds like based on what you just said -- and you said you would maintain momentum in that business -- it's not just people trialing your new product. You think you probably have a pretty good stick rate and probably could continue at these kinds of levels in that business?

I have to tell you, I'm very, very excited about the news that I have heard over the last couple of days on the synergy and the physicians and engineers I've talked to and the lesions that I've seen and the preclinical data. I really believe that our engineering team came up with a very innovative and clinically significant product. This whole pulsed RF concept and the cooling as well as the overlapping of fields and heating of tissue from the intramyocardial layer out in creating columns and be able to ablate in deeper, thicker tissues, believe that this is going to be a big momentum gainer.

And we didn't talk about this piece on the script. I did mention it following that. But there's also this much more advanced switching system which does simplify the procedure as well. There's a box that actually comes with the -- it's a one-time box -- but it comes with the synergy system. And basically, it allows you to make the connections of all the devices. It cleans up the patient sensing and [spinning] for the pen. Physicians are really going to like that. I think that's going to be an important upgrade in general.

So between the momentum we have with the open pen, the new open dissection tool which is not going to be a revolution, it's going to be a progressive displacement strategy where we get it on the shelf and people pull it over time. There will be more diagonal trends with that. But we would really expect -- we are expecting big, big things in terms of momentum building with the synergy in the open market.

I don't know if you're prepared to say, but will synergy kind of be the only platform going forward, or will it be kind of a premium-type clamp that you would sell? Just generally, what's your strategy around that?

Well certainly from an operating efficiencies perspective, we would rather narrow the number of products that we carry. From a clinical perspective, we want to give patients the best possible products.

So, I would say that first of all in the U.S., our goal will be to narrow the product line as much as possible. And synergy right now looks to be like a big enough differential that we think customers may really want that product and be willing to pay for it.

Internationally, there's a variety of different issues. For example, in Japan, Japan is a big market for us on the international side. And the regulations in Japan because of the hardware additions with the synergy, that's going to require us quite some time to get it in. So we will stock both products and we will sort of monitor the opportunities and the needs. But my guess would be in the U.S. that synergy is going to be a quick win.

Okay, and it's safe to assume you have some good IP around that technology?

Safe to assume.

On the minimally-invasive side of things, I just want to make sure I'm kind of synthesizing all the information and kind of getting it correct. You have some technique to kind of fully define here that Edgerton and Jackman are doing -- and you said ideally, you'd like to have your second-generation pen in hand. And you also said that you were going to submit for your feasibility study extension in the second quarter and hopefully start to enroll in the second half.

So, am I correct in assuming that if you want to start enrolling in the second half, your technique development and your second-generation pen are more or less on that kind of timeline; they will be ready for second half to start your additional 25 patients in the feasibility study? Am I kind of putting that together correctly?

Not completely. We will start -- we plan to start the feasibility trial, the second arm of RESTORE-II for the more permanent patients using the maze-like procedure, with the Isolator Endoscopic Synergy product, which we will just make an R&D build for that. We're not ready to relaunch it really in the June or July time frame. It will be fully launched by the end of the third quarter.

But we will be able to do a small R&D build for the clinical trial. But we will use our current generation pen technology because the next generation -- I don't really want to call it a pen because it's much more than a pen -- but the next-generation technology for making these connecting lesions, which also has pen functions, is going to be released in the fourth quarter.

Now, the issue is that the current generation pen is not ideal for making these long connecting lesions that are required to replicate a maze-like procedure. You have to work harder at it and your mapping techniques have to be a lot more comprehensive. That's why we brought Sonny Jackman to the Medical City of Dallas to do the mapping and to develop the methods for mapping with this current pen technology, as well as with the next-generation technologies in our own mapping system.

But we're going to have to be somewhat confined in terms of not letting this expanded lesion set get too far into the marketplace too soon, because the technology requires fairly extensive mapping to make sure that you have transmurality with the connecting lesions.

Now the issue is -- a big part of the issue is that when you put these expanded lesion sets in, and you add the lines above and beyond the pulmonary veins, if you are incomplete, you have a tendency to create an arrhythmogenic substrate. So the last thing you want to do is leave people with less [sighted] lines that are not transmural, because they end up with left atrial flutters and left atrial tachycardias, which often have a more rapid one-to-one ventricular response. And that's associated with a greater degree of symptoms.

So the worst possible outcome is to take somebody with atrial fibrillation and leave them with a left atrial tachycardia or a left atrial flutter, and that's what we're trying to avoid. And that's why we want to make sure that we do the right thing and contain the current expanded maze-like procedure to a small number of sites that have sophisticated EP systems and sophisticated electrophysiologists that are willing to do the mapping to make sure that we achieve transmurality.

But if you in fact did that, it sounds like you have a maze technique down for those accounts that you could start a feasibility study with or you're close to it.

Well, that's our plan. We do that. That's our plan is to take the pen, even though it's not ideal, because we have world-class electrophysiologists. For example, at [NCD] in Dallas and in Oklahoma where we want to start this feasibility trial, the electrophysiologists will be very involved in the mapping part of the procedure, especially for these connecting lines. They will help us develop the methods, both surgically and from an electrophysiology perspective. And by the time we get to the fourth quarter and we have our new platform for the expanded lesion set and mapping system, we will have all the procedure algorithms and EP algorithms ready to go in terms of making this a more generalizable approach.

One more question if I can -- on the clip, I know you've talked about this before and you and I have talked about it -- but do you still have pretty much kind of every indication based on your conversations with FDA, that this won't require human data and would be a 510-K? Is that a -- maybe like a better than 90% chance or still very 50-50, or you don't know yet?

I can say that when we started the process, our consultants were 80/20 that we wouldn't need human data. And I'm not completely sure why, but I think it's somewhat associated to some of the discussions, even though they weren't direct about the clip. But there was some subtle subtleties that came through in our discussions about the cardiac tissue indication that we interpreted as potentially crossover into the clip.

So we are at the point now where if we had to say from a percentage perspective that you put me against the wall to say, do I think we will need human data or not, I would probably say that it's 50-50.

Well, thank you for taking my questions and congratulations on a great quarter.

[Len Yaffe], [Stock Doc Partners].

You touched earlier on competitive issues as it relates to Boston Scientific and the data they presented at STS. Could you give us your assessment of other companies that are looking at this area, with their technologies, how you see them coming onto the market, what the potential advantages or disadvantages of their products are?

Then secondly, I'm willing to assume that the favorable recommendations from the sell-side analysts bear fruition in that your stock price hits a significantly higher level during the course of the year. And again, that's my assumption. I was wondering, given that scenario, what amount of cash would you like to have on the balance sheet assuming the stock that was at a higher level so that it wouldn't be significantly dilutive, so that you could run a business in the way that you want to? Because you're going to be expanding both your sales force, your projects, and then you're going to be looking to become a much more significant company. And as you alluded to, I think you're going to have less than a year's worth of cash on the balance sheet exiting this fiscal year.

And obviously with a higher stock price, you could get a lot more comfort in running the Company the way you'd like to. Could you comment on that please as well?

Well, first of all, to comment on the competitive surgical approaches. In our opinion, they are all very much alike. They all deal with a single element versus a bipolar-like technology that ablates from the outside of the heart, the epicardial surface of the heart. And they all generally have a similar problem, which is the heat sink. The blood moving in the heart pulls the heat away from the endocardial surface and creates a real biophysical problem in terms of making transmurality. That's why the lesions with these uni-directional systems tend to be wide on the surface and get very narrow as they get closer to the endocardial surface.

And in our opinion, based on our testing and our conversations with our consultants, all of these unidirectional technologies are fundamentally trying to lasso the pulmonary veins and are being left with incomplete pulmonary vein isolation.

Now, that can be done in the EP lab; that's what the electrophysiologists do. They do it percutaneously. They also get similar results. I mean, I think it's sort of interesting that the surgical results that are being presented with these unidirectional technologies are very much similar to what the catheter ablation technologies are publishing, because they are not creating transmurality. They are not isolating the pulmonary veins. So we think that they are all going to have significant issues as they get out into the market at this stage, because the surgical companies are basically reproducing results that can be accomplished by a catheter.

Our strategy has been focus on the technical endpoints, achieve the pulmonary vein isolation, and map to make sure that you've achieved it. Take down the ganglionic plexi and denervate the left atrium and confirm that you've done it. Exclude the left atrial appendage and use a TEE to make sure that you didn't leave a cul-de-sac. Take the pen and another new technologies and create expanded lesion sets and use the electrophysiologist to come in and map and developing mapping methods to confirm that all of your lines and all of your technical endpoints are complete in terms of transmurality.

It starts with the technical endpoints, and it takes you down a road of superior clinical outcomes. And then our strategy is to monitor these patients in the most rigorous way. So the question is, why is AtriCure driving the process of rigorous monitoring? Why is our monitoring actually more rigorous than the electrophysiologists?

And the reason is that the more you look for atrial fibrillation, the more you find it. And we are confident that if we can set new standards for the way that people look at atrial fibrillation and they compare apples-to-apples, that our technologies and products and procedures are going to have that much more clinical benefit for patients. And we will gain that much more credibility and adoption in the marketplace.

In terms of the capital structure, we spent, in cash, $14 million in 2006, just under $14 million. Our relationship between operating expense and sales is becoming more favorable throughout 2007. So we expect to have less of a cash burn than $13.7 million, which was our cash burn in 2006. Plus, we're starting the year with 19.5 million in cash. So our backs are not against the wall to do a financing event.

I think the real question is, at what point in the capital structure -- is it 15 million? Is it 10 million? Is it 8 million? At what point if you can't see profitability, do you want to go out and top off your capital structure? And at what point -- when you get to that point, what is your mechanism? How do you go about doing it? And we're still having those discussions at the Board level.

So am I correct as a follow-on that you started the year with 19.5 million in cash and you're expecting to end the year with more than half of that still in the bank?

No, I don't think that that's a correct assumption. We haven't given guidance on that, but we spent 13.7 million in 2006. We will spend less than 13.7 in 2007.

So I am just wondering again if -- I think then you'll be exiting the year with less than one year's worth of cash, depending on what the projections for '08 are looking like in terms of cash burn versus cash generation. And I was just wondering, are you comfortable at that level? What would give you the greatest comfort, given all the efforts you've put in to build this Company into being a significant medical device company -- would hate for it to happen because you were cash-strapped at the point of your inflection in terms of turning cash positive.

I think your question is a very good one, and I do believe that as we dip down below $10 million, which is possible during the course of the year, if we get to a position where we're dipping down below $10 million, that the Board will have -- in that range, the Board is going to have many more serious conversations about how we can better protect the potential of this organization. Because we believe that the long-term potential is there, and we would want to think about rebuilding our capital structure on a going-forward basis.

Larry Haimovitch, HMTC.

Well, Dave, my question was asked, so -- I can't imagine how. This has been probably the longest conference call but very informative. And I'm sure we've all gotten a lot out of it. But it's been long, so I'm going to say, "I don't have question." And we will talk later; I'm sure.

Larry, thank you very much for your help.

And that does conclude the time we have for questions and answers today. I will now turn the call back over to management for any closing remarks.

We'd just like to thank the shareholders for your support and for your time and attention. Have a great evening; thank you.

Ladies and gentlemen, thank you for your participation in today's conference. That does conclude the presentation; you may now disconnect.