AtriCure Inc (ATRC) 2007 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the First Quarter 2007 AtriCure Earnings Conference Call.

My name is Michelle, and I will be your coordinator for today.

At this time, all participants are in listen-only mode.

We will be facilitating a question and answer session towards the end of today's conference.

(OPERATOR INSTRUCTIONS)

As a reminder, this conference is being recorded for replay purposes.

And I would now like to turn the presentation over to your host for today's call, [Mr.

R.J.

Pellegrino].

Please proceed.

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 Cubeau] at 646-536-7020, and he will fax or email 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 earning 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's results may differ material from those projected on today's call, and AtriCure undertakes no obligation to publicly update any forward-looking statement whether as a result of new information, future events or otherwise.

I would 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 AF.

The Company and others acting on its behalf may not promote any of its products for the surgical use 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 for the current cleared uses and, except for the multifunctional 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 multifunctional bipolar pen device for the surgical ablation of cardiac tissue and the evaluation of cardiac arrhythmias.

As such, the Company may promote this device to doctors and provide education and training on the use of the multifunctional bipolar pen device for those uses.

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, R.J., and thank you, everyone, for joining us on our first quarter 2007 conference call.

We are pleased with our financial results and highly optimistic regarding our achievement of a series of key operational milestones during the quarter.

First, I want to commend our management team and employees for achieving these major milestones on schedule as planned.

The strength of our Company is our people and their talent, drive, passion and extraordinary commitment toward preserving and improving human life by building on our leadership position in the large and growing market opportunity for products that have been adopted for the treatment of atrial fibrillation.

Now I'd like to highlight our Company's achievements and a series of key strategic operational milestones, which further position AtriCure for sustained growth and long-term profitability.

We launched our Isolator Synergy ablation system for open procedures at the end of the first quarter.

We filed our amended 510(k) in support of our cardiac tissue ablation indication for our Isolator bipolar ablation clamps.

We filed our 510(k) for our Cosgrove-Gillinov left atrial appendage occlusion clip.

We filed an extension for a new arm of our minimally invasive FDA regulated clinical trial, RESTORE IIB.

This clinical trial is designed to investigate our expanded ablation treatment for persistent and permanent atrial fibrillation patients.

We submitted our [ABLATE] clinical trial to the FDA.

This is an updated clinical trial for treating patients with -- undergoing open heart surgical procedures who have a history of atrial fibrillation.

We believe that our ablate clinical trial with this design will accelerate the approval process for atrial fibrillation indication and position AtriCure to be the first ablation company to receive an approval for atrial fibrillation.

Importantly, momentum building minimally invasive data has recently been published, including a 111-patient multicenter registry and a 41-patient single center study highlighting the superior clinical outcomes with the use of our minimally invasive products.

This data will be presented tomorrow at the Heart Rhythm Society meeting.

Additionally, a case report was recently published in the Annals of Cardiac Surgery highlighting the use of our minimally invasive products to perform a fully thoroscopic ablation procedure.

Now, collectively the achievements of these milestones facilitates our growing opportunity to advance and expand the treatment alternatives for hundreds of thousands of atrial fibrillation patients.

Before reviewing our accomplishments in more detail, let me briefly summarize our first quarter 2007 financial results.

Our first quarter consolidated revenue was $10.8 million and represented a 24% year-over-year increase.

Importantly, revenue from domestic open products of $6.6 million was a record-breaking performance and an 18% year-over-year increase.

Based on an underpenetrated open market, the full launch of our Isolator Synergy system in late March and our selling strategy of combining our multifunctional bipolar pen with our Isolator Synergy system, we believe that our increased momentum and favorable trends in our open business will continue throughout 2007.

First quarter domestic minimally invasive revenue of $3 million was our second strongest performance and a 32% year-over-year increase.

Minimally invasive procedures were successfully completed in 67 domestic medical centers during the quarter, compared to 71 in the previous quarter.

However, we believe our minimally invasive results during the second quarter and for the full year will be strong and in line with expectations.

There were three primary influences during the quarter, which had a short-term impact on our minimally invasive performance.

First, entering a new year we experienced a slower than anticipated rebound of procedure volumes.

This was followed by our [Techton] and Society of Thoracic Surgeons meetings, which are our largest industry meetings, resulting in many surgeons and our sales representatives being out of the field for a full week.

Following our industry meetings, we began our initial human procedures using the new Isolator Synergy system for open procedures under a controlled manufacturing pilot.

This is the final step within our design control process prior to fully releasing product.

The Isolator Synergy system is disruptive technology and features a new advanced upgraded switching system as well as an upgraded software algorithm.

This hardware and software upgrading process is performed by our field personnel and requires approvals for the biomedical department to install the upgraded switching system and software.

Additionally, we focused our field personnel on in-servicing the operating room staff and educating our surgeons on the use of the Isolator Synergy system.

The process of performing initial human procedures with an upgraded advanced technology platform is a significant undertaking that impacts our entire organization.

This extensive process was condensed into a two-month period during the first quarter and resulted in the successful launch of our Isolator Synergy system at the end of March, on schedule, as planned.

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 launches, we believe our minimally invasive business will demonstrate strong growth trends during the year and expand the treatment options for hundreds of thousands of patients who are seeking superior alternatives.

In terms of our international results, international revenue of $1.2 million was a solid performance and represents a 47% year-over-year increase.

We believe that a series of new product releases, combined with our developing international distribution channels, will continue to stimulate progress throughout our international markets during the full year.

Now, turning to our growth initiatives that we expect will stimulate our performance during 2007, beginning with our open business.

As previously mentioned, the new Isolator Synergy ablation system for open procedures was successfully launched just prior to the end of the first quarter.

During March, we successfully completed more than 40 procedures and remain highly confident that this innovative ablation technology will increase our open growth trends and further distinguish AtriCure as the innovator and market leader.

Based on our initial experience, we believe that the Isolator Synergy meets our product requirements of enhancing our system's ability to ensure more durable lesions and thicker and more diseased tissues while continuing our safety profile of confining the ablation energy to within the jaws of the device in order to reduce or eliminate the risk of thermal damage to surrounding structures.

Another important reason for increased momentum in our open business is the further adoption of our multifunctional bipolar pen.

The use of our pen in open procedures, combined with the use of our Isolator bipolar ablation clamps, has been accelerating growth.

However, the market remains significantly underpenetrated.

Now with the launch of our Isolator Synergy, combined with our new advanced switching system, we believe that we have a large opportunity to combine clamps and pens in the same procedure, in part because the new switching system enables physicians to more simply and rapidly toggle back and forth between clamps and pens.

The combined use of our Isolator Synergy and multifunctional bipolar pen was showcased in two live procedures performed by Dr.

Ralph Damiano, a true pioneer in the surgical ablation field.

This was live-cased at the Advanced Cardiac Techniques and Surgery meeting in front of approximately 400 cardiac surgeons on May 2nd in New York City.

Based on Dr.

Damiano's successful combined use of our Isolator Synergy and pen, this meeting was an important success and is another stimulus that is expected to increase the adoption of our Isolator Synergy clamps combined with our multifunctional pen.

The combined use of our Isolator Synergy clamps with our multifunctional bipolar pen is in line with our commitment to improving patient outcome by integrating electrophysiology methods with the advantages of surgical ablation procedures.

We believe this strategy will become widely adopted and position our open growth trends to be more in line with the higher growth segments of our business.

Now turning to our minimally invasive business, in terms of the current publications and presentations we believe that this year's ongoing Heart Rhythm Society meeting is a pivotal meeting for AtriCure.

We are pleased to announce that the first published results from the multicenter minimally invasive ablation registry sponsored by the Cardiopulmonary Research Science and Technology Institute will be presented tomorrow, May 11th, at the Heart Rhythm society meeting.

The data will be presented by Dr.

James McClelland, an electrophysiologist who trained with Dr.

Warren Jackman and is now directing the electrophysiology program at the Oregon Heart and Vascular Institute.

Of the 111 patients described in this abstract, 60% had paroxysmal atrial fibrillation, 19 had persistent atrial fibrillation and 21% had permanent atrial fibrillation.

In comparing the outcomes to the published results for catheter ablation, based on a serial EKG analysis, which is the most common clinical endpoint in the peer review literature, the efficacy rate utilizing our minimally invasive ablation products at six months were 96% for paroxysmal patients, 89.5% for persistent patients and 64% for permanent patients.

This data is consistent with previous reports highlighting the use of our minimally invasive products, and we believe that this data further validates the superior patient outcomes utilizing our minimally invasive products.

Furthermore, we have encouraged investigators to also measure success by using continuous event monitoring in order to account for asymptomatic recurrent episodes.

This is the most rigorous method of reporting results and the peer review literature suggests that catheter ablation results are overestimated by approximately 25% when the conventional follow-up method of serial EKG analysis is compared to continuous event recording.

We believe that ablation patients should be more rigorously monitored and that serial EKG analysis is a suboptimal endpoint.

More rigorous continuous monitoring will enable physicians to determine which subsets of patients will benefit more from minimally invasive ablation procedures versus catheter ablation procedures.

In this same multicenter study, when continuous event monitoring was used as a method of reporting results, the efficacy rates were 82% for paroxysmal patients, 77% for persistent patients and 50% for permanent patients.

We believe that these results will prove to be superior to other ablation and medical alternatives.

However, in order to achieve higher success rates for the permanent patients, additional ablation lines will be required.

To address this large unmet need, which we believe may represent the largest opportunity for minimally invasive surgical ablation products, we are developing a minimally invasive expanded ablation kit platform and integrated mapping system.

We believe that the new expanded lesion set platform will enable surgeons to create additional ablation lines for those patients who require additional ablation treatment and that our new customized integrated mapping system will enable physicians to more effectively confirm that the ablation lines being created are forming lines of conduction block.

We believe that the expanded lesion set platform and mapping system together with the new endoscopic Isolator Synergy ablation plans will optimize efficacy rates for patients who require more involved and expanded ablation procedures.

We are planning to release the expanded lesion set ablation platform and integrated mapping system by year end and the new endoscopic Isolator Synergy ablation plans during the third quarter.

There will be another presentation highlighting the use of our minimally invasive products and will also be presented tomorrow at the Heart Rhythm Society meeting.

During this presentation, the Lubbock, Texas, Group will present their results from 41 patients who underwent minimally invasive ablation procedures utilizing our products.

The reported success rate at six and 12 months was approximately 90% and, once again, in line with previous reports using our minimally invasive products.

Additionally, the Annals of Thoracic Surgery, the official journal for the Society of Thoracic Surgeons, has accepted a case report highlighting the successful use of our minimally invasive products to perform a fully thoroscopic 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.

In terms of symposia, Dr.

Ken Ellenbogen, Calkins and Jackman, all pioneering electrophysiologists, participated in a clinical symposium yesterday at the Heart Rhythm Society meeting.

This symposium was hosted by the Medical College of Virginia and supported through an educational grant from AtriCure.

The title of the symposium was AF Ablation, What EPs Can Learn from Surgeons.

Dr.

James Edgerton was invited to present an updated series on his minimally invasive single center and the multicenter registry experience.

We estimate that 300 electrophysiologists attended the symposium.

All these physicians are potential referring physicians for our minimally invasive products.

The meeting highlighted the use of our minimally invasive products and the opportunity for surgeons to collaborate with electrophysiologists in order to advance the treatment alternatives for atrial fibrillation patients.

Additionally, last week the Cardiopulmonary Research Science and Technology Institute hosted a symposium at the American Association of Thoracic Surgeons in Washington, D.C.

The program was supported by an educational grant from AtriCure.

The symposium was entitled The Future of Minimally Invasive AF Therapy, Creating an AF Center.

The symposium was well attended and we believe the presentation of our minimally invasive registry that this data impressed the attendees and that this will lead to increased adoption of our minimally invasive products.

In summarizing our minimally invasive opportunity, we are the dominant leader in the large and growing market opportunity for minimally invasive products that physicians have adopted to treat AF.

There is a mounting body of peer review literature and presentations at major meetings reporting superior and reproducible outcomes with the use of our minimally invasive products.

Furthermore, we have plans to release a series of new products which are designed to provide promising options for patients who require additional ablation treatment.

Now, turning to our regulatory programs.

We recently submitted our ABLATE clinical trial to the FDA.

This is an updated clinical trial for patients undergoing open heart surgical ablation procedures where the atrial fibrillation ablation treatment is performed concomitantly with the open heart procedures.

Based on discussions with the FDA, we anticipate being able to use our experience from our RESTORE I clinical program and other physician-sponsored prospective studies as objective performance criteria to reduce the sample sizes of patients required for this study and potentially abbreviate the approval timeline.

We believe that our new clinical trial design in the ABLATE study will position AtriCure to be the first ablation company to receive atrial fibrillation approval.

We anticipate initiating enrollment in this key clinical initiative during the second half of 2007.

In terms of our minimally invasive regulatory programs, based on encouraging results from the feasibility phase of our RESTORE II clinical trial, we filed an extension for a new arm of this study, RESTORE IIB.

This clinical trial is an expansion of our feasibility trial incorporating our new endoscopic Isolator Synergy ablation plans and multifunctional bipolar pen.

RESTORE IIB will include an expanded ablation treatment and enroll patients with persistent and permanent atrial fibrillation.

This may represent that largest opportunity for atrial fibrillation ablation and our minimally invasive products.

We anticipate initiating enrollment of this key clinical initiative during the fourth quarter of 2007.

In terms of a cardiac tissue clearance for our Isolator bipolar ablation plans, we recently filed our amended 510(k) and based on discussions with FDA, we anticipate receiving a cardiac tissue ablation clearance for our Isolator bipolar ablation clamps during 2007.

Additionally, we filed our 510(k) in support of our Cosgrove-Gillinov left atrial appendage occlusion clip.

As previously stated, it's possible that FDA will require human data.

We anticipate hearing back from the FDA during July.

Additionally, we have decided to postpone European implants and work to refine our processes for manufacturing the clip.

At this pint, I'd like to turn the call over to Julie for a detailed overview of our first quarter financial results.

Good morning and thank you, Dave.

I'll now review our first quarter 2007 financial results.

As Dave mentioned, revenues were $10.8 million, a 24.5% increase over the prior year and a 1.4% sequential increase.

Domestic open revenues were $6.6 million, representing growth of 17.8% over the first quarter of 2006 and sequential growth of 3.2%.

Revenues from domestic minimally invasive products were $3 million, a 32.5% increase over 2006 and a sequential decline of 9.8%.

International revenues were $1.2 million, a 47.4% increase over 2006 and a sequential growth of 28.4%.

Minimally invasive revenues accounted for 31% of domestic revenues, and international revenues accounted for 11% of consolidated revenues.

As a reminder, revenues from our pen, which is used in both open and minimally invasive procedures, is allocated between open and minimally invasive revenues based on our best estimate of the pen's actual usage.

The average first quarter domestic selling price for our open clamps was $2,561, a 3% increase over the fourth quarter of 2006, and $7,425 for our minimally invasive kit, which, as a reminder, includes two clamps and a dissection tool, representing a 1.4% decline compared with the fourth quarter of 2006.

The average selling price for our pens increased 2.7% quarter-over-quarter from $1,670 to $1,715.

The increases in average selling prices for the open clamps and the pen were primarily due to product price increases that became effective January 1st.

The decrease in the average selling price for the MIS kit was primarily driven by sales promotions during the first quarter.

Now moving to gross profit.

Gross profit for the first quarter of 2007 was $8.5 million, reflecting a growth margin of 79.4%, a 160 basis point improvement over 2006 fourth quarter gross margin of 77.8%.

This increase was primarily due to an inventory valuation adjustment in the fourth quarter of 2006 of $0.2 million.

Gross margin for the first quarter of 2006 was 81.5%.

The decline in gross margin, as compared to the first quarter of 2006, was primarily due to product mix, with new product introductions initially resulting in a higher product cost.

Next, an update on operating expenses and EPS.

Research and development expenses for the first quarter of 2007 were $3.1 million compared to $2.9 million for the first quarter of 2006 and $3.2 million for the fourth quarter of 2006.

The year-over-year increase was attributable primarily to an increase in personnel-related expenses to support our new product development plans and clinical studies.

Selling, general and administrative expenses were $10.3 million for the first quarter of 2007, compared to $7.5 million for the first quarter of 2006 and $9.5 million for the fourth quarter of 2006.

Selling, general and administrative expenses increased year-over-year primarily due to increased sales and marketing headcount and headcount related expenses, increased marketing activities, increased stock option expense, including a $0.2 million nonrecurring valuation adjustment and $0.3 million related to a proposed settlement of an outstanding legal dispute with a former European distributor, LST, which will be paid quarterly over the next four years on an interest-free basis.

The sequential increase in selling, general and administrative expense was primarily due to increased selling and marketing expenses and activity, option expenses and the proposed settlement with LSG.

During the quarter, we recorded $0.3 million of grant income, which was primarily related to expense sharing under a grant for research and development related expenses.

The related expenses that AtriCure incurred were primarily incurred during 2006.

The net loss for the quarter was $4.3 million, or $0.35 per share, as compared to a net loss of $3.1 million, or $0.26 per share, in the first quarter of 2006 and a loss per share of $0.35 for the fourth quarter of 2006.

The first quarter of 2007 included $0.6 million, or $0.05 per share, of option expense, and the first quarter of 2006 included $0.2 million, or $0.01 per share, of option expense.

In terms of the balance sheet and cash, we ended the quarter with cash, cash equivalents and investments of $16 million.

We had total debt outstanding of $1 million and total working capital of $19.5 million.

Cash used in operations was $3 million for the first three months of 2007, as compared with $3.8 million for the first three months of 2006.

Now turning to our 2007 guidance.

For the full year 2007, we are confirming our revenue range of $48 million to $50 million and our expected loss per share in the range of $0.95 to $1.05.

For the second quarter, we expect revenues to be in the range of $11.6 million to $12.3 million.

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

Thank you, Julie.

We feel very strong about our business momentum.

We feel very strong about both open and minimally invasive and international, and we're excited to open the call up to questions.

(OPERATOR INSTRUCTIONS)

Your first question comes from the line of Tim Nelson of Piper Jaffray.

Please proceed.

Can you hear me?

Hi, Tim.

Just a couple of cleanup questions here on the pen revenues.

Can you tell us what those were and how you allocated them?

Well, actually we haven't folded up the entire pen sales and given the pen numbers that break out.

We've allocated that based on our best estimates from a bottoms up forecast.

Right.

Can you give me allocation percentages again?

Well, the current allocation percentages are basically 42.5 for minimally invasive.

Okay.

On the international revenues, that's a very nice increase.

Is that due to any particular geography?

And I know you've had a big Japan business, I wonder if you could talk about that?

That's an exciting segment of our business.

The European business has really contributed to the bulk of the growth and is continuing to grow at a rapid rate.

We're also excited because we have a series of new products entering Japan in the third quarter as well as the Synergy, which will enter Europe during the second quarter.

So we feel like we're well positioned for strong growth trends that are consistent with previous performance throughout 2007.

On the Synergy, are you going to have a price increase associated with that?

I know you just had one at the beginning of the quarter but that wasn't related to Synergy, right?

We're actually, even though we fully released Synergy at the end of March, we're sort of working through a lot of the details in our key accounts.

Our average selling prices are very strong in the open procedures and we did just recently implement a price increase.

We're actually more committed to combining the pen and the Synergy in the same procedure.

So we're working though some of those details.

It'll be another quarter or so before we can give you a little bit more guidance on how that plays out.

But the selling strategy of combining the Synergy platform, the new switching system and the multifunctional bipolar pen we believe is a key strategy and will stimulate growth in the open business throughout 2007.

I keep hearing rumors about pricing pressure out there.

Can you comment on the competitive environment and what's new out there that might be causing this pricing pressure?

I think you've got, like any emerging medical device company or industry, what occurs is you get several companies that enter the market and take a leadership position, and then you have several companies that try to enter a high-growth market.

And what I think you're seeing is basically certain companies are rising to basically take a significant share and other companies that have been out there in the market that are trying to get into the market are struggling.

And the first place that some of these struggling companies go is to price.

But as you know from historical trends and just your experience in the industry, that usually doesn't work.

So we believe our prices are firm, that our products are highest of quality and that actually the positive news for AtriCure is that we're maintaining individual ASPs while we're increasing the number of products being used for procedures.

Great.

On the ABLATE clinical trial, could you describe that trial design a little more colorfully for us, please?

An excellent question.

Well, first of all, the FDA, in terms of atrial fibrillation clinical trials, realizes that they've made I believe in certain situations very complicated for companies to get AF labeling.

Therefore, no company has an ablation product, whether catheter or surgical, that's labeled for atrial fibrillation.

We had a RESTORE I clinical trial that had some complicated indications in terms of inclusion/exclusion that made it difficult to enroll patients, so enrollment was slow.

And the other companies that were working on concomitant FDA regulated clinical trials also had slow enrollment, actually slower than AtriCure.

So we went back to the FDA and we asked them to look at a redesigned clinical trial and to use a Bayesian statistical model to allow us to use objective performance criteria and prospective studies to reduce our sample size.

So we currently believe that this trial will require about 55 patients; 55 patients, six month follow-up and we've got 10 centers that are ready to go forward with those clinical trials.

If we can execute, as we believe we can, we strongly believe that AtriCure is well positioned to be the first company to have AF labeling.

You can enroll 55 patients in a couple of months, couldn't you?

A couple of months might be aggressive, Tim, but people have been at AF labeling for the past 15 years, so I think we believe that we can enroll rapidly, that we have rapidly enrolling committed centers.

And again, I think this is really -- with a six-month endpoint, where most other clinical trials for catheter ablation procedures for example are at 12-month endpoints, with a six-month endpoint and 55 patients, and they also loosened some of the testing, for example patients don't have to have CTs and MRIs as a preamble to the procedure, they loosened some of those other critical issues that accelerate enrollment, we feel very positive about this clinical trial.

I want to really commend our clinical and regulatory team because they submitted ABLATE and RESTORE IIB back-to-back, which is a tremendous amount of work.

So congratulations to them.

And I think that the ABLATE trial again will really stimulate AtriCure in terms of being able to allow us to become the first company to receive an AF labeling.

What is the endpoint and are these paroxysmal or permanent or a mixture?

Well, the endpoint is a Bayesian statistical model that bottom line is that fundamentally patients will have to have about a 70% success rate.

So the endpoint is going to be basically 70% success, more or less.

Don't hold me to that exactly because it -- there are a couple of variables that weigh in on that.

But basically it's a six-month endpoint with 70% success rates.

With intermittent EKG monitoring?

With actually Holter monitoring at six months.

Okay.

And then the last cleanup question on the research grant.

Is that an ongoing event or is that just a one-time?

That's an ongoing event.

This is a grant that supports the Atrial Fibrillation Innovation Center through the Ohio Department of Development.

We're very excited about the grant.

We think it gives us a lot of exposure with key physicians and we just began drawing down on the grant this past quarter.

Would you expect similar amounts in subsequent quarters?

Julie?

Most of that amount, Tim, actually related to the prior year, so I think you would expect that similar amount on an annual basis for the next three years.

Okay, got it.

Thanks.

I'll get back in queue.

Thank you, Tim.

Your next question comes from the line of Steve Ogilvie of ThinkEquity.

Please proceed.

Morning.

Can you maybe talk about the clip for a sec?

It seemed like you're a little more pessimistic in terms of not launching in Europe and the potential for human data.

Am I reading that correctly?

I think yes and no.

I think first of all we're not pessimistic at all about the clip.

We had meetings with key physicians reviewing the clip.

We think this clip is really a key product for AtriCure and the left atrial appendage is a growing opportunity for surgical ablation in terms of creating an advantage over catheter ablation procedures.

And it's a clip design that's spot-on.

Now, we don't have enough experience with fully implantable devices and so we want to take a balanced approach to this.

Most of our consultants told us that we wouldn't require human data.

Some have said that it's a possibility, so we want to get it out in the open.

The other issue to just fall back on is that AtriCure, this is a new core competency in terms of manufacturing for AtriCure.

And we want to take time.

We actually could release the product in Europe but we want to take some additional time to refine our manufacturing processes to make sure that we put out the highest quality product.

And the reality of the situation is that if we take that time to refine our manufacturing processes, we'll see a benefit of cost of goods.

And we'll also, if we need human data, by the time that we refine the manufacturing processes, we'll have heard back from the FDA and we can perform the human data in the U.S., which is a much more efficient and less expensive approach for us.

Okay.

Then, yesterday at the symposium, Dr.

Edgerton said something about the clip and I guess it's kind of fallen out of favor with him for some imaging reasons post operatively.

Could you maybe clarify what he was getting at?

I think -- at the symposium -- are we talking about the symposium at HRS?

Yes.

Okay.

It wasn't the clip, Steve.

I think that was a confusing point.

Jimmy Edgerton had one mortality in his series and it was with an Ethicon endo stapling system.

The appendages may be the most delicate portion of the procedure and the most high risk because appendages come in all sizes and shapes and certainly in all tissue thicknesses.

And the issue is that when you have a stapler, you have to be very careful.

You don't want to leave a neck on the appendage or a cul-de-sac on the appendage.

But the stapler's operate at about 150 psi, so if you actually grab atrial tissue with the stapler, the atrium actually operates at about 30 mm of mercury in terms of pressure, where the stapling system's in the 150 psi.

It's a pressure mismatch.

So a critical issue and what happened with Jimmy is he actually got too much atrial tissue in that Ethicon endo stapling system and caused a spiral dissection and they couldn't recover the patient from that.

That was not with our clip.

I think actually Jimmy is enthusiastic about our clip because the clip actually performs at about somewhere in the range of 2 to 8 psi.

It's a much lower pressure system, and I think people generally believe that it's safer and will lead to more efficacious results because it's easier for the clip to be placed at the junction of the atrium and the base of the appendage.

So again, I think the physicians are very enthusiastic about the clip.

I think this refinement of manufacturing process in part is a learning process for us because these are new materials and it's an implantable product that's not really in our manufacturing core competency.

We want to step back, take some additional time, refine the process, lower the cost of goods and if we need human data, we think that we can do that as efficiently in the U.S.

at a lower cost versus trying to get out ahead of the manufacturing process in Europe.

Good.

And then there was a guidance document that came out about a-fib, kind of a multidisciplinary document.

And it seem like your trial endpoints are, at least your clinical advisory [surgical] trial endpoints are shooting a bit higher in terms of AF.

I think the difference was three seconds versus 30 seconds.

I mean how does that document affect you guys in terms of your clinical work and maybe are you a little ambitious in your endpoints?

No, I think -- well, two points.

I'm going to answer this indirectly first and then answer it directly secondly.

First of all, the expert consensus statement on catheter and surgical ablation that was published by HRS.

Now, think about it, Steve, that's the HRS published a consensus statement on catheter and they included surgical ablation.

And we believe that AtriCure was at the forefront of influencing this decision.

This is a big step for HRS to include surgical ablation in their guidelines.

And actually, they talk about concomitant in the surgical section, but they also talk about sole therapy minimally invasive being indicated for patients who prefer minimally invasive procedures as well as patients that are not indicated for catheter ablation.

So we believe that this was a major step for HRS to recognize minimally invasive sole therapy as a standard treatment alternative to catheter ablation and was really a nice coupe for the company and for the industry of surgical ablation.

In terms of the endpoints, you're right.

Jimmy Edgerton took the most conservative approach at three seconds.

So he said anything on a continuous monitoring that was a three second episode of atrial fibrillation was a failure.

And the reasons that he did that, and we had conversations with him advising him in terms of the monitoring portion, but the reason that he did that is one of our major objectives is to gain credibility.

We want to be viewed as taking the most conservative and most rigorous approach to monitoring.

We can always re-look at that data and re-report it at 30 seconds or a minute.

So our number one goal is number one to analyze that data to make sure that we're monitoring in a very rigorous way so that we can tease out which patients will actually do better with surgical ablation, to gain credibility by the electrophysiologists by doing things like three second snapshots and calling those failures and at the same time we're going to force the catheter ablation market to do the same thing.

And if you start doing continuous monitoring in surgery and catheter, I think that's going to bode very well for the catheter -- for the surgical side of the business.

Does that answer your question, Steve?

Yes, it does.

Thank you.

Just one last thing and then I'll get back in queue.

Talking to the EPs at the symposium yesterday, very well attended.

None of them use your product.

They're all -- they all consider catheter ablation kind of a first line of therapy in their minds.

Very few of them would ever refer a patient to minimally invasive for a first line of therapy.

What does it take to get the EPs more involved?

Do they need to be in the surgery, do they need to have some other incentive or is it just bit by bit working away at the way they look at it?

I think it's an evolution.

I believe that if you look at the 70 centers or so that are performing the procedure now, each center has maybe one, maybe two electrophysiologists that are referring patients.

This is a very early stage market development process for the company.

HRS, this is the first highly attended meeting that we've had at HRS.

Now, next year hopefully we'll have things like live cases and things of that nature.

But if you look at the peer review literature, the major cardiology journals, the pipeline of literature is still waiting to be published.

What we're talking about is abstracts and presentations and data that's solid data, but certainly waiting to be published.

So the majority of electrophysiologists, it's not uncommon that they're not as familiar with surgical ablation and the advantages.

But if you think about yesterday's symposium, Ken Ellenbogen, who refers 20% of his patients now for surgery, [Warren] Jackman, who's the world leader in catheter ablation, he's sending patients for minimally invasive procedures.

And we also had Hugh Calkins, who is a believer in minimally invasive procedures.

Those were three pioneers in catheter ablation procedures and the general community, when you get beyond these university centers, don't perform catheter ablations.

So if we can get the validation and the credibility and the acknowledgement from these key opinion leaders that minimally invasive procedures are a good treatment alternative, even in centers that perform catheter ablation for a certain subset of patients that we believe that the centers in the mainstream where they don't have electrophysiologists or the electrophysiologist is too busy to perform catheter ablation will refer patients.

But it is an evolution.

We do believe that we're building momentum and we do have some electrophysiologist champions.

But again, it is an evolution and we believe that we're making strong progress and that the next several quarters will confirm it.

Great.

Thank you.

Your next question comes from the line of Kari Hall of Pacific Growth Equities.

Please proceed.

Good morning, and thank you for taking my questions.

Hi, Kari.

Morning, Kari.

You demonstrated some nice growth in the open heart market in the quarter and I'm wondering if you can just update us in terms of where you stand in market share?

We haven't really sharpened our pencil on the market share side recently.

I think we're still probably best estimate in the low 40s.

Synergy really hasn't kicked in yet.

Synergy again requires -- it's a process with Synergy because you've got to upgrade hardware, software.

So the rollout is going to be very systematic.

But in speaking with Ralph Damiano, had dinner with him last night, he told me he didn't want to use anything but Synergy.

Met with Marc Gillinov.

He was very, very high end Synergy and said there was no reason to use anything else.

The Synergy technology is meeting all the product requirements.

The lesion geometry and the morphology is clearly a benefit when compared to other ablation technologies.

So we're very bullish on our ability to recapture market share with the Synergy technology and we also believe strongly that the multifunctional pen and the concept of GP ablation, which many of you heard here at the meeting, is a big opportunity for the pen, confirmation of conduction block, expansion of additional ablation lesions, that the Synergy clamp and the multifunctional pen are really catalysts for growth in the open business.

That's great.

Thank you.

and then maybe you can talk just a little bit about the RESTORE IIB trial and a little bit about the new ablation technology and how that really -- the benefits of the new ablation technology versus just isolating the pulmonary veins?

Well, the core issue is that -- just step back for a second and just talk a little bit about the pathophysiology of atrial fibrillation.

Patients that have more paroxysms of atrial fibrillation tend to have triggers.

So by isolating these triggers, you can basically disrupt their episodes of atrial fibrillation and often have high treatment results.

But patients that have more forms of permanent atrial fibrillation often have a combination of triggers and what's called rotors.

These rotors are large electrical circuits that wander around the atrium.

So in order to actually cure the more permanent atrial fibrillation patients, you've got to basically section the atrium, you've got to compartmentalize the atrium in ways that don't allow enough atrial muscle for these wandering electrical circuits to coexist.

And that's what the expanded ablation lesion set will do.

And we've developed a very nice approach, not just the technology but the surgical approach, where we're adding a roofline, what's called the roofline, which is a very safe and reproducible line, that we think will cut through many of these rotors.

And also another key line is to the mitral valve annulus.

The mitral valve annulus line has always been a problem for surgical and catheter companies because the mitral valve basically encompasses the circumflex artery and it's always been a concern that if you ablate down to the mitral valve annulus that you run the risk of damaging the circumflex artery.

We've developed a very unique technique, without getting into too many technical details, I can show you this, Kari, when we get together, but show you some anatomical images.

But we're actually making that line to what's called the left fibrous trigone by the non-coronary cusp of the aorta.

And that trigone region actually connects to the mitral valve.

This was a technique that actually Dr.

Jackman and Dr.

Edgerton came up with together and that allows us -- the key issue is that fibrous trigone is the one area that connects to the mitral valve where there is no coronary circulation.

So we really believe that the technologies and the procedure development activities are going to lead to increased results for these more permanent and persistent patients as well as those patients that fail catheter ablation.

Great.

Thank you, Dave.

And then lastly, you mentioned that some of the thought leaders in electrophysiology are referring about 20% of their patients to the [atrial] procedure.

What percentage of your overall sales are from EP referrals, and can you comment on some of the initiatives that you have in place now to increase referrals and as well drive an integrated cardiac surgery and EP practice?

That's an excellent question.

We've looked at this from several different perspectives.

First of all, phase one was to get some pioneering electrophysiologists onboard and collaborate with them.

The reason that we wanted to do that is because they're the experts in arrhythmia management.

They can help refine our technologies and our procedures.

Like Dr.

Jackman helped us with this left fibrous trigone concept and has helped us with mapping the confirmed conduction block and also is helping us develop some technologies that are mapping technologies, as has Dr.

Ken Ellenbogen from the Medical College of Virginia and others.

So it's been very important that we establish these relationships with the key opinion leaders because these key opinion leaders are validating what we're doing as a legitimate treatment alternative.

Evidence of that is that Hugh Calkins and others publish sole therapy as a treatment alternative in their [HSR] guidelines.

I wouldn't underestimate the impact of that.

The other things in terms of referral development, phase two is really having these pioneering electrophysiologists basically help support the more mainstream electrophysiologists in understanding the advantages of a minimally invasive program.

And what's happening in certain centers like Dr.

Ken Ellenbogen's center, he does a lot of catheter ablation, but because he's offering surgical ablation, building both towers is actually increasing the overall ablation procedures within their programs.

And I think that's going to play out in other centers as well.

But again, it's an evolution.

So phase two for us is obviously involving these mainstream electrophysiologists, going -- seeking them out through our market development managers and getting partnerships built at these individual centers so that the clinical development and the referral development process can get underway.

And we've done, I think, a fairly good job of that in about 70 centers.

To build on that, once the EPs are onboard or at least neutral to what we're doing, because we don't want to leapfrog them and become in competition with them, we want to collaborate with them, there's more than enough AF patients to go around, once we establish those relationships with the EPs, now the cardiac surgeon -- remember they do several hundred procedures that are referred to them from cardiologists.

So the next step is actually to go and work with the cardiologists that refer patients into the cardiac surgeon for valve and bypass operations to consider referring AF patients because remember, the AF is often seen by the cardiologist and then if they need intervention sent to the electrophysiologist.

In many respects the electrophysiologist is a tertiary physician.

So the next step is to actually bridge out to the cardiologist and gain their support for the surgeon when they're already referring CABGs and valves to those surgeons.

Now, we have several key strategies.

One is our market development managers that are working with our electrophysiologists.

The other is we're putting in place a group, a small group of people that are going into hospitals and have experience selling to CEOs.

And they're selling the economics of the procedure and they're using the hospital platform to try to gain support to reach out to these cardiologists and TCPs to educate those folks.

And our next step is that we're going to hire some detail reps, like pharma reps and drug reps, to call on the cardiologists and TCPs and use that as a tool and a resource for the hospital to market out to these basically TCPs and cardiology groups so that they can learn about the atrial fibrillation procedures being offered at the hospitals.

At the same time, we believe the hospital will put resources, whether they're media resources or CME programs, behind the minimally invasive program because of the economics.

So we're in a phase now where we've gotten EPs onboard in about 70 centers.

We want to pause where we are in terms of the number of centers, regroup and reeducate and go further and deeper into these 70 centers and then over the next several quarters we'll begin to expand again.

But the concept of going deep and expanding, it's a cycling event.

I hope that more or less answered your question, Kari.

That's very helpful.

Thank you very much and thank you for taking my questions.

Thank you.

Your next question comes from the line of Matt Dolan of Roth Capital.

Please proceed.

Hi, guys.

Good morning.

Morning, Matt.

Hi, Matt.

First a question on the guidance.

Given the EPS number in the quarter and looking at a sequential jump in SG&A and also assuming AATS and HRS adding just some spend here in Q2, can you just help us characterize over three quarters where we should see that leverage and that improvement on the net loss line, where that's coming from specifically?

Matt, this is Julie.

We did have a couple of unusual items that hit SG&A and then we had a lot of our big shows and big marketing activity during the first quarter tied to STS as well as the launch of Synergy.

So we do think SG&A will trend down in subsequent quarters because of these unusual activities in the first quarter.

And that's really the reason we did not adjust our EPS guidance.

Got it, okay.

And then, Dave, on the ABLATE study, is that 55 incremental patients that you're looking for or are you going to be able to roll the 40 or so that you had involved in RESTORE I into that trial protocol?

Well, basically, we used the number of approximately 40 and we used that prospective data along with some other prospective data, put that into a Bayesian statistical model to come out with what we believe -- again, don't hold me to the exact numbers because there were some variables that affect sample size as well as endpoints.

But generally speaking, we're looking at a range of 55 new patients and an endpoint at six months of 70% success rate.

And those will be permanent AF patients with a full maze-like procedure.

So we think that those endpoints are very achievable, that the timelines are achievable and that the sample size, that reduced sample size will really allow AtriCure to get out in front of this AF labeling issue.

And can you remind us what Medtronic's Cure AF set of patient population is or expected enrollment is supposed to be?

75 patients.

75, okay.

And then finally, as it relates to the guidelines published yesterday, is there any way to quantify that?

Do you have any market statistics that would give us an idea of how many patients have (inaudible - background noise) have enlarged atria, et cetera?

Is there any way to quantify that?

I think the big top-level look at that, I would say that if you look at the total population of diagnosed, say you have patients which is 2.5 million, about 50% are persistent and permanent.

And by the time patients get to persistent and permanent, the stretch factors have generally kicked in, which means they have larger left atriums because remember, the permanent patients have focal and these wandering electrical circuits which require a fair amount of left atrial mass to sustain permanent atrial fibrillation considering the wandering circuits and the focal triggers.

So we generally feel very good that the large population of patients that may be best suited for our minimally invasive procedures are those patients that fit the more persistent and permanent and that the expanded lesion set will be a real catalyst.

So the pipeline of literature, it's real manuscripts that are going to be published that we believe in the next six to 12 months as well as this expanded lesion set, we believe the two major catalysts, as well as just the market development work that we're doing to connect electrophysiologists and cardiologists and to support surgeons in their marketing efforts through hospitals and into cardiology groups to stimulate progress.

Okay, makes sense.

And then finally on Synergy, any expectations for data specific to that device in the near future here that we could look forward to?

I think the first Synergy data, and it's not necessarily specific to Synergy but it will come out, Synergy will be used in RESTORE IIB.

We're gong to release the endoscopic Synergy platform at the end of the third quarter.

But we're also going to have enough product built to go into RESTORE IIB and that we reported the number of ablations that are required to create electrical quiescence and complete isolation of the pulmonary veins.

So I think that data will show us, we believe, that there's a reduced number of ablations required to create full thickness ablation lesions and confirm conduction block.

I would like to also just say that at the meetings several issues became more, I think, pivotal for surgery.

One was clearly the pulmonary vein isolation is critical and a year and a half or two years ago or even less, it was a controversial issue.

What you hear today is that complete isolation of the atrium or the pulmonary vein region is a key catalyst to success.

You heard that the ganglion flexi, although early, some of the thought leaders really believe strongly that the triggers are very much often coming from the ganglia flexi and that these are located on the epicardial surface.

So we've been talking about this concept but it's a building momentum.

You also heard yesterday from [Michelle Hanzager] that the left atrial appendage is basically a critical structure, not just from a stroke reduction perspective, but from an anti-arrhythmic perspective because the additional atrial mass that the left atrial appendage offers allows for these wandering circuits to coexist.

So by removing or excluding left atrial appendage in our minimally invasive procedure, we believe that we'll get a stroke benefit but that we'll also get an anti-arrhythmic benefit and that was also discussed yesterday.

So I think the trends in terms of treatment strategy, which are isolation of pulmonary veins, [GP] ablation, appendage from a stroke in an anti-arrhythmic perspective and additional ablation lines are required for the more permanent patients, the trends that are being talked about at this meeting I think bode very well for our clinical strategies.

Okay, great.

Thanks for the time, and I look forward to seeing you at the meeting.

Thank you, Matt.

And your next question comes from the line of Larry Haimovitch of HMTC.

Please proceed.

Good morning.

Julie, just a question on the minimally invasive side.

You gave some numbers, I think you said it was 31% of Q1 revenue?

Of domestic Q1.

Q1.

Can you give us the -- can you quantify that a little bit better for us, what the actual number was and how that compares to the first quarter of last year and the fourth quarter of last year as well?

Well, minimally invasive revenue was $3 million for the first quarter.

Okay.

It was $3.3 million for the fourth quarter of last year.

Okay.

And the last year's first quarter I imagine was lower than that.

32% increase over the first quarter.

Right.

Okay.

So minimally invasive was down, which surprises me, over the fourth quarter, considering all the initiatives and all the progress that you're making.

Any explanation, Dave?

I think the explanation is that it's still a very young, small, emerging opportunity for us and I think when you have small numbers in early markets, cycling is not an insignificant issue.

Talked about STS and Techton.

You were at those meetings.

Those were our best showings of any national meetings that we've been to and most of our sales force was there and most of or customers.

That was a full week, so you look at $3 million versus $3.3 million, it's really a few days of selling time.

And I wouldn't underestimate the Synergy.

Remember the Synergy has new hardware, requires biomedical approvals, so our sales reps have to go down to the biomedical department and get their approval to implement the new hardware, educate the OR staff, educate the surgeons.

To do this manufacturing pilot with a derivative technology is one thing, but to do it with a technology that requires new hardware and new software implementation, biomedical engineering approvals, not an insignificant effort and our goal was to fundamentally release it by the end of March.

The one thing that I'm very proud of from our management group and employees and they should really be commended because the highlights of RESTORE IIB, ABLATE, the clip submission, Synergy launch, if you go back in time in our previous calls, I think the schedule of events occurred, from execution perspective, as planned.

And that was really due to the hard work and commitment and conviction of our employees.

So we're very proud of the fact that we executed on the operations side during the quarter.

Dave or Julie, on the minimally invasive platform, the average selling price is approximately what and is that pretty stable?

Well, it seems to flux between about $7,425, which it was this quarter, and about $7,500.

And that would exclude the pen, which is frequently used in minimally invasive.

And the pen revenue, the average selling price for the pen is roughly $1,700, so a full minimally invasive procedure, including the pen, would be in excess of $9,000.

So if want to get to your approximate minimally invasive procedure, a good number to divide by would be approximately, what, about $8,000?

That's a good estimate.

Okay, great.

Okay, thanks very much.

See you at the show, Dave.

Thank you.

Thank you.

And that does conclude the question and answer session.

I'll now turn it back to management for closing remarks.

Well, I'd just like to thank all of our shareholders for their support and we look forward to the second quarter earnings call.

Thank you very much.

Ladies and gentlemen, thank you for your participation in today's conference.

This does conclude the presentation.

You may now disconnect.

Have a good day.