AtriCure Inc (ATRC) 2007 Q2 法說會逐字稿

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

My name is Frances and I will be your coordinator for the call today

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

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

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

And I would now like to turn the presentation over to Mr.

David Drachman, president and chief executive officer of AtriCure.

Mr.

Drachman, please proceed.

Thank you, Operator.

Good morning and welcome to AtriCure's second quarter 2007 earnings conference call.

Joining me on the call today is Julie Piton, Vice President of Finance and Administration and Chief Financial Officer.

At this time, I would like to turn the call over to Julie for a few introductory comments.

Thank you, Dave, and good morning, everyone.

By now you should have received a copy of the earnings release.

If you have not received a copy, please call [Sara Wickman] at 513-755-4136 and she will be happy to 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 earnings estimates, other predictions of financial performance, launches of new products and market acceptance of new products.

Forward-looking statements are subject to numerous risks and uncertainties, many of which are beyond AtriCure's control, including, but not limited to, the rate and degree of market acceptance of AtriCure's products and other risks and uncertainties described from time to time in AtriCure's SEC filings.

AtriCure's results may differ materially 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, or FDA, has not cleared or approved the Company's Isolator Bipolar Ablation plans or its ablation and sensing units for the treatment of AF.

They have been cleared for the ablation of cardiac and soft tissue.

The Company and others acting on its behalf may not promote any of its products for the surgical treatment of AF, or atrial fibrillation, 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 not 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.

AtriCure has provided research grants to institutions for the purposes of conducting certain studies that may be referred to on this call.

The primary authors of the papers referred to on this call may be consultants to AtriCure.

With that, welcome, everybody, and I'd like to turn the call back to Dave.

Thank you, Julie.

There has never been a more exciting time to be an emerging medical device company focused on expanding the treatment options for patients who suffer from atrial fibrillation.

This is especially true for AtriCure, as we have established a leadership position in these high growth markets as well as the capacity to innovate, educate and commercialize breakthrough products rapidly and efficiently.

AtriCure has developed a team of extraordinary people.

The men and women of AtriCure have a passion toward preserving and improving human life through innovation, education and a deep commitment to realizing the full potential of our markets and Company.

These factors have positioned AtriCure to expand the markets for cardiac ablation and make seminal shifts in the treatment algorithms for atrial fibrillation patients.

The market for ablation devices that treat atrial fibrillation are approximately 1% penetrated and we believe that these markets represent the next frontier and the largest growth opportunity within cardiovascular medicine.

In terms of the second quarter, we are pleased with our financial results and further encouraged by the achievement of a series of key operational financing and business development milestones.

First, I would like to congratulate our management team for their leadership and good, orderly direction and our employees for their record-breaking financial results and the achievement of momentum-building operational milestones.

Now, I will briefly summarize our second quarter 2007 financial results.

Our second quarter consolidated revenues were $12.4 million, which represent a 28% year-over-year increase.

U.S.

revenues from domestic open heart products were $6.8 million, which represents a 21% year-over-year increase.

U.S.

revenues from minimally invasive products were $4 million, which represents a 47% year-over-year increase.

International revenues of $1.5 million was a solid performance and represents a 21% year-over-year increase.

Based on a series of new product releases, combined with our developing international distribution channels, along with underpenetrated international markets, we anticipate continued strong growth from our international business.

Now, turning to our record performance and the increasing momentum in our open heart business, as you may recall, during March of 2007 we released the first version of our Isolator Synergy system, the long open-heart clamp product which features our unique pulsing technology.

The Isolator Synergy system is meeting all of or performance expectations and is being widely adopted and recognized as a superior cardiac ablation technology.

In the first full quarter of commercialization, the long version of the open-heart Isolator Synergy accounted for more than one-third of our open heart clamp sales.

During the third quarter of 2007, we plan to release the standard length open-heart Isolator Synergy.

Based on rapid adoption during our first full quarter of selling the long version of the open-heart Isolator Synergy and our planned third quarter release of the standard length open-heart Isolator Synergy, we believe that we are well positioned to continue our favorable growth trend in our open heart business.

Furthermore, our sales strategy of combining our multi-functional pen with our open-heart Isolator Synergy clamp is a clinical strategy that is being more widely practiced, resulting in broader adoption of our open-heart products and increased revenues per procedure.

As a reminder, our multifunctional pen provides the surgeon with the ability to create cardiac ablation tissue ablation and perform electrophysiology procedures within the operating room.

This is in line with our market development initiative of transforming the cardiac surgeon into the arrhythmia surgeon.

Our unique multifunctional pen is being used in open-heart procedures as a high end accessory product in order to confirm that the ablation lines created by the Isolator Synergy system are establishing full thickness lines of conduction block.

The surgeons are using that same multifunctional pen to ablate the ganglionic plexi, which are neurally mediated arrhythmia triggers.

The ablation of the ganglionic plexi is a rapidly growing trend which favors our technologies and procedure development plans.

The use of the open heart Isolator Synergy combined with our multi-functional pen is raising the bar for our competition because mapping with the multifunctional pen is evidence that the Isolator Synergy is reproducibly creating full thickness lines of conduction block.

We believe that when surgeons begin mapping to confirm conduction block with competitive ablation systems, they will find that the competitive systems are not able to reliably achieve full thickness lines of conduction block.

The use of our Isolator Synergy system combined with our multifunctional bipolar pen was the catalyst for our 21% year-over-year open heart growth and represents the foundation for market share gains in our open heart business.

Additionally, we believe that our September 2007 release of the standard length version of our open heart Isolator Synergy will further stimulate growth during 2007 and 2008.

Now, turning to the momentum that is building in our minimally invasive cardiac ablation markets, during the quarter we achieved new levels of performance in both minimally invasive revenues and market penetration.

Minimally invasive procedures were performed in 83 U.S.

medical centers as compared to our previous high of 71.

This represents a 17% growth in the number of medical centers performing minimally invasive procedures.

We believe that there are two primary catalysts which fuel our minimally invasive growth and expansion during the quarter.

First, the recently published Heart Rhythm Society Guidelines for catheter and surgical atrial fibrillation ablation.

Remember, these guidelines recommend minimally invasive sole therapy procedures for patients that prefer a minimally invasive surgical approach, for patients that have failed one or more attempts in catheter ablation and for patients that are not candidates for catheter ablation.

Secondly, the results from our multi-center minimally invasive ablation registry utilizing our minimally invasive products sponsored by the Cardiopulmonary Research Science and Technology Institute were presented on May 11th, 2007 at the Heart Rhythm Society meeting.

Of the 150 patients presented, 55% of the patients were paroxysmal, 20% were persistent, and 25% were permanent patients.

In comparing the outcomes to the published results for catheter ablation based on serial EKG analysis, which is the most common clinical endpoint in the peer review published literature, the efficacy rate using our minimally invasive ablation products at six month follow-up were 95% for paroxysmal patients, 82.6% for persistent patients, and 70% for permanent patients.

This initial data is consistent with previous reports highlighting the use of our minimally invasive products and we believe that this data further validates the superior efficacy results that are being achieved with 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 the more rigorous method of continuous event monitoring.

We believe that more rigorous monitoring will enable physicians to determine which subsets of patients will benefit more from our minimally invasive ablation products versus catheter ablation and other surgical alternatives.

In this registry, when continuous event monitoring was applied, the efficacy rates were 82% for paroxysmal patients, 70% for persistent patients, and 53% for permanent patients.

Once again, we strongly believe that these results are superior and that these initial results position AtriCure for a large growth opportunity in our highly prevalent, growing and underpenetrated markets.

Physicians and patients are continuing to search for safer and more efficacious options and, based on the initial data, we believe that we have developed a superior treatment alternative for a large and growing subset of patients.

As a result of this multi-center registry and other physician-sponsored studies, we anticipate a building body of evidence in the peer review journals that will fuel the broad adoption of our minimally invasive products.

As previously discussed, in order to achieve higher success rates for the persistent and permanent patients, additional lines of ablation are required.

To address this large and growing unmet need, which we believe represents the largest growth opportunity for ablation products, we are developing a minimally invasive expanded lesion set ablation platform and integrated mapping system.

Together with the release of our endoscopic minimally invasive Isolator Synergy system, we believe that our minimally invasive products will expand the treatment alternatives, improve patient outcomes for the more persistent and permanent patients and for those patients that have failed catheter ablation procedures.

To this end, on July 24th, Dr.

James Longoria, along with his referring electrophysiologist, narrated a video of their fully fluoroscopic [maze-like] procedure using our current minimally invasive products.

This case has been archived and can be viewed on the OR Live website.

This procedure demonstrates our ability and the ability of our products to replicate the Maze procedure using a fully fluoroscopic approach.

Dr.

Langoria's patients are generally discharged one or two days following the procedure, returning to a normal lifestyle within days.

Our planned product releases of our minimally invasive expanded lesion set ablation system, integrated mapping system and endoscopic minimally invasive Isolator Synergy system will provide the technologies to further expand these groundbreaking procedure development activities and grow our minimally invasive business.

Now, turning to our regulatory and clinical progress, recently AtriCure became the first and we believe to date we are the only company to receive an FDA cardiac tissue ablation indication for a bipolar ablation clamp.

Our clearance was based on clinical data demonstrating that our clamps reliably and safely isolate the pulmonary veins and can also create a connecting lesion of the Maze procedure.

Duplicating these technical endpoints of safely and reliably creating full thickness lines of conduction block based on rigorous electrophysiology mapping and testing will represent a high hurdle for competitive bipolar technologies.

Our cardiac ablation indication is a competitive advantage and allows AtriCure to expand our [self messaging] and marketing activities as well as our educational programs while continuing to maintain compliance with FDA regulations.

In terms of our FDA submission in support of our Ablate clinical trial, we received conditional approval from FDA to begin our clinical study.

The Ablate study is designed to treat permanent atrial fibrillation patients during concomitant open heart surgical procedures.

Ablate is a single arm study.

We plan to enroll approximately 60 to 75 patients and we intend to submit our PMA with six month follow-up data.

We plan to enroll our first Ablate patient during October of 2007.

We believe that the Ablate study positions AtriCure to be the first ablation company to receive an atrial fibrillation approval.

Turning to our left atrial appendage occlusion clip, as you may recall, we submitted our 510-K in March and we recently received responses back from FDA.

We are encouraged that the pathway for commercialization in the U.S.

remains a 510-K.

However, as discussed on previous calls, support of this submission will likely require human data.

Assuming human data is required, which is currently being discussed with FDA, then we believe that there is clear justification for a small study with short duration follow-up because our study would be designed to simply demonstrate that technical endpoints of the safety and effectiveness of achieving left atrial appendage occlusion.

We are currently discussing our submission with FDA.

Importantly, we are planning to perform our first human implant in Europe next month.

Following these initial European implants, we are planning to submit our responses to the agency.

In terms of our minimally invasive regulatory programs, we received conditional approval to move forward with our Restore 2b clinical trial.

As you may recall, this clinical trial is an extension of our Restore 2 feasibility study.

The new clinical trial design incorporates an expanded ablation treatment, a minimally invasive Maze-like procedure that includes patients with persistent and permanent forms of atrial fibrillation.

Importantly, we have new products in our short term pipeline specifically designed for this minimally invasive Maze-like procedure, such as the expanded lesion set ablation system, integrated mapping system and endoscopic minimally invasive Isolator Synergy.

Additionally, in the near term we plan to focus our regulatory and clinical operation schemes on initiating Ablate, which is our shortest path to an atrial fibrillation approval, as well as our clip submission.

Based on the efficiencies and opportunities, we plan to submit an IDE supplement in support of Restore 2b to include our next generation products and initiate the study during the second quarter of 2008 with our new minimally invasive product portfolio.

Now, turning to our product development and business development progress.

As we discussed during March of 2007, we released the first version of our Isolator Synergy system, the long open heart clamp which features our unique pulsing technology.

Moving forward with new product extensions of the Isolator Synergy platform, we plan to launch the standard length version of our open heart Isolator Synergy system during September of 2007 and launch our endoscopic minimally invasive Isolator Synergy system during the fourth quarter of 2007.

In terms of our clip, next month we plan to perform our first human implant using our left atrial appendage occlusion clip in Europe.

Additionally, we plan to fully launch our minimally invasive expanded lesion set ablation system along with our integrated mapping system during the first quarter of 2008.

In terms of business development activities, on August 7th, 2007 we acquired the Cooper Surgical Frigitronics product line and certain related assets for an aggregate purchase price of $3.7 million.

The Frigitronics product line includes a cardiac cryosurgical console that is used in combination with several different reusable cryosurgical probes.

Prior to the acquisition, we were a worldwide distributor of these products.

We believe that this tuck-in acquisition of the Frigitronics system is a key market development strategy and an efficient, productive use of capital.

We are enthusiastic about expanding our technology platform and integrating the Frigitronics systems into our open heart product portfolio.

The Frigitronics system has been used by cardiac surgery since the '70s and represents the gold standard for cardiac cryogenic ablation.

We estimate there are more than 400 cardiac Frigitronics consoles installed in open heart centers across the United States.

Currently, the Frigitronics reusable probe has been widely adopted by cardiac surgeons in combination with our Isolator clamps during open heart procedures, predominantly to create spot ablation lesions at the mitral and tricuspid valves.

The Frigitronics probes have not been adopted for the new and growing cryogenic indications because the current line of reusable probes has limited length and are configured for spot ablations, not long linear ablations.

The use of long disposable cryogenic probes is a growing market trend for very specific indications during open heart ablation procedures.

There are two growing indications for cryogenics.

First, ablation procedures performed concomitantly during right lateral mini-thoracotamy valve procedures with or without the use of a robot, as well as procedures performed during redo open heart procedures.

Surgeons perform long cryosurgical probes for these open heart indications because the probe is used for the entire ablation treatment during these procedures, not just spot valve ablation.

In terms of the competitive landscape for cryogenics, ATS is selling the 7 and 10 cm disposable probes developed by CryoCath.

ATS recently paid $30 million for the acquisition of the CryoCath surgical product line.

We have been in the process of developing a long disposable cryosurgical probe that is compatible with the Frigitronics console.

We believe that our long disposable probe will have several significant technical, clinical and commercial advantages and generate new revenue and product leverage opportunities.

First, we believe that the Frigitronics systems -- with the Frigitronics system we have the largest U.S.

installed base of cryogenic consoles.

Second, we believe that cardiac surgeons have a strong preference for the thermodynamics of our Frigitronics nitrous oxide probes.

Third, our Frigitronics console is configured with two channels.

This enables surgeons to simultaneously ablate with two probes and mix our standard reusable probes with our long disposable probe.

This is an important clinical benefit and a highly competitive advantage.

Fourth, we have a world-class sales force which is solely committed to selling cardiac ablation products along with enabling technologies.

Our sales steam is best positioned to educate surgeons and leverage our open heart and minimally invasive clamps, pens, dissection tools, mapping system and cryo probes in order to fuel growth and expand our market share.

Currently, we plan to release our first generation long disposable probe during the second quarter of 2008.

With this technology expansion of our product line, we will be competitively positioned to offer surgeons products for open heart procedures, minimally invasive open heart procedures, redo open heart procedures and minimally invasive sole therapy procedures.

Atricure has the broadest offering of technologies and products for the widest range of clinical applications.

At this point in the call, I would like to turn the call over to Julie for a detailed review of our financial performance.

Thank you, Dave.

Now for a review of our record second quarter 2007 financial results.

Total revenues were a record $12.4 million, representing a 28% increase over the prior year and 15% sequential growth.

Revenues from domestic open heart products were $6.8 million, again a record, representing growth of 21% over the second quarter of 2006 and 4% sequential growth.

Revenues from domestic minimally invasive products, also a record, were $4 million, a 47% increase over the second quarter of 2006 and a 34% sequential increase.

International revenues were $1.5 million, representing a 21% increase over the second quarter of 2006 and sequential growth of 25%.

Minimally invasive revenues accounted for approximately 37% of total domestic revenues and international revenues accounted for 12% of total revenues.

As a reminder, revenues from our multi-functional 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.

Turning to a quick review of some year-to-date 2007 revenue highlights, total revenues were up 26% to $23.1 million as compared with $18.3 million for the first six months of 2006.

Open heart domestic product revenues were up 19% to $13.4 million and minimally invasive domestic product revenues were up 40% to $7 million.

On a year-to-date basis, revenues from minimally invasive products represented approximately 34% of total domestic revenues and international revenues at $2.7 million represented 12% of total revenues.

Now let's move back to the quarter and gross profit results.

Gross profit for the second quarter of 2007 was $9.8 million, reflecting a gross margin of 79.4%, which is consistent with the gross margin we recognized in the first quarter of 2007.

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

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

Next, an update on operating expenses and earnings per share.

Operating expenses for the second quarter of 2007 were $13 million, a 14% increase over the second quarter of 2006 and a 3% decrease on a sequential basis.

The year-over-year increase in operating expenses was primarily driven by an increase in selling expenses attributable mostly to an increase in headcount and a 28% increase in revenues, which drove an increase in variable selling expenses.

Additionally, we incurred increased marketing expenses primarily due to an increase in marketing activities and our expanded presence at industry events, such as our well attended symposium at the recent heart Rhythm Society meeting which occurred during the second quarter.

The sequential decline in operating expenses was primarily due to non-recurring expenses that occurred during the first quarter of 2007.

The net loss for the quarter was $2.8 million.

This represents the smallest quarterly net loss since becoming a public Company and a 13% improvement over the second quarter 2006 net loss of $3.2 million.

The second quarter net loss for 2007 represented a sequential decrease of 35%, or $1.5 million, as compared to the first quarter net loss of $4.3 million.

Net loss per share for the second quarter was $0.22 per share on 12.9 million average shares outstanding as compared with a net loss of $0.26 per share for the second quarter of 2006 on 12.1 million shares outstanding.

The impact of the second quarter -- the impact to the second quarter earnings per share calculation of the [pipe] transaction was approximately $0.01.

The increase in share count during the quarter was primarily attributable to the issuance of 1.8 million shares of our common stock on May 30th in a private placement, or pipe transaction.

1.7 million shares were sold at approximately a 12% discount to market, or $9.15 per share.

Approximately 107,000 shares were purchased by an affiliate at the market rate of $10.32 per share, which is required under NASDAQ regulations without shareholder approval.

No warrants were issued as part of the transaction.

Gross proceeds from the transaction were $16.5 million and net proceeds are estimated to be approximately $15.2 million.

Note that the shares issued were registered in July for resale by the investors.

In terms of the balance sheet and cash, we ended the quarter with cash, cash equivalents, and investments of $28.7 million.

We had total debt outstanding of approximately $900,000 and total working capital of $31.7 million.

Note that certain fees associated with the private placement transaction of approximately $1.2 million are included in current liabilities at June 30th.

Our outstanding shares at June 30th, 2007 were 14.1 million shares of common stock.

Cash used in operations was $5.6 million for the first six months of 2007 as compared with $6.2 million for the first six months of 2006.

Now turning to 2007 guidance, for the full year 2007 we are confirming our revenues in the range of $48 million to $50 million and our expected loss per share in the range of $0.95 to $1.05.

Please note that the net income of the Cooper acquisition and our planned investment in our disposable cardiac cryo probe is expected to offset the benefit to the net loss per share that would have resulted from the increased share count and interest income from the private placement transaction on May 30th.

Looking ahead to the third quarter of 2007, which as a reminder to everyone has historically been a seasonally light quarter, we expect revenues to be in the range of $11.3 to $12 million.

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

Thank you, Julie.

In summary, AtriCure is strong, building momentum across all business segments and positioned to make breakthrough contributions.

At this point in the call we'd like to open the call up to questions.

(OPERATOR INSTRUCTIONS)

Your first question comes from the line of Tim Nelson with Jefferies.

Please proceed.

Really nice quarter.

And it's Piper Jaffray, not Jefferies.

Quick question on the two trials.

As I understand it, Ablate is top (technical difficulty) and you're postponing Restore 2b until you get the new minimally invasive product portfolio ready to go?

Did I hear that correctly?

Good morning, Tim.

That is correct in terms of our fastest pathway.

And we believe the fastest industry pathway to an atrial fibrillation approval is through the Ablate clinical trial.

We want to initiate that clinical trial and we also want to get our clip product approved.

Those are the two current priorities.

At the same time, Restore 2b is better served with our next generation products and that's the rationale for our current regulatory strategy.

Now, on Ablate 2b, will follow-up be continuous monitoring?

Follow-up will be continuous monitoring.

And additionally, it's important to note that the group in Dallas that's currently sponsoring and reported on 150 patients from their registry is also opening up a new arm of that registry, which includes this expanded lesion set with our current technology platform.

So we'll be able to basically acquire data with the expanded lesion set with the current technology through the registry while the Company proceeds with Restore 2b in the second quarter of 2008.

What exactly does a conditional IDE mean?

Does that mean you can open up just a certain number of centers and when do you project to enroll those and then what will the mix be between permanent and persistent?

Conditional basically means that the FDA approves your IDE under certain conditions.

For example, they asked us to make some minor modifications to the protocol, nothing significant, just some minor modifications to the protocols, consent forms, and really some handling of the study design that requires some updating.

Once it's updated, then we can submit to the IRBs.

So we're in the process of doing the updates to the clinical protocol and we would plan to begin submitting to IRBs in September and perform our first cases in October.

Thank you.

The current quarter, could you come in on pricing trends in the quarter, both for domestic MIS and for open?

Good morning, Tim.

This is Julie.

Pricing has remained relatively consistent with our earlier quarters.

Okay.

And projected, I assume, to continue that way?

That's correct.

And on a gross margin front, the 79%, given the rate of new product introductions you guys have got coming, is that going to hold, would you guess, through the year?

We would expect margins to continue to be in the high 70s, somewhere kind of between the 76% and 79% range is what we would expect prospectively.

And you didn't give us the allocation on [pen] sales between the two product categories.

Could you tell us what that is there for the quarter?

Minimally invasive was allocated to 38% of pen sales.

38%, okay.

Great.

All right, great quarter.

One final question.

The [83 counts] for the MIS, that's a huge increase.

I thought the strategy was to sort of go deep and not broad.

Has that changed?

It's hard to hold back momentum.

Coming off of HRS there was a lot of momentum in the marketplace.

I think we did an excellent job in terms of training people.

The initial results in these new centers have been equal to the results that we've had previously in opening up new centers, so I think that we're well controlled in terms of managing new penetration as well as further adoption in the existing centers.

Is your strategy to continue this increased number of accounts performing MIS procedures or are you going to try and focus on the very interested and well trained group -- core group you've got now?

We will gradually increase the number of centers in a very systematic, well coordinated way.

I also think that it's important to remember that if you look at last year's catheter ablation numbers of 25,000 to 30,000, that about 80% of those procedures were performed in 50 centers.

So although we want to expand in a very systematic way, we believe that 150 centers over some window of time would certainly produce a very high growth minimally invasive business.

Great.

I'll get back in queue.

Thanks.

Thanks, Tim.

Thank you, Tim.

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

Please proceed.

Hey, guys.

Good morning.

Nice results.

Thanks, Matt.

Thank you, Matt.

First question on the MIS business.

Dave, can you give us an idea of where usage stands in the centers that have been onboard for a longer period of time?

I think it looks like just under six, six and a half procedures per quarter given the accounts you had.

But can you give us an idea of where that stands and accounts that maybe have been around for, say, more than six or 12 months?

Well, in broad brush, as you know, in early stage markets it's sort of an 80%-20% rule.

But what we're very focused on is taking the high users and continuing to build momentum with the high users but taking the users that are using the product less frequently and developing them into high users.

And we have several market development and account strategies to do that.

So it's a continuation of opening up new accounts, expanding in the existing accounts and taking the existing accounts and moving them into the high user range.

Okay, so the high end, could they be doing more than four a month or is there a number we could peg on there?

Two to three cases a month would be a high user.

Okay.

And then in terms of the pen with the switching system, what are you seeing now in terms of pen adoption and I guess put in terms of the percentage of surgeons that are now using the pen pretty regularly?

It's expanded significantly.

I think the pen in the minimally invasive has always been a consistent product.

In the open heart with the Synergy, the advantage that we have is we have a second run at the pen.

And what we're doing is we're using the Synergy technology to demonstrate with the pen that we can achieve conduction block with the first ablation.

And we believe that that's going to create a very high bar for our competitors in the industry.

Also, this whole concept of ablating the ganglionic plexi is also being adopted in the open heart procedures.

Very earlier on in the year it was more focused on the minimally invasive.

So the concept of confirmation of conduction block and ablating the ganglionic plexi, which was originally more of a minimally invasive technique, is now transferring over to the open, which is creating an opportunity for us to combine the multifunctional pen with the Isolator Synergy.

Okay, great.

and then finally on the Frigitronics announcement, can you just give us a comment on the current market for the two incremental indications you mentioned, either as it relates to the current revenue business, CryoCath generating or more generally the number of patients that are applicable to those indications?

Well, if you look at the CryoCath trailing 12 months sales for their surgical product lines, we estimate that that's about $12 million.

And that was done through basically ATS, who was acting as a sales agent, and a few reps from CryoCath held on to a few direct accounts.

We believe that with our direct sales force and superior products that we can expand the market for cryo products and also use this cryo platform to leverage and pull through our existing technologies.

Great.

Okay, very helpful.

Thanks a lot, guys, and congratulations.

Thank you, Matt.

Thank you.

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

Please proceed.

Hi.

Good morning.

Question on the minimal accounts.

It's my understanding that your training cycle was relatively long in terms of getting a surgeon from the interest phase to the phase where he's actually performing procedures.

So is that true and, if so, was there anyone who got interested at HRS that actually was one of those 83 accounts in the same quarter?

There were centers that got interested at HRS that became active centers during the quarter.

And you're right that the training cycles were relatively long, in large part because we were very targeted in terms of which accounts we wanted to target.

The minimally invasive platform really wasn't ready to be highly scaled in the marketplace six months or a year ago.

With each quarter that goes by, the minimally invasive platform is becoming more adoptable and more scalable.

And the way that we perceive our best pathway to scalability is through professional education.

So over the past six months we've worked very hard with hiring internal people as well as external consultants to develop a world-class professional education organization that can compress the cycles for training.

And that's our intention.

The way that we perceive scalability is once the peer review literature is further out there and we have additional new technologies in the marketplace, we'll have a [profitable] organization that is capable of scaling this business rapidly.

Okay.

And so then is it safe to say that the interest that was from HRS has not yet really been capitalized on fully?

Not yet capitalized on fully.

It's a developing market and I think you'll see it continue to develop throughout the year.

Okay.

And then on the Frigitronics, just a few things.

Do you have any material sales today?

Not material.

It's in the range of about $300,000 to $500,000 per year.

The reason to acquire the asset was so that we could use the engineering designs and make compatible disposable probes and have control over the entire platform.

Now again, Frigitronics has been used since the '70s and I think one thing that's important to think through is ablation of cardiac arrhythmias started out in the operating room.

So the EP would wheel the mapping system into the OR and the surgeon would use the Frigitronics system to do the ablation.

So cardiac surgeons have a very favorable impression of the Frigitronics platform.

And our goal now is to take their original reusable probes, develop long disposable probes, maintain the same preferential thermodynamics and market the product to the same indications that CryoCath has picked up over the past several years, which are emerging indications, right lateral mini valves and redo procedures.

Okay.

Could you say how many consoles are out there and if they're all accessible to cardiac surgeons or are they being used for -- in other areas of the hospital?

There are more than 400 active Frigitronics systems being used by cardiac surgeons.

One point that we should emphasize is that we developed a distribution relationship with Frigitronics because the surgeons were accustomed to using the Frigitronics system to make valve lesions.

The valve, as you know, is around the coronary anatomy and physicians want to be very careful and cautious around the valve.

And historically, through the Maze procedure, physicians adopted cryo probes to ablate around the tricuspid and mitral valve annulus.

So we developed this distribution agreement with Frigitronics so that we cold sell our clamps and use the cryo product to leverage the sales of our clamps so that physicians would be comfortable making the valve lesion and completing the full Maze procedure with our clamp technology.

So there are active systems out there.

We believe there are more than 400 active systems that we can leverage off of and we don't believe that the cost of the unit is going to be an issue.

Our plan is to develop this long disposable probe.

The system has two channels and we'll be able to mix and match between reusable and disposable probes and eventually we'll move to an entire disposable product line.

Okay.

And then two follow-ups on that.

In terms of accounting, are all of these consoles now yours?

And on your books, are they owned by the hospitals?

And then secondly, how much R&D spend do you anticipate needing to get these products out?

Well, the R&D spend on the disposable probe is about $1 million.

And we do own the Frigitronics systems that are out there in the market.

A high percentage of them have been sold to the accounts.

Okay, great.

From a pure accounting perspective, the hospitals have purchased them and they're technically owned by the hospital.

All right, thank you.

Your next question is from the line of [Larry Hannowicz] with [HMPC].

Please proceed.

Good morning.

Hi, Larry.

Larry.

Congrats on a great quarter, Dave.

thank you.

On Ablate, could you go into a little more detail on the trial?

You mentioned starting in October, PMA trial I think you said 60 patients?

Well, the Ablate trial in terms of the exact number of patients, it's a little bit challenging because it's a [Bazine] statistical model which uses objective performance criteria from the peer review published literature to support the sample size.

So the better the results in terms of safety and efficacy, the fewer the number of patients.

Based on the -- our best estimates, we believe that we'll need to enroll about 60 to 75 patients.

The FDA's agreed to a six month follow-up and, once again, we think this is a very enrollable study and provides AtriCure and perhaps the industry with the most rapid pathway to an AF labeling.

And this would be a single arm trial I think you said, right?

Single arm.

Single arm study, correct.

Okay, good.

And how long would you guess the enrollment might take before you could have the data to put the PMA together?

Any guess at all?

Best estimate at this point would be six to nine months to complete enrollment.

How many centers do you plan on enrolling?

We want to keep this fairly tightly controlled, so we're -- we'll have 10 active centers.

Okay.

To move on to Frigitronics, I understand the strategic sense of the deal.

I've heard several doctors at meetings talk about their preference for cryo.

What I've also heard from the podium and particularly from [Ralph Damiano], and I'm sure you've heard this as well, he really liked it because it was a reusable and I think he liked the fact that he didn't have to use a disposable.

I'm just wondering if it's going to be a challenge at all, Dave, to shift the market from pretty much of a reusable mindset to a disposable mindset.

Certainly it's obvious why it's advantageous for AtriCure.

I'm just wondering how the doctors will receive that.

Well, remember, Larry, we're going to continue to provide surgeons with these short spot ablation reusable probes.

So people like Ralph will still have access to the Frigitronics system and he'll be able to use reusable probes for spot ablation over the near term.

But we're also going to develop a long disposable probe and physicians that would prefer to use a long disposable probe, for example the physicians that are performing mini right lateral thoracotamy procedures that are targeted at valves as well as redo procedures.

That CryoCath market is a long disposable market and accounts for about $12 million of worldwide sales and there are some growing trends in that direction.

So the advantage that we have, beyond the fact that Frigitronics has superior thermodynamics in terms of the actual biophysics of the ablation, the advantage is that we have two channels and those two channels can support reusable and disposable products.

And the reusable products are for a very different indication.

They're for people like Ralph Damiano and others that want to use our clamps but use the Frigitronics system for just spot ablation around the valve.

So we think that that's a significant advantage, the two channels.

And by the way, the two channels can be used simultaneously, so you can imagine a physician doing a mini right lateral thoracotamy mitral valve with the long disposable probe across the posterior wall and the spot ablation reusable probe at the mitral valve annulus.

He can use two probes simultaneously, which is again a significant advantage over our competitors.

Got it.

Okay, that makes sense.

And then on the minimally invasive, Julie, what were the actual minimally invasive procedure numbers?

You had a very strong quarter, better than I was expecting.

I think you made remarkably good progress.

What was the procedure growth percentage-wise or the actual number of MIS procedures in the U.S.?

Yes, Larry, we actually don't provide procedural information.

Okay.

How about -- how about the approximate ASP?

It's been running about, what, 7,500 or so for the --?

Yes, and it was relatively consistent during the second quarter.

It was --

Do you have any more color on the MIS?

Was it just the fact that you just put a lot of effort -- I know the sales reps that I've talked to have been putting a lot of effort to really work that market?

Is it just a consistent effort or is something different going on?

Are you gaining share or is the market just really coming strong?

A little more color on that would be helpful, Dave.

I think the sales organization was really focused on all aspects of our business.

We're extremely excited about a 21% year-over-year growth on the open business.

So the open business is reemerging as the strong growth segment of our overall business, while minimally invasive demonstrated a 47% year-over-year growth.

And we think that's primarily because things like the HRS guidelines, which actually support the use of minimally invasive procedures for patients that prefer them, for failed catheter ablations and where catheter ablation is not indicated.

So it is building momentum for the minimally invasive platform that AtriCure is providing because that data supports it.

It works.

The more patients that are being treated, the more patients that are being cured, the more momentum that we're building and I think that you'll continue to see that well into the future.

It looked to me last year, Dave, that your share in minimally invasive was somewhere in the, call it two-thirds, three-quarters of the market.

Do you think you've actually been gaining share this year with that performance the last couple of quarters or is the market itself strong, too?

I think it's a combination of both.

I will certainly tell you that [Creighton Pruitt's] data with the AFX on 100 patients followed for 12 months with 40% results and his comments that he could not achieve full thickness lines of conduction block with the Guidant AFX system was a major step in the right direction toward minimally invasive procedures.

It's also made people more aware that they need to create full lines of conduction block and that's the AtriCure strength.

So I do think that companies like AFX have lost some momentum because the published literature is out there.

The other thing that's happened from a competitive perspective is some of these patients that have been treated with competitive technology are returning with atrial fibrillation or other atrial arrhythmias to the [P lab].

And when the electrophysiologists map these patients and if they see that these lines are not creating continuous lines of conduction block, then why send patients to surgery?

So to some regard, the competitive piece has been very strong for us over the last year as people have begun to show their true colors from a technology perspective.

In another sense, things like the HRS guidelines have also been strong for us in terms of providing validation that minimally invasive is here to stay.

Great.

Congratulations again, Dave.

Thank you.

And your next question comes from the line of [Bob Koshkalian] with [Caris Partners].

Please proceed.

Hi, Dave and Julie.

Can you hear me okay?

Yes, we can hear you.

Okay.

Congratulations on a great quarter.

A few questions.

Using the midpoint of the guidance that you're giving for Q3 and for the full year, it says Q4 has to be around $14 million a quarter.

Does that include Frigitronics sales and, if so, how much of that is in Frigitronics?

Would you just mostly expect it to come from growth of the momentum you've built in your core businesses?

Well, first of all, Bob, as you know, the third quarter, if you look at the AtriCure business, the minimally invasive, as you know, is highly elective.

The other component that people underestimate is that our open heart business is also highly elective.

The majority of open heart procedures that are performed are performed during elective valve procedures.

So there is a seasonality to our business and we wanted to make sure that we took that into consideration.

The Frigitronics system will really not be a considerable contributor to revenue until we have our disposable -- long disposable cryosurgical probe, which we plan to release in the second quarter of 2008.

On a full year basis, cryosurgical technologies will produce somewhere between $300,000 and $500,000 wroth of sales for the Company.

Which is relatively consistent with history, so no change or factoring that into the guidance per se.

Okay.

And are you currently the exclusive worldwide distributor of the Frigitronics products?

Bob, we own the Frigitronics product now.

Well, I know now, but I mean prior to your purchase of it.

Well, prior to the purchase there was some co-exclusive nature to our relationship.

For example, the reason why we didn't mention the fact that we were the exclusive distributor is because our distribution agreement actually expired and Frigitronics sold some systems directly out in Europe.

Okay.

But that was the nature of our relationship.

All right, but that all makes sense.

The numbers you're quoting for the kind of sales you were doing and the kind of sales going forward for the moment say that you were doing most of their sales when you had the distribution relationship.

Correct.

Can you talk a little bit more about the financial aspects of that business?

I'm just curious what kind of margins the Frigitronics business generates.

Is it a profitable business right now?

How are you going to -- how is it being paid for?

Is it all cash?

Well, first of all, in terms of the profitability, the major advantage that we have is that the units are already in place.

And as Julie pointed out before, the hospitals have purchased the units.

So we have very little depreciation to account for in terms of the P&L.

And the product itself is a fairly simple probe.

We're designing it now but the cost of goods and the gross margin should be consistent with our other disposable products without the burden of having to install new hardware because the majority of centers that we would be targeting already have the hardware.

So I think the margins will be strong in the business.

It just makes very clear sense for us to have this product portfolio in our bag.

In our history we've had the inability to fill that growing niche of mini right lateral thoracotamies with or without a robot and the reason that mini valves may be growing is because surgeons see percutaneous valves on the new frontier.

And in preparation of percutaneous valves, they want to prepare themselves by performing right lateral mini thoracotamy valve procedures with a robot.

And the concern that we have is that our clamp isn't configured to actually ablate on the left side of the heart from a right lateral thoracotamy.

And people generally have adopted this CryoCath technology because it can make all of the lesions of the right lateral thoracotamy Maze procedure.

Now, our technology, we believe, will be superior because we have less thermal spread and we believe that the technology also will make more reliable full thickness lines of ablation and fills that niche.

So AtriCure can now walk into an account and we can offer physicians the highest quality products for open heart procedures, for mini valve open heart procedures and for minimally invasive sole therapy procedures.

This really fills out our product line and should not only increase our revenue in terms of cryogenics but will lead to pull-through technology product sales as well.

Okay.

And the purchase price, Bob, was $3.66 million.

We paid $3.2 million in cash at closing and then we will pay in an unsecured note another roughly $420,000 upon kind of successful transfer of the manufacturing line, which we would expect to happen sometime during the first quarter of 2008.

Okay.

That was my next question.

From an integration standpoint, all of this will be brought to Cincinnati?

It will all be brought to Cincinnati.

It's a fairly simple system actually in terms of hardware and console as well as the reusable probes.

We've been working with Cooper Surgical and Frigitronics now for actually more than two years.

We have a pretty good command over the technology and getting control over the platform, the device master record, the design history file and the prints and so forth allows us to really facilitate the development of our long disposable product line, which our first generation probe again will be released in the second quarter of 2008 and we plan to develop additional derivatives of that technology on a going-forward basis.

Okay.

Just out of curiosity, if I may, where are these assets now?

Where is Cooper Surgical manufacturing it?

Connecticut.

In Connecticut, okay.

And I'm sorry, last question on Frigitronics is so in 2007 this will be accretive or is it going to take a little work?

I understand the strategic nature of the acquisition.

It makes perfect sense to me.

Just curious financially will it be accretive in 2007 or will it take the disposable probe to bring it into the black?

It will definitely be dilutive during 2007 because there's no incremental revenue we expect to be generated until we develop and bring to market the disposable, which will not come out until the second quarter of 2008.

Okay.

To give you a broad brush on top of that, I think that from the time that we deliver that disposable probe, somewhere in the two-year timeframe, we think that this acquisition will certainly pay for itself just based on the cryogenic sales, not including the pull-through product sales that we'll obtain by having a broader product line.

Okay.

And in your guidance, have you -- that you've given for EPS lost for the year obviously includes this?

Right.

Yes, absolutely.

Okay.

Last question.

Just kind of a housekeeping question.

What exactly today has a cardiac tissue indication?

Is it both the open heart and the minimally invasive endoscopic clamps?

That's right, Bob.

All of our -- or all of our clamping technologies and pen technologies have a cardiac tissue ablation indication.

Okay.

And Synergy is getting -- a cardiac tissue ablation indication for Synergy is something that's in the works as well and is that relatively -- you think that'll be relatively soon or will it take a little while?

It'll be very quick.

Very quick, okay.

Okay, thank you very much and congratulations again on a great quarter.

Thank you, Bob.

Your next question is a follow-up from the line of Tim Nelson with Piper Jaffray.

Please proceed.

(technical difficulty) your comments on more extensive mapping coming on the redo out of EP labs and then discovering the failure rates.

How do you keep these EPs from throwing the baby out with the bathwater and differentiating between ablations that are performed by AtriCure technology and other technologies and sort of making sure that you rise to the top there?

Well, that's a fairly simple solution.

We have a world-class sales organization and basically it's becoming more evenly divided between people that have experience selling to cardiac surgeons and manage the end user as well as a group of highly successful professionals that have worked in the electrophysiology markets.

So we go in and we talk to the electrophysiologists about the AtriCure approach and what makes the AtriCure approach special and different in terms of technical endpoints and clinical outcomes.

I mean are you doing anything to track EPs to determine their referral rates and whether their referral rates are affected by the failures they're discovering?

It just seems like it's a bit of a risk that the industry could get a bad name from technologies that don't cut the mustard.

It is a bit of a branding issue on a broader scale.

We've sort of struggled for different ways to brand our products.

For example, whenever you see an AtriCure case, the AtriCure name is on the clamp.

And calling on the electrophysiologists is one way to do it.

Getting out and calling on the cardiology, the big cardiology groups and trying to separate the technologies.

It's certainly a needed process and there is occasionally some baggage and some time to recover from other failed technologies in certain cities.

We recently came across that in a major city during the quarter where we had a much more difficult time penetrating because they used a competitive technology and there were several complications as well as poor clinical outcomes.

So it is a challenge, but I think it's becoming less of a challenge in part because the competitive technologies right now -- somebody mentioned this earlier on the call, but we believe that our minimally invasive position is stronger today in terms of market share than ever before.

And then as a follow-up, on the upcoming FDA panel meeting for, I think (technical difficulty) in September [to do an] AF ablation trial design.

Do you expect that to have any impact on your clinical program in terms of the speed at which you can get these protocols approved and executed?

Well, maybe on Restore 2b, but the Ablate trial, based on our own current knowledge of the data and the published data for the AtriCure technologies when used in an open heart procedure for permanent AF patients and a sample size of 60 to 75 patients and ten high-volume enrolling centers and six-month data in terms of follow-up and very achievable clinical endpoints that we know that we can achieve based on our historical data, I'm not sure that there's a faster way to get to market with an AF labeling than Ablate.

I do think that the agency is looking at the concept that ablation trials for atrial fibrillation have not been enrollable and may look at more of a single arm study with historical controls.

That's been the big push because when you look at the most recent AF clinical trials, there's been randomization against an already failed drug.

And that's a very difficult trial to convince somebody to enroll in.

If I'm a patient and I've already failed an anti-arrhythmic drug and now you're going to randomize me to either another drug or an ablation technology when I can get the ablation technology on the open market, it's difficult to enroll patients that way.

I think the FDA has had a lot of pressure from the Heart Rhythm Society and will look at alternative methods like historical controls to make these trials more enrollable.

Okay, thanks.

And there are no further questions at this time.

I'd like to turn the call back over to Mr.

Drachman for any closing remarks.

We'd like to thank everybody for their support and for joining us on the call today and we look forward to our third quarter earnings call coming up.

Thank you very much.

And thank you for your participation in today's conference.

This concludes the presentation.

You may now disconnect and have a good day.