AtriCure Inc (ATRC) 2007 Q3 法說會逐字稿

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

My name is Nicole, and I'll be your coordinator for today.

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

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

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

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

David Drachman, President and Chief Executive Officer of AtriCure.

Mr.

Drachman, you may proceed.

Thank you, Operator.

Good morning, and welcome to AtriCure's third quarter 2007 earnings call.

Joining me today on the call 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 press release.

If you have not received a copy, please call Sarah Wichman at 513-755-4136 and Sarah will fax or e-mail you a copy.

Before we begin, let me remind you that the Company's remarks today may include forward-looking statements.

These statements include, but are not limited to those that address activities, events or developments that AtriCure expects, believes or anticipates will or may occur in the future, such as revenue and 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 our 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 clamp systems 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 train doctors to us 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.

Additionally, AtriCure's Left Atrial Appendage Clip System, which will be referred to on the call today, is not commercially available and is pending FDA 510(k) clearance in the United States.

It is, however, currently being used in clinical evaluations in Europe.

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

Thank you, Julie.

This month we celebrate our sixth year anniversary.

Today, we are more certain than ever before of our ability to make seminal contributions within cardiovascular medicine, build a great and enduring company, and create value for our shareholders.

Operationally, the men and women of AtriCure are executing and building momentum on all fronts.

We are demonstrating strong growth, while we maintain financial controls, leverage our existing infrastructure, and plan for rapid market expansion.

We have amassed greater penetration and stronger market presence in each of our current business sectors and we believe that our left atrial appendage clip system will develop into a new business sector and represents a new high growth opportunity for our company.

We believe strongly that no other atrial fibrillation company is better prepared or positioned than AtriCure to deliver results for patients, physicians and shareholders.

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

We are encouraged by our third quarter performance and our favorable trends in terms of operational leverage as our third quarter performance represents our most favorable net loss since becoming a public company in August of 2005.

Third quarter consolidated revenues were $12.1 million, which represents a 29% year-over-year increase.

U.S.

revenues from domestic open heart products were $6.7 million, which represents a 22% year-over-year increase.

And, despite the challenges of seasonality as it relates particularly to the elective nature of minimally invasive cardiac ablation procedures, U.S.

revenues for minimally invasive products were $3.5 million, which represents a 28% year-over-year increase.

Minimally invasive procedures were performed in 73 U.S.

medical centers during the quarter, a solid performance.

International revenues of $1.8 million were a record-breaking accomplishment and a 65% year-over-year increase.

Now, I would like to address our strategy of market segmentation, which we believe will lead to minimally invasive market expansion.

As we have communicated in the past, the U.S.

opportunity for a minimally invasive product platform is approximately $2 billion, with an equal opportunity in the rest of the world.

At the core of our minimally invasive growth plan is our market segmentation strategy.

The initial objective of our product, and market strategy, was to replicate the technical endpoints and clinical outcomes of the classic cut-and-sew Maze procedure, using our proprietary bipolar ablation devices to duplicate a full lesion set and simplify the cut-and-sew Maze procedure in order to stimulate broad adoption in our open heart markets.

As a result of the broad adoption of our open heart platform, approximately 30 peer reviewed publications have reported clinical outcomes for more than 700 patients.

The long-term efficacy from these reports using our open heart platform are very similar to the classic cut-and-sew Maze procedure, with our results ranging from 80% to 96% in all forms of atrial fibrillation, including the more persistent and permanent patients.

Based on our simple, safe and efficacious clinical outcomes using our minimally invasive open heart platform, we are confident that we can achieve similar clinical outcomes with our minimally invasive products as we evolve our minimally evasive products in order to mimic the classic cut-and-sew Maze procedure through a totally thorascopic approach for sole therapy persistent in permanent patients.

Now, turning to our minimally invasive market segmentation strategy, which is core to our growth initiatives.

During 2005, we began to commercialize our first generation minimally invasive products.

Up until recently, our minimally invasive platform has been engineered to create a limited lesion set targeted primarily at the paroxysmal patients, which account for approximately 50% to 60% of the diagnosed atrial fibrillation population in the U.S.

Based on the initial, but building results presented and published using our current minimally invasive product platform and limited lesion set, we believe that our results are superior to catheter ablation.

As the peer reviewed literature continues to build, we anticipate significant penetration into the paroxysmal segment of the market.

In contrast, catheter ablation has been attempting to address the paroxysmal market segment for the previous 15 years and has achieved minimal penetration and no atrial fibrillation FDA approvals, despite the investment of significant time and resources.

Although a newcomer by comparison, AtriCure is beginning to make more rapid penetration into the sole therapy paroxysmal market segment and has clinical trials underway to obtain atrial fibrillation approvals.

It's important to note that the recently published Heart Rhythm Society consensus statement describes three standard options for paroxysmal patients -- medical management, catheter ablation, and minimally invasive ablation.

Medical management includes a variety of antiarrhythmic and anticoagulation drugs which are poorly tolerated and often ineffective.

Catheter or minimally invasive ablation is recommended as a second line of treatment.

With catheter ablation, patients often require multiple ablations, are frequently exposed to excessive amounts of radiation and significant risk associated with thermal spread and injury.

The majority of physicians would characterize the catheter ablation results as suboptimal.

In comparison, the growing body of peer reviewed literature is reporting 80% to 95% success rates with one procedure using our minimally invasive platform in the paroxysmal population.

Although many physicians believe that our results are superior, in certain aggressive ablation catheter centers, our minimally invasive platform can be viewed as competitive with catheter ablation, particularly within the paroxysmal market segment.

We strongly believe that centers that are not aggressive catheter ablation centers, which represents the majority of medical centers, will often adopt our minimally invasive product platform for the paroxysmal market segment.

We expect to enter phase two of our market segmentation plans during the first half of 2008.

During this second phase, we will more clearly segment the market between catheter ablation and our minimally invasive product platform based on three clinical presentations of atrial fibrillation -- paroxysmal or intermittent, persistent and permanent.

During phase two of our market segmentation plan, we anticipate that our minimally invasive platform will become highly complementary with catheter ablation as a result of our penetration into the more persistent and permanent patient population.

To accomplish this, we are focused on expanding the lesion set from a limited ablation paradigm aimed at the paroxysmal market segment to a more complete lesion set that mimics a Maze procedure and can be performed with a totally thorascopic approach.

The current treatment options for the more persistent and permanent segments of the market are generally limited to rate control strategies or antiarrhythmic drugs, used in combination with anticoagulation drugs to reduce the high risk of stroke in these subsets of patients.

Due to the limitations of catheter ablation, it is not typically indicated for the more persistent and permanent segments of the market.

This unmet need accounts for approximately 40% to 50% of the 2.5 million Americans that have been diagnosed with atrial fibrillation.

We believe that the more persistent and permanent patients represents the largest unmet clinical need within the ablation markets.

In fact, the Heart Rhythm Society consensus statement recommends the use of minimally invasive ablation for those patients that are not indicated for catheter ablation, which are often the persistent and permanent patients, and those patients that have failed one or more multiple catheter ablations.

Catheter ablation failures occur approximately 30% of the time.

Market segmentation will enable physicians and patients to more clearly understand the distinct roles and indications for catheter ablation versus our minimally invasive ablation platform.

We believe that the growth for catheter ablation will be segmented primarily to the early onset paroxysmal patient population.

We believe that our minimally invasive products will become a viable alternative for paroxysmal patients in certain centers where catheter ablation is not aggressively practiced.

Importantly, we believe our next generation minimally invasive product platform will mimic portions of the Maze procedure and become a standard of care for the more persistent and permanent segments of the market, achieving high penetration rates in U.S.

medical centers.

There are several successful examples of this type of market segmentation in the cardiovascular industry.

For example, patients with single vessel coronary artery disease are generally referred to percutaneous catheter intervention procedures, such as stents, while patients with multi-vessel disease or failed percutaneous catheter interventions are generally referred for coronary artery bypass grafting.

If we follow this model, then approximately 30% of all sole therapy atrial fibrillation ablation will be performed using minimally invasive products, a space that we currently dominate as the clear market leader.

One of the testimonials of this example is the Agency for Health Care Research and Quality.

This federal agency is one of the arms of the Department of Health and Human Services.

They recently published results that surgeries are generally underutilized and that percutaneous procedures should be reserved for earlier disease stages.

Now, I would like to review three highly visible indicators of our minimally invasive progress.

Last month, in the Journal of Cardiovascular Electrophysiology, Dr.

James McClelland, a well known electrophysiologist from the Oregon Heart and Vascular Institute, reported results from a consecutive series of 20 atrial fibrillation patients.

It's important to note that this is the first acceptance of a minimally invasive ablation manuscript in a premier electrophysiology peer review journal.

This is a major milestone for AtriCure patients, physicians and our industry colleagues, as well.

The results from this McClelland manuscript are based on the use of rigorous 30-day continuous monitoring at one-year follow-up.

At one year, 87.5% of the paroxysmal and the persistent patients were free from left atrial arrhythmias, including atrial fibrillation and off antiarrhythmic drugs.

We believe that these results using our minimally invasive product platform are consistent with other published and presented data highlighting the use of our platform and that these results are superior to catheter ablation.

Furthermore, on January 17, 2008, at the upcoming Boston atrial fibrillation meeting, during the accredited main sessions, there is a symposium entitled, The Surgical Management of Atrial Fibrillation.

This CME accredited symposium as a part of the main sessions will begin with a live satellite case transmission from the Medical College of Virginia, highlighting the use of our minimally invasive product platform.

Dr.

Ken Ellenbogen, a pioneer in electrophysiology, from the Medical College of Virginia, will moderate the live minimally invasive transmission of his patient.

Additionally, Dr.

James Edgerton will further highlight the use of our minimally invasive product platform and the evolution to our newer products aimed at the more persistent and permanent patients.

Additionally, Dr.

Marc Gillinov will present the surgical management of the left atrial appendage.

Moreover, at the same Boston atrial fibrillation meeting, on January 18th, Dr.

David Fitzgerald, a key opinion leader and professor of clinical cardiology and electrophysiology at Wake Forest University, will be hosing an accredited CME luncheon symposium titled, The Electrophysiologist's Perspective on Bipolar Epicardial Ablation Procedure for Atrial Fibrillation.

We believe that these symposiums are very clear indicators that our minimally invasive platform is on the way to becoming a standard of care.

We anticipate that the proceedings of this high profile minimally invasive symposium will be published as a supplement to the Heart Rhythm Society journal during 2008.

When we consider our building momentum and indicators of minimally invasive breakthrough momentum, coupled with our consistent strong growth trends from our open heart and international markets, along with the high potential of our left atrial appendage exclusion clip, we believe that AtriCure is exceptionally strong and positioned to deliver results for patients, physicians and shareholders.

Now, turning to our regulatory and clinical progress.

In terms of our FDA submission in support of our Ablate clinical trial, we anticipate enrolling our first series of patients this month.

Ablate, as you may remember, is a single arm open heart study.

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

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

Now, turning to our left atrial appendage exclusion clip.

As you may recall, we submitted our 510(k) in March and we received initial responses back from the FDA in July.

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

remains a 510(k) submission and, as we've communicated, we are in the process of working with FDA to understand whether our 510(k) submission will require human data.

We believe these requirements will become clearer during the first quarter of 2008.

If human data is required, then we believe there is a clear justification for a small study with short duration follow-up, primarily because our study would be designed to simply demonstrate the technical endpoints of the safety and effectiveness of achieving left atrial appendage exclusion.

To this end, we have initiated our European clinical study based in Zurich and have successfully implanted a small series of clip systems and plan to continue enrollment.

Moreover, we have plans to expand our international human clinical programs during the first quarter of 2008 in order to strengthen our FDA submission, if needed.

Now, turning to our 2008 product plans.

We plan to release our minimally invasive [cool rails] expanded lesion set ablation platform along with our integrated mapping system during the first quarter of 2008.

This is a critical step for the second phase of our market segmentation strategy, providing physicians the technology to expand our current minimally invasive lesion set, which is expected to provide an alternative for the more persistent and permanent patient populations.

Moreover, we recently launched our endoscopic isolator synergy platform, which we believe will continue to improve clinical outcomes, while further solidifying our minimally invasive market dominance.

Additionally, we have several other 2008 product development plans that we believe will enhance our minimally invasive product platform.

In terms of our open heart business, during the summer of 2008, we plan to release our Frigitronics disposable probe in order to expand our market share in the open heart markets.

Our cryo system represents a clear opportunity to continue building on our favorable open heart trends well into the future.

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

Thank you, Dave.

Now, for a review of our third quarter 2007 financial results.

Total revenues were $12.1 million, representing a 29% increase over the prior year and a 2% sequential decline.

As a reminder, our third quarter revenues are affected by seasonality due to the elective nature of the surgical procedures which utilize our products, particularly minimally invasive products and procedures.

Revenues from domestic open heart products were $6.7 million, representing growth of 22% over the third quarter of 2006, and relatively consistent with second quarter 2007 revenues of $6.8 million.

Revenues from domestic minimally invasive products were $3.5 million, a 28% increase over the third quarter of 2006 and a sequential decline of $0.5 million, impacted by seasonality.

Internationally, revenues were a record $1.8 million, a 65% increase over the third quarter of 2006 and a sequential growth rate of 20%.

As a reminder, revenues from our multifunctional pen, which is used in both open and minimally invasive procedures, are allocated between open and minimally invasive product 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 27% to a record $35.2 million, as compared with $27.6 million for the first nine months of 2006.

Open heart domestic product revenues are up 20% to $20.1 million and minimally invasive domestic product revenues up 36% to $10.5 million.

On a year-to-date basis, revenues from minimally invasive products represented 34% of our total domestic revenues, while international revenues, of $4.6 million, represented 13% of AtriCure's total revenues.

Now, moving back to the quarter and gross profit results.

Gross profit for the third quarter of 2007 was $9.3 million.

This reflects a gross margin of 77.1% as compared to 79.4% for the second quarter of 2007.

Gross margin for the third quarter of 2006 was 79.8%.

The decline in gross margin sequentially and compared to prior year was primarily attributable to an increased mix of international revenues, which generally carry lower gross margin, as we market and sell to most international markets through distributors and, also, a slight decrease -- increase in product cost due primarily to the introduction of new products, such as the isolator synergy product line.

Next, an update on operating expenses and our net loss per share.

Operating expenses for the third quarter of 2007 were $12.2 million, a 12.3% increase over the third quarter of 2006 and a 5.9% sequential decline.

The year-over-year increase in operating expenses was primarily driven by an increase in selling expenses attributable to an increase in headcount and an increase in variable selling expenses.

Please note that late in the second quarter of 2007, the activities of certain clinical education specialists, which had been reported as a component of product development costs, were refocused to professional education and selling activities, which are reported as a component of selling general and administration costs.

This redeployment of resources, combined with a slight decrease in overall development project-related costs, was the primary driver of the decrease in research and development expenses on both a year-over-year and a sequential basis.

The sequential decline in overall operating expenses was primarily due to a reduction in marketing expenses.

As you may recall, during the second quarter, we had several key industry events and shows.

Moving to the net loss and earnings per share.

The net loss for the quarter was $2.6 million, the smallest quarterly net loss since AtriCure became a public company.

Our third quarter net loss was an 18% improvement over the net loss for the third quarter of 2006 and an 8% sequential improvement.

Net loss per share for 2007's third quarter was $0.18 on 14.1 million shares outstanding, as compared with a net loss per share of $0.26 for the third quarter of 2006 on 12.1 million average shares outstanding.

Just as a reminder, the increase in shares outstanding is primarily attributable to the issuance of 1.8 million shares of our common stock in a private placement transaction on May 30, 2007.

Moving to the balance sheet and cash.

We ended the quarter with cash, cash equivalents and investments of $21.2 million, total debt outstanding of $800,000, and working capital of $26.6 million.

On August 7th, we acquired certain assets from Cooper Surgical for a total purchase price of $3.7 million, of which amount $3.3 million was paid in cash at closing.

Preliminarily, we have recorded $2.2 million in goodwill and $500,000 in amortizable intangible assets.

In addition to the $3.3 million purchase price paid at closing, we have an unsecured note payable to Cooper for approximately $400,000.

Under GAAP, this note has not been recorded on the balance sheet, as it is contingent upon Cooper successfully completing certain activities, primarily the successful transfer of the manufacturing operations, which we anticipate will be completed during the first quarter of 2008.

Cash used in operations for the first nine months of 2007 was $7.8 million as compared with $10 million for the first nine months of 2006.

This 22% improvement in cash used in operations was primarily due to improved management of working capital assets.

Now, turning to 2007 guidance.

For the full year, we are narrowing our revenue range to $48 million to $48.8 million and reducing our expected net loss per share to be in the range of $0.92 to $0.97.

We expect fourth quarter 2000 revenues to be in the range of $12.8 million to $13.5 million.

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

Thank you, Julie.

At AtriCure, we are highly encouraged by our third quarter financial results.

Importantly, we are demonstrating financial controls, efficiencies and operating leverage.

These controls in performance is consistent to our internal and external communications.

The men and women of AtriCure are committed to rigorous financial planning, efficiencies, and focusing on our high growth initiatives, while we preserve cash and drive toward profitability.

Importantly, based on the strength and building momentum within our open heart minimally invasive and international business sectors, we believe strongly that no other atrial fibrillation company is better prepared or positioned than AtriCure to deliver results for patients, physicians and our shareholders.

At this point, we will open the call to questions.

(OPERATOR INSTRUCTIONS)

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

Please proceed.

Mr.

Nelson, your line is open.

Dave.

Hi, Tim.

Good day.

Great quarter.

It seems to me that AtriCure is really the main company that's achieving consistent, reliable growth in this sector.

Could you comment on market share and what's going on in the rest of the market, as no one else seems to be growing and you're continually delivering great numbers?

Tim, thank you very much for the lead-in.

We believe strongly that if you look at the number one competitor, which is Medtronic, that we're taking share from Medtronic both in open and continuing to dominate the minimally invasive sector.

Next, there is CryoCath and, as you know, we have a very clear and robust plan with the Frigitronics system, which is the standard of care for cryogenics in cardiac surgery to launch products in the summer of 2008, which we believe will take significant share from the ATS CryoCath platform.

And then there is the third competitor, AFX, which you know as a part of guidance, and then Boston Scientific and then just recently acquired by a non-med tech company, AFX has been stumbling in the marketplace in terms of results and I think this acquisition is also going to help us.

So I believe that the market is generally moving into three competitors, AtriCure, Medtronic and Cryogenics.

We simply dominate the bipolar ablation systems in the open.

We dominate the minimally invasive space.

We have a superior cryogenic approach and the AFX systems, because of a variety of different technology and business reasons, seem to be falling off.

So without giving you firm market share numbers, which we're trying to do a bottoms-up re-forecast, we have every belief that our share in both open and minimally invasive is increasing and enhancing and will continue to do so throughout the next 12 to 24 months.

So on the open side, domestically, what would you guess the market growth rate is, given your success and the other companies' slower growth rates?

Well, I think the market share or market growth during 2007 has slowed somewhat.

We somewhat underestimated the lack of specific reimbursement for the open Maze procedure.

In 2008, there's clearly going to be specific CPT codes, professional fees for physicians for the Maze procedure.

So we believe that the growth in the open market has slowed to somewhere between 12% and 17%.

We're growing at about 22% and we think that that momentum will continue out through 2008 and that the market itself will pick up momentum when the new reimbursement codes for physicians are put in place during 2008.

And could you comment on any pricing trends in the marketplace?

Are you holding your open chest pricing or accelerating it?

And same on the closed chest side.

Well, this is an interesting trend, [but] we're very encouraged by [it].

We have a strategy that we refer to as displacement and, also, new product innovation.

Now, the displacement strategy versus distribution, what we mean by displacement is our reps are encouraged to put as many new and meaningful products on the shelf as possible and then we educate our field personnel to educate our customers to actually pull as many products per procedure as possible.

So we're seeing two very positive trends in both open and minimally invasive.

First, because of our new products, our average selling prices are increasing, and, secondly, because the broad platforms that we're developing and because of our displacement strategy, our sales reps are in the operating room hand to hand with our customers and encouraging them to use meaningful new products which enhance clinical outcomes.

So the products themselves have higher ASPs, but, also, we're using more products per procedure in both open and minimally invasive and we're staying away from the whole bundling strategy at this point, believing that displacement is the stronger strategy in terms of revenues and gross profit dollars per procedure.

So on a per procedure basis, then, what would your average revenue per procedure be in open and closed?

Well, we believe, currently, that the average selling price for our open products -- and it's a bit of a blend, because we're transitioning from old to new, but it's about $2,600 for the clamps and then our pen is achieving about a $1,700 average selling price and then our pen is increasing penetration into the open markets.

We'll also be launching the cryo and we think that many centers will use a bipolar clamp for $2,600, a pen for approximately $1,700, and a cryo probe, which will also be a premium product.

In the minimally invasive, if you just look at our clamps and dissection tools, we're in the $7,600 range, but almost every minimally invasive procedure uses the pen.

Now we're coming out with the [cool rails] clips.

So this displacement strategy I think will continue to take advantage of the high reimbursement rates, especially on the minimally invasive side of our business.

On minimally invasive, how many centers were you active in in the quarter?

73.

73 centers.

Great.

Then the OUS performance was really strong.

How much of that was currency and is there a geographic -- particular area of strength you'd like to highlight?

Well, I'll let Julie talk to the currency issue.

Currency had a minimal effect on aggregated revenues and it's really driven by more cycling in the business, which Dave can talk to in terms of the geographics or what other components are driving that.

And I think the big thing to think about with AtriCure and what we're really excited about is we're still a young company, six-year anniversary this month.

And we actually didn't really put a serious effort into the international markets until after we raised the $43 million of net proceeds in the August 2005 IPO.

Then our first step was to develop a European DV.

We've got strong growth in Europe.

We have some direct reps in Germany.

As you know, Germany's about 85 million people.

It's probably the strongest med tech device market in the European Union.

We're also doing much better in Asia.

We have high market shares now in Japan.

We're expanding into China and throughout the Pacific Rim.

So we view the international markets as under-penetrated, early stage markets for AtriCure, and we anticipate that these high growth trends will continue well into the future.

And most of that performance so far internationally is open chest procedures, isn't it?

It's primarily open chest procedures with the concept, with the concept, Tim, that we need to really demonstrate higher growth, more publications, and more readiness in the U.S.

in terms of market share for the minimally invasive before we put resources into the international markets.

As you know, international generally follows U.S.

So once we have the publications in place, which are mounting and building based on the JCE publication, the HRS guidelines, and a body of peer reviewed literature that's in the process, once those publications get out in more of a full swing, we're going to become much more aggressive with minimally invasive in the international markets and believe that we can be successful.

Great.

And my final question would be on the cool rails product.

I hadn't heard of that before.

Can you describe that technology and if it's water cooled?

Are there any IP issues there?

Well, first of all, we clearly believe, through our consultants and internal rigor, that we have freedom to practice.

Now, the cool rails makes deep lesions and it's designed to make deep lesions that make the connecting lesions of the Maze procedure.

The technology is internally cooled.

It's not externally cooled.

And fundamentally, the way that we've designed our technologies, and I'd rather not get into too much detail, but the reason why our unidirectional bipolar technologies make deep lesions is because we pull heat away from the pericardial surface of the heart.

It's very different than an externally cooled system.

We're constantly, based on the electrode configuration in geometry and makeup, as well as internally cooled processes, we're pulling heat away from the surface of the epicardium so that we can make deeper and deeper lesions.

The other very exciting thing is that we have a [gen-2] cool rails which will have a real time indicator of transmorality.

It'll be based on standard integrated electrophysiologic principles.

So we continue to advance our technologies in terms of reliable full thickness lesions, the synergy for the pulmonary veins, the cool rails and the mapping system for the connecting lesions and minimally invasive, and then we continue to expand the integration of the electrophysiology, so that we can make sure that we have robust clinical and technical endpoints.

If the technical endpoints mimic the Maze procedure, which we believe strongly they will, then our results, especially in these more persistent and permanent population of patients, should mimic the classic Maze results and be far superior to any other alternative.

That sounds really exciting.

I said that was my last question, but I did think of one more thing, while you were talking.

I didn't catch the percent success you had in that HRS paper from --

First of all, I'd like to say that this was the first, once again, Jamie McClelland, who actually trained with Sonny Jackman, he's in Oregon, Eugene, Oregon at a major program, well known electrophysiology.

Actually, this is the first publication in a premier electrophysiology journal.

The Journal of Cardiovascular Electrophysiology is one of the key peer review journals in electrophysiology.

This was the first manuscript ever published in a key electrophysiology peer review journal and the results for the paroxysmal and persistent patients, based on 30-day continuous monitoring at 12 months, was 87.5%, and these patients were off antiarrhythmic drugs.

So we're extremely excited.

It's a somewhat small sample, but the 150 patients that were presented at the poster -- at the past HRS meeting were consistent with those results and other results that we've seen published and presented are also consistent.

So we believe very strongly that because our technologies are designed to make full thickness continuous transmural lesions and because we're expanding the ablation treatment, that we are going to be able to mimic the classic cut-and-sew Maze procedure through a totally thorascopic approach and achieve very high success rates.

And I want to go back to something we said earlier.

We've already demonstrated that we can do this.

Our initial target was to duplicate the classic cut-and-sew Maze and simplify that procedure with our ablation technologies in an open heart procedure.

And remember, these open heart patients have more advanced structural heart disease.

So if we can duplicate those results of a classic cut-and-sew Maze procedure in all forms of atrial fibrillation in patients that have more advanced structural heart disease, then we feel strongly that we can duplicate those results by reducing our devices for minimally invasive through totally thorascopic procedures and maintaining the same technical endpoints.

So this paper, were the lesions they used thorascopically the same one you're going to go forward with?

Actually, no.

I want to be very clear.

The patients with paroxysmal atrial fibrillation, with our current lesion set, which is pulmonary vein isolation, targeted guided GP ablation, which, by the way, we pioneered that clinically and that has become a standard within the electrophysiology world in terms of reducing the triggers of atrial fibrillation and left atrial appendage exclusion.

That's the treatment paradigm that we've used for the paroxysmal patients and that's the treatment paradigm that Jamie McClelland reported on his JCE manuscript and that's where they had the 87.5% results on paroxysmal and persistent patients.

It only gets better, Tim, because now we expand the lesion set to a more complete lesion set that mimics the Cox-Maze procedure and that's where we begin to get similar results in the more persistent and permanent patients that clearly don't have ablation alternatives and are confined to rate control strategies, antiarrhythmic drugs and anticoagulation drugs.

This is the biggest unmet need in the AF market and we believe that we're going to be able to resolve that with our totally thorascopic full lesion set and the cool rails will be an enabler to allow us to accomplish that.

I'll give somebody else a chance.

Thanks.

Thank you, Tim.

Thank you, Tim.

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

Please proceed.

Hi, guys, good morning.

Morning, Matt.

Hey, Matt.

Just a question on the guidance, given that Q3 came in at the high end of the range, you provided on last quarter's call.

Can you give us an idea of why the high end for the full year is coming down?

I'm guessing it has something to do with the international performance, but commentary there would be appreciated.

Well, first of all, what we want to look at, Matt, is the full year.

This is still a relatively strong growth, young company.

We had a strong quarter.

The numbers, even though they're trending toward $50 million, it's still an emerging medical device company and we like to look at things on more of an annualized basis.

So there are certainly cycles to ordering patterns.

We had a stronger than expected third quarter, but we're basically saying and being very consistent with our full year guidance.

The numbers that we put in place are consistent with what we said in the past in terms of where we believe that we'll finish the year and we want to maintain that consistency, because we understand that highly emerging medical device companies often have cycles to ordering patterns.

The cycles are often not as well understood as we'd like to think they are, but we also want to maintain a somewhat accurate and conservative view and consistent with our previous communications in terms of full year guidance.

Okay, very good.

In terms of the Frigitronics probes and how they tie into your market segmentation plans, can you give us an idea of your current procedure volume?

Do you have an idea of the procedure breakdown today, paroxysmal versus persistent or permanent?

Well, first of all, Matt, just to regroup, the cryogenic technologies that we acquired and plan to commercialize during the summer months of 2008, that's a different strategy.

That's basically open heart.

We're not looking to segment the market in open heart.

We're already achieving extremely high success rates in all forms of atrial fibrillation in the open heart.

The market segmentation strategy is more for the minimally invasive sole therapy procedures, where we started off performing limited ablation based on the evolution of the technology.

The limited ablation for the minimally invasive approach was aimed initially at paroxysmal patients based on the original technologies that we were able to develop, which was technology aimed at pulmonary vein isolation, guided targeted GP ablation, and left atrial appendage exclusion.

Now, that procedure, from a minimally invasive thorascopic approach, has had extremely high success rates, somewhere in the range of 80% to 95% for the paroxysmal population of patients.

Now, those minimally invasive procedures for paroxysmal patients can be competitive with catheter ablation in centers that are aggressive with catheter ablation procedures.

So in order to more clearly and distinctively segment the market for minimally invasive, we want to accomplish what we accomplished in the open heart by developing technologies like the cold rails that will allow us to perform the same lesion sets through a totally thorascopic approach that we've been able to perform through an open heart approach and if we do that, what we believe will happen is that the catheter ablation technologies, because of their limitations, they will be limited for the years to come to the early onset paroxysmal patients.

There's the persistent and permanent patients, which make up almost half the diagnosed population, that are confined to rate control strategies, anticoagulation treatment and antiarrhythmic drugs.

They really don't have an ablation alternative.

We know that we can get high cure rates in those patients because we've had high cure rates in those patients in the open heart.

So our market segment strategy is really targeted at the minimally invasive sole therapy procedure, where we've had great success with the paroxysmal patients and where we continue to evolve to the more persistent and permanent patients, where catheter ablation is not indicated.

Does that make sense?

Yes, that does.

I appreciate it.

I guess another way to look at it, then, on the open side, what percent or what breakdown of your procedure volume would apply to a cryo probe?

Well, I'll answer that somewhat indirectly.

But if you look at cry cath/ATS trailing 12-month sales, their trailing 12-month sales have been in all open procedures.

Our best estimate says that their worldwide trailing 12-months sales are about $12 million.

We believe that about 9.5 of that is coming from the U.S.

and we think that in the first 12 months of release of our products, our cryogenic products, because the Frigitronics system is more the gold standard for cryogenics, that we'll be able to pick up half the market share for cryogenics in open heart market.

Okay, great.

Finally, and then I'll jump off, with respect to operating expenses, R&D came down, as we look at the various programs you have ongoing.

How should we expect that number to track relative to where we've been over the past couple of quarters here?

I'm going to let Julie fully answer that, but I want to make one remark.

We can't put out any more new products.

We're putting out a new product per quarter.

We want to maintain that momentum.

We want to continuously take our competition to the DCs of innovation and we want to put out one new product per quarter.

But we don't have any ambition of being able to commercialize any more than one new product a quarter.

Along with that, there's other information that I think Julie is better equipped to share with you.

I think there's a couple of drivers affecting that line.

One is the redeployment of the individuals we talked about.

Basically, these individuals were performing kind of pre-clinical activities and now they're focused more on kind of the professional education and the selling support function.

So at the end of the second quarter, we reallocated those individuals and then what you see a little bit right now is we don't have any patients enrolled, per se, in active clinical trials.

So I think in thinking about this line prospectively, you should think about this quarter as a little bit of an anomaly, because the product developments in the hopper, as well as the clinical trials kicking in, I think, will return that line to more neutral type tech activities as you've seen in the past.

Okay, great.

Thanks a lot, guys.

Nice results.

Matt, could I make one more comment for you?

Please.

The one thing that you and I have talked a lot about is operating leverage and if you look at the basically year-over-year revenue growth, 29%, 22% in open, 37% minimally invasive, 65% in our OUS, and that's really a trailing six-month snapshot compared to previous year.

So if you look at the trailing six months, 28.4% in consolidated revenue growth, 21.3% in open, 37.4% in minimally invasive, 41.2% in OUS, gross profit dollars increased by 24.5%.

Operating expenses for the same six-month period last year have increased by 13% and Julie talked about the favorable results on the net loss.

So we clearly believe that we have the infrastructure in place and, as we've communicated in the past, that we're beginning to leverage that infrastructure and drive toward cash preservation and profitability.

Great.

Thank you, guys.

Thanks, Matt.

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

Please proceed.

Hey, guys.

I just kind of had a more general question.

I'm pretty sure catheter ablation is growing a bit faster that surgical ablation, either minimally invasive or open heart.

But clearly you guys have the better data.

So it doesn't seem to be data driven at this point.

And you guys also have better hospital reimbursement.

So that doesn't seem to be driving it.

Do you feel like coming out with all the cool rails and the gen-2 cool rails and the iterations of devices, is that really going to drive adoption or is that going to drive market share shifts?

If not, what's going to turn the corner in terms of getting these EPs to actually focus on what you're doing in the data instead of pushing catheter sales up?

Well, certainly, I think if you follow catheter sales, it's been a little bit of an up and down trial and error process.

What I've seen over the past 15 years is that somebody comes out with a new technology, whether it's a bioscience technology or an irrigated catheter or a [NAVEC] system, and more people are inclined to try it, but these technologies don't address the core issue of not having direct visualization in suboptimal biophysics.

So there seems to be a push and then a pullback.

From our perspective, what we're doing is we're saying the paroxysmal population are a population of patients that may be achievable to get reasonable results with catheter ablations if patients are willing to undergo several procedures, which seems to be the case.

However, catheters are limited in terms of what they can do and the more persistent and permanent populations are yet to be candidates for ablation, and these are most often the most needy patients.

They're often most symptomatic and they often have the highest risk of stroke.

So part of our major strategy is to go ahead and compete with catheter ablation in areas where they have aggressive catheter ablation programs and, quite honestly, in most centers, catheter ablation may actually be more widely adopted in those specific centers.

But in the overall market, there's 50% of the diagnosed population of patients that aren't indicated for ablation and these are patients that we're actually serving well in the open heart procedures.

So our philosophy is if can just reduce the technologies to a totally thorascopic approach and complete the same lesion set that we've been able to complete in the open heart market, that we'll be able to have high cure rates for the persistent and permanent patients, and there's plenty of atrial fibrillation patients.

If you go to the University of Michigan, Cleveland Clinic, University of Pennsylvania, some of the major catheter ablation places, Steve, I think you know that these centers have long waiting lists for patients.

Sometimes their waiting lists are six months to a year.

So the reality is that catheter ablation, although the numbers are somewhat growing, they're growing generally in a confined number of centers and they're not growing into the other segments of the market, which are the more persistent and permanent population, which is where we believe we can make our biggest contribution.

And once again, this is very typical for cardiovascular medicine.

If you look at the CABG versus the stent, stents are more widely adopted in general because they're percutaneous and some patients are willing to go through one or two or three procedures from the stenting perspective before they go to CABG.

However, 30% of all coronary interventions are done surgically.

The difference is that in atrial fibrillation, half the patients are really early onset paroxysmal patients, where half of the patients are more persistent and permanent, where, in coronary artery disease, it's much more heavily weighted to the early onset atherosclerosis versus the later stage double and triple vessel disease.

Does that sort of clarify some of our thinking?

Yes.

And then just one follow-up and I'll hop off.

To drive that penetration, is it a question of just getting more data and more devices?

What do you see as being the key?

Well, I think there are several keys.

First of all, we've validated and we're validating, through the ATRS consensus statements, through the JCE, through programs at Boston A-Fib, think a year ago, look at the indicators.

The indicators are very strong.

A year ago, would you have imagined that we would have a live case transmission from Medical College of Virginia, which is a very high profile catheter ablation center, from a pioneering electrophysiologist like Ken Ellenbogen, that he would refer a patient and do a live transmission at the Boston A-Fib case, and that Jimmy Edgerton would get the stage to present his data, and that Marc Gillinov would present data there, as well, and that Ralph Damiano would moderate a whole mini-session within the main sessions of AF.

Would you have imagined that ATRS consensus statements, all the catheter ablators, would basically characterize minimally invasive procedure as an alternative to catheter ablations for patients that prefer it or with catheter ablation not indicated or catheter ablation that's failed?

And then this JCE publication is just the beginnings of things to come.

So I think you have to look past the numbers and look at really the market indicators.

AtriCure is beginning to make tremendous progress in terms of validating with the key electrophysiologists and making the market and building the momentum for further penetration into specifically the persistent and permanent segments of the market over the next short term, six, 12, 18 months.

Great.

Thank you.

(OPERATOR INSTRUCTIONS)

Your next question comes from the line of Larry Haimovitch from HMTC.

Please proceed.

Good morning, Dave.

Hey, Larry, how are you?

Great.

How are you?

Thanks.

Fine, thank you.

Performance, real good quarter.

Julie, a couple quick questions for you.

I didn't catch the operating cash burn in Q3.

I think you gave the number, but I missed it.

What was the operating cash burn, taking out, of course, the cryo acquisition?

Our cash used in operations for the year-to-date, the nine month ended, was $7.8 million.

And for the quarter?

I don't think we actually gave that information.

I'll have to follow-up with you, Larry.

I don't have it handy.

Okay, that's fine.

And, Dave or Julie, when you look at the way the business is sized today, the growth of the revenue and the way you're controlling your operating expenses, what would you guess would be the type of quarter that would get you to somewhere near cash flow breakeven?

What type of quarterly run rate would that take?

Are we looking at around 15 million for cash flow breakeven or is that too high?

I'm sorry.

I didn't hear the question.

I was looking for...

The question was in terms of cash burn.

We've previously talked about $80 million to $100 million in terms of the range where we believe, on an annualized basis, that we would achieve profitability.

We have a much more favorable perspective on that based on our current operating leverage.

We generally believe it's somewhere between an annualized run rate of $77 million to $87 million of revenue that we will begin to turn profitable.

And, Dave, would that also be pretty much -- as you turn profitable, would that also be when cash would turn positive?

Yes.

It's pretty close in line, Larry.

And to answer your first question, we had a burn of about $3.2 million, neutralizing the pipe, as well as the Cooper deal.

3.2 for the quarter.

Yes.

Okay, great.

I'd just like to make one additional point that we're not -- we're basically in a position where we're leveraging our operating structure to get to breakthrough momentum.

We don't view our business model as a consistent growth model where we're 25% to 30% growth.

We view ourselves in a position where we're managing our business, leveraging our operating structure to get to breakthrough momentum.

We think that AtriCure has the capacity to have true breakthrough momentum and be one of the great cardiovascular companies of the decade.

And, Dave, breakthrough momentum implies that you would grow more rapidly in the revenue line than you are currently doing.

Is that what I'm hearing you say?

Exactly.

Okay, great.

And not to be picky on the guidance, I thought Matt Dolan raised a very good point, which is it looked like you took a little more conservative view on Q4 than previously.

Q3's guidance was 48 to 50.

Guidance for Q3 was 48 to 50.

Now you've narrowed that a little bit.

It doesn't sound like there's anything going on from an operational standpoint that should make us feel that the fourth quarter is not as strong as you thought.

It sounds like you were just being your usual conservative self.

Is that fair?

I don't know if it's conservative or just trying to stay the course.

We had guidance that we wanted to be consistent with.

We understand that we're in the building phases of breakthrough momentum and that there's cycling involved with that from the early stage process.

And our guidance, we wanted to maintain consistency, because we understand -- and there is some cycling in the earlier stages getting to breakthrough momentum.

So when we looked at our full year, we just wanted to be as accurate and consistent as possible from a full year basis.

Dave, to follow-up on your comment about breakthrough momentum, what do you think it's going to take?

I think I understand what you're saying.

What event or events or what trends might have to really change here for you to shift from pretty good momentum to breakthrough momentum?

This is my favorite question.

Okay, great.

I'm glad I asked it.

This is my favorite question and it's my favorite question because there is no clear answer when you're dealing with 510(k) new procedure, new product platforms.

If this was a PNA with a novel new device and that was the catalyst, you could simply point to that catalyst, that approval, that randomized clinical study and launch off of that.

But what we're doing is we're executing day in and day out.

We have a very clear and, we believe, a very strong strategy to develop the atrial fibrillation markets and when you're dealing with, in my opinion, breakthrough momentum, there's a phase of that where the momentum is built by the indicators.

The Boston A-Fib meeting, the HRS consensus statement, the JCE publication, the launch of new products that allow us to expand the ablation treatment to mimic a more classic Maze procedure through a totally thorascopic procedure.

These are some of the indicators and what we believe happens in breakthrough markets that are business models that are built generally the way our business model is generated is that the indicators begin to build up.

Those indicators build up momentum and the breakthrough happens through execution.

It's very difficult to point at one single catalytic event.

What happens is you continue to dig in deep with passion, commitment and a clear strategy.

You execute day in and day out.

You drive the major indicators at places like Boston AF and HRS and the peer review literature.

You have the right clinical strategy.

You stay on the right side of the clinical issues and eventually, eventually, you will break through and the breakthrough, in my opinion, will happen not from necessarily being able to give you visibility on it, it'll just happen and all of a sudden we'll be underestimating our numbers by a lot.

I look forward to that, Dave.

So do we.

Thanks.

And I show no further questions at this time.

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

Drachman for closing remarks.

Well, thank you all for your involvement and participation in the call today and for your support.

We look forward to our next earnings call.

Thank you.

Thank you for your participation in today's conference.

This concludes the presentation and you may now disconnect.

Good day.