AtriCure Inc (ATRC) 2008 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the 3rd Quarter 2008 AtriCure Earnings Conference Call.

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

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

We will be facilitating a question and answer session towards the end of this call.

(Operator Instructions)

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

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

David Drachman, President and Chief Executive Office of AtriCure.

Please proceed.

Thank you, operator.

Good morning and welcome to our 3rd Quarter 2008 Earnings Conference Call.

Joining me on the call today is Julie Piton, Vice President of Finance and Administration, and our 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 Wickman at 513-755-4136 and she will fax or email you a copy.

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

These statements include, but are not limited to those that address activities, events, or developments that AtriCure expects, believe, or anticipates, will or may occur in the future, such as revenue and 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 our products for the treatment of AF.

The Company, and others acting on its behalf, may not promote any of these products for the surgical treatment of AF, or train doctors to use our products for the surgical treatment of AFF.

With that, I would like to turn the call back to Dave.

Thank you, Julie, and welcome to members of the investment community who have joined us today.

I will begin with opening remarks, and then a brief review of our 3rd Quarter highlights, followed by a concise overview of our key strategic initiatives, recent matters, and our current outlook.

Following my remarks, Julie will provide a detailed review of our financial performance.

We will then open the call for your questions.

The 3rd Quarter was another strong quarter of execution as the men and women of AtriCure delivered market leading performance.

Now, turning to our business highlights and achievements for the quarter.

We achieved consolidated revenue growth rate of 23%.

Notably, we achieved organic growth of greater than 20% for ten consecutive quarters.

We achieved record-breaking minimally invasive product sales of $5.7 million.

As a result, U.S.

minimally invasive product sales grew 65%.

We achieved record-breaking revenues of $2.4 million from markets outside the U.S.

We generated $1.2 million of free cash flow during the quarter.

We achieved a 72% improvement, or a $500,000 loss in earnings before interest, tax, depreciation, amortization, and non-cash compensation during the quarter.

We achieved a gross margin of 77.1%.

Gross margins improved by 60 basis points on a sequential basis.

Despite our historically high gross margins, we are applying a strong and constant focus on continuing to improve gross margins.

The first patient was enrolled in our Exclude clinical trial in support of our left atrial appendage system, and we submitted our 510(k) in support of our Frigitronic disposable cryo system, which represents a new market and growth opportunity for our business.

Now, a review of our new products which are key business drivers.

First, a review of our new products intended to stimulate growth in our open heart markets.

We are completing the development of our disposable cryo probe.

We anticipate that our disposable cryo probe will lead to new selling opportunities and expand our footprint in the open heart ablation markets.

We anticipate that market release of our disposable cryo probe during the 1st Quarter of 2009.

Additionally, we are in the process of designing and developing our next generation open heart clamp platform.

We believe that our new disposable cryo probe, followed by the introduction of our new open heart clamp will lead to accelerated growth and share gain within the growing markets for open heart ablation products.

Next, continuing our tradition of innovation and market leadership, we plan to release a series of new minimally invasive products during 2009 which we believe will expand physician adoption.

Included in these new product releases are our premium port access mapping probe, a second generation port access multifunctional pen, and a new minimally invasive clamp platform.

Now, a review of our investments and clinical science, and FDA approvals.

First, a review of FDA regulated Exclude clinical trial, designed to investigate our left atrial appendage system.

As a reminder, the pathway for US clearance for a left atrial appendage system is a 510(k).

The clinical trial design requires that 30 patients be followed for three months, and 30 patients be followed for six months.

We have enrolled the first patient and we are working to initiate enrollment in all of our sites.

Additionally, we plan to submit our 510(k) by year end 2009.

Turning to our Ablate clinical pivotal trial.

As a reminder, the Ablate clinical trial is designed to treat patients undergoing elective open heart procedures that have a documented history of permanent atrial fibrillation.

The trial has been initiated in ten sites, and we have enrolled approximately 30 patients.

We anticipate an enrollment requirement of approximately 70 patients.

Turning to recent matters.

The Department of Justice, Civil Division, has opened an investigation for potential false claims act and common law violations related to the Company's marketing of its surgical ablation devices.

The Department of Justice has informed us that its investigation is focusing on whether AtriCure improperly promoted its products to physicians for the use of atrial fibrillation, and whether the Company improperly caused the filing of false claims for reimbursement.

The Company takes this development seriously and strives for continuous improvements in all areas of our business.

AtriCure always paid careful attention to requirements related to advertising, promotion, and reimbursement, and has gone to great lengths to ensure that we are in compliance.

AtriCure intends to continue this tradition by cooperating fully with the Department of Justice in its investigation.

Over the years, AtriCure's commitment to compliance has included, among other things, development of a compliance program, consistent and repeated training of our employees, and benchmarking against our peer medical device companies.

We also have worked with outside consultants to develop and revise relevant policiees and procedures, and to periodically review those procedures and policies to improve our compliance.

In part, because of these efforts, AtriCure has a clean inspection history with FDA.

Despite numerous inspections by the agency, including the most recent inspection in 2006, we have never received an observation on a Form 43, a warning letter, or untitled letter, or any other official indication from the agency that AtriCure's marketing practice has noncompliance in any way.

In addition, AtriCure is consistent and in constant contact with the agency, which is extremely familiar with AtriCure's business, that of our competitors, and of the surgical ablation markets in general.

Although we take the DOJ investigation seriously, it is important to understand that this kind of investigation is not uncommon in the pharmaceutical and medical device industries.

At this time, the government is only investigating AtriCure's action and has not charged the Company with any wrongdoing.

Many government investigations of this type never result in any such allegations by the government.

Now, I would like to take a moment to reflect on the macroeconomic environment and deteriorating consumer confidence, which we believe are impacting current procedure volume trends.

Although AtriCure is constant and consistent with the broad, mid-tech markets, demonstrated solid 3rd Quarter growth.

We have recently observed a moderation in procedure volumes, which seems to be more evident in our assessment of a minimally invasive trend.

Today we are reviewing two recent and challenging circumstances.

The macroeconomics and the relationship to procedure volumes combined with the current notification of a Department of Justice investigation are limiting our ability to accurately estimate the financial performance of our business for the remainder of the year.

Given the recent nature of these circumstances, combined with our commitment to provide accurate projections to our financial performance, we believe it is prudent to lower expectations for 2008 and to withdraw our previously provided financial guidance.

Independent of these current circumstances, we believe that our business thesis is powerful and we remain focused on the challenges and opportunities in executing our strategic plans.

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.

Total revenues were $14.8 million, representing a 22.8% increase over 3rd Quarter 2007 revenues.

As a reminder, the 3rd Quarter has historically been seasonally impacted as a result of the elective nature of some of the procedures which utilize our products.

Revenues from domestic open heart products were $6.7 million, consistent with 3rd Quarter 2007 open heart revenues and a sequential decline of 10.1%.

Revenues from domestic minimally invasive products were a record $5.7 million, a 62.5% increase over 2007, and a sequential increase of 11.7%.

International revenues were also a record at $2.4 million, a 29% increase over 2007.

Currency impact on total revenues during the quarter was 0.6%.

Year-to-date revenues are up 22.8%.

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.

And now turning to gross profit and gross margin.

Gross profit for the 3rd Quarter of 2008 was $11.4 million, reflecting a gross margin of 77.1%, which is consistent with the 3rd Quarter of 2007, and a sequential increase of 60 basis points over 2nd Quarter 2008 gross margins, up 76.5%.

The sequential improvement in gross margin was primarily due to manufacturing efficiencies.

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

Operating expenses for the 3rd Quarter of 2008 increased 8.4% to $13.2 million.

The year-over-year increase in operating expenses was primarily driven by an increase in product development expenses in support of our 2009 new product initiative, which Dave covered, increased clinical trial expenses, primarily in support of our Ablate clinical trial, which has enrolled over 30 patients, and increased selling expenses.

These increases were partially offset but a reduction in other general administrative expenses.

On a sequential basis, operating expenses were flat at $13.2 million.

The net loss for the 3rd Quarter of 2008 was $1.8 million, a 31.9% improvement over 2007's 3rd Quarter net loss of $2.6 million.

Net loss per share for the 3rd Quarter of 2008 was $0.12 cents, a 33% improvement as compared with a net loss per share of $0.18 for the 3rd Quarter of 2007.

In terms of balance sheet and cash, we ended the quarter with net cash, cash equivalents, and restricted cash and cash equivalents of $12.2, representing a sequential increase of $0.9 million.

As a reminder, in early July we entered into a $10 million credit facility.

Considering uncertainties in the credit market and specifically the financial industry, we drew down and deposited cash of $6 million under the credit facility during the quarter.

This cash that we drew down under the facility is accounted for as a long term asset and reflected in our financial statements accordingly.

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

In summary, our capacity to succeed and meet our challenges and opportunities with rapid, well-executed solutions, is enabled by the men and women of AtriCure who are dedicated to our purpose.

Through their commitment and leadership we plan to capitalize on the markets for our products and deliver results for patients, physicians, as well as shareholders.

At this point in the call we would like to open the call up for questions.

(Operator Instructions).

The first question comes from the line of Vivian Cervantes from Rodman & Renshaw.

Please proceed.

Hi, good morning, thank you for taking the question.

I will start off with the most topical issue in everybody's mind.

Given the DOJ inquiry, are there any changes that you foresee in how you go about with your business, and running the company, your conversations with the sales force, and your customers?

Thank you, Vivian, for the question.

We certainly take the DOJ investigation very seriously.

It is important to note that this concept of healthcare compliance is core to the Company's philosophy and culture.

Pre-IPO we had Underwriter's counsel working with the Company to ensure that we had the proper controls, procedures, policies, and systems in place, as well as an educational system to continuously monitor and train our sales organization.

Following the IPO, we underwent a fairly intense audit in June of 2006.

With that, during that audit there were two FDA inspectors who spend two weeks on site with AtriCure, helping us work through our systems and evaluating and assessing our systems, including our sales and promotional activities, as well as issues relative to reimbursement.

At the end of the audit there were no formal inspectional observations.

On moving forward, after we got our cardiac tissue indication, I think it is important that those circumstances of the IPO as well as the 2006 inspection in June, occurred without a cardiac tissue indication.

In further working toward compliance, the Company received in July of 2007 a cardiac tissue indication was based on the submission of clinic data.

Following that point in time, we continued to work with our consultants and continuously update our healthcare compliance systems.

We have annual educational activities with our sales and marketing teams, and we feel confident that we have made a sincere effort, and that our healthcare compliance systems are robust.

Having said that, we look forward to working with the Department of Justice to see if there are any areas for continuous improvement.

As of now, it is business as usual and we have instructed our sales organization to have a heightened level of awareness but to conduct their business in the ordinary course.

That is helpful.

With some of the doctors and customers that you have spoken with over the course of the last couple of days, can you give us any color on some of the feedback and reaction that they have been giving you as a result of this inquiry.

I mean, are they getting nervous?

Anything of that nature?

Well, speaking with physicians and working through situations like this is certainly a process, not an event, but we, at AtriCure, feel very confident in talking to our top 10 or 15 key opinion leaders.

Their level of support was really encouraging and inspiring.

During the weekend we spoke to about 10 or 15 key opinion leaders, all of which had a very supportive message, a very understanding message.

They work with the AtriCure personnel in our field and sales and marketing teams on a day-to-basis.

They know management, and they know AtriCure is working to strive to do the right things in advancing our products in the market, and I think they have an appreciation for that, so we were very inspired by our initial touches with our key opinion leaders.

Okay, and then as far as the competitive landscape is concerned, it is not like there is any new device or technology that is out there that could possibly encroach upon what is currently going on.

Am I right in thinking that, or has the landscape changed?

Vivian, could you clarify your question.

I am not sure I completely understand your question.

Sure, sure.

With the situation as it is right now, is there a potential for another technology that can somehow take advantage of the current hiccup that you are finding yourself in right now, understanding that you have about 70% to 80% of MIS procedures, is there anything else that could sort of take your place, given some of the things that are happening?

Well, it is early to tell.

We are certainly digesting this whole process, both in terms of our responses to the Department of Justice, reassessing our business, both in terms of top line as well as our capital resources required to continue to operate our business, so we are in a digestive process.

Having said that, we are the market leaders.

We have a big footprint.

We have talked to our key opinion leaders.

We believe that our key opinion leaders respect our company personnel, respect our business practices, and respect our products as being superior technologies to other technologies that are available in the marketplace.

So, on a going forward basis, after talking again to our top, key opinion leaders who, again, were very supportive of the AtriCure personnel, of the AtriCure practices, and of our products, we do not foresee any specific technology or company benefitting from our investigation at this point in time.

And finally, just one last question and I will jump back into the queue.

You had mentioned that more recently you are seeing some trends that are giving you pause on the MIS front, both on the macro side and the consumer confidence side -- any color you can provide on that end?

Just over the past month or so, what we have begun to see is some of our higher volume, minimally invasive accounts have told us that they are seeing patients, they are screening patients, they are in general agreement with patients that patients should undergo elective surgical procedures, but yet these patients are very slow to schedule.

We have heard this from a number of fairly large accounts, and our general thought process as we try to work our way through these unprecedented times, is that perhaps consumer confidence, perhaps these macroeconomic issues are delaying people's decisions to undergo elective procedures, and we are trying to monitor that very carefully.

We currently believe that that is a factor, and will need to get further into the quarter to better verify that.

Great.

Thank you for taking my questions.

Thank you, Vivian.

Your next question comes from the line of Mr.

Tim Lee from Piper Jaffray.

Please proceed.

Hi, good morning.

Thanks for taking the question here.

I guess if you can help me kind of reconcile your comments.

I mean, you have the infrastructure and training in place to really ensure good sales practices, and as such you do not see any near term changes, which I read as a good business model and things should continue to trend relatively well, yet you are withdrawing your full year outlook because of this overhang with the DOJ.

So, do you think that this could really have an impact on the physicians' perception of AtriCure?

Well, first of all Tim that is a very good question.

There are two things that are happening that are fairly tightly coupled together.

First, 40% of our business to date through the quarter is minimally invasive business.

We began to see, believe that it started after the close of the year, some moderation in procedure volumes and some concern from some of our top centers that their volumes had slowed down with minimally invasive elective procedures.

You begin to look further into that and, as we spoke earlier, it seems that there is some delay in their system.

We cannot specifically track that down to the macroeconomic environment but there is a general thought process that patients are being seen, screened, agreeing that the procedure is the right next step but slow to actually schedule procedures.

So, that is an October developing trend that we believe, again, is associated with the macroeconomic environment for the time being.

Secondly, just within a few days we received the Department of Justice letter informing us from their Civil Division that they are going to initiate an investigation.

As a small company we take that very seriously.

We reached out to our customers.

Our first touch points with our customers were positive.

We know that there are going to be competitive tactics around these circumstances.

AtriCure has a history of accurately forecasting our business.

We are proud of the tradition and history that we have created in accurately estimating the financial performance of our business.

Because these two circumstances, one which we believe is a slow down in elective procedures associated with macroeconomics, the other is a significant event for the Company to receive the Department of Justice letter, we are digesting those circumstances.

Rather than open up a range of guidance, we prefer to take this time to digest the information, to do a bottoms up and tops down forecast and give you accurate information.

That is in line with our thought processes, our systems, and the philosophies that we have around estimating our business.

Okay, no, that is very helpful.

Thank you.

Then, just on the DOJ front, what is the next step here?

Have you received the document request, and I guess can you just walk us through kind of what are the potential next steps that we can see from this process?

We are just in the process, just in the process of receiving the document request.

Our perception of this process is that we will review that request with our attorneys.

We understand that the request for information is fairly generic in nature.

We will review that request for information, compile the information, review it with our attorneys, and then schedule time hopefully for management as well as our attorneys to meet with the Department of Justice to help them better understands the information, and to also better understand any concerns that they may have about our operating practices.

And, again, just one follow-up on this one.

Will this potentially take your sales people out of the field in terms of will they be interviewing your reps?

I am just trying to figure out what type of disruption it could have at the field level?

We really cannot comment on what disruption it may have on a forgoing basis.

We know that a high percentage of these cases are dropped fairly early on in the process.

We do not know the course of this specific case, and these specific allegations.

We know that we have not been charged with an unlawful act.

We know that we are going to fully cooperate, and we believe that our healthcare compliance systems are robust and set standards for the industry.

Great.

Thank you.

I will jump back in the line.

Thank you very much.

Thank you, Tim.

Your next question comes from the line of Jason Mills from Canaccord Adams.

Please proceed.

Hi, Dave.

Hi, Julie.

Thanks for taking the question.

Good morning, Jason.

Good morning.

So, I wanted to follow up on Tim's line of questioning just with respect to a couple of things, Dave, you mentioned in your opening remarks and reconciling them.

First, you mentioned your next generation open heart clamp that you are excited about, and you mentioned that you expect it to lead to higher growth for you guys in that segment of the business, and share gains in that market.

On the other hand, obviously we have talked about the guidance and your reasons for withdrawing guidance, and your limited ability to forecast accurately.

Obviously one of your competitors reported last night, and while they do not break it out, it is hard to get at what their open heart growth is.

I am wondering if you are suggesting that you expect open heart procedures also to see some pull back in growth, or how we should think about, given that you on one hand say that you expect to lead growth on that side of the business and gain shares, and you are not able to forecast accurately your entire business?

Well, first of all, we viewed products like Cryo as developing trends in the marketplace.

We acquired the Frigitronics platform for that reason, which we have been selling for several years prior to the acquisition.

And that platform, by the way, has an indication of cardiac arrhythmia, just to be clear.

The disposable platform that we are preparing to release, we are preparing to release that in the first half of 2009.

We do think that that will stimulate growth in areas where physicians are adopting cryogen products.

In those areas we will have a new growth opportunity and that we will develop a more competitive position.

On top of that we are developing new clamp technology, both for the minimally invasive as well as for the open heart.

That new clamp technology is likely not to reach the market until some time late in 2009, so the first step in the process is to develop a competitive position in the open heart markets for cryogenics.

The second step in our process will be to launch both a minimally invasive and an open clamp, which will happen in series, and these products will be out in the market, we believe, about the end of the year 2009.

One will come in 2009, and the other will come in the early portion of 2010.

We will stagger the introduction of those products.

On top of that, when the clip comes to market we think that will also help us leverage growth in both the open heart and minimally invasive markets.

Okay, so, just some clarity.

I did not hear you discuss what your thoughts are about the open heart market in general.

Are you able to more accurately forecast that market, given that it is not perhaps as elective as the minimally invasive stand alone?

Perhaps you could give us some color around what you are seeing in the open heart market, and what you expect to see during the tumultuous economic period of time, and whether or not the concomitant market perhaps is a bit more insulated from the consumer confidence that you mentioned?

I agree with you.

I think that the open heart markets are more insulated from any consumer issues.

They tend to be taking structural heart disease that require elective open heart surgery and the ablation is conjunctive procedure, so we do feel like that is more insulated.

At the same time, in terms of the moderation of procedure volumes in minimally invasive, it is important to note that minimally invasive accounted for approximately 40% of our revenue during the 3rd Quarter and we have about 90 centers performing minimally invasive procedures.

So, if we see a few centers begin to experience a slowing, or a moderation that they evenly attribute to the macro environment overall, that is what led us to our concern in terms of being able to accurately understand the impact of the macroeconomics on elective procedures during these unprecedented times, followed and coupled with the Department of Justice letter of investigation, we thought it would be more prudent to pause, adjust this information, and be analytical in terms of trying to understands the impact before we provided any guidance on a going-forward basis.

Okay, that is very helpful.

Just a few more follow-ups and I will get back in queue.

One of the things, Dave, that really was attractive about AtriCure, has been attractive, is the product pipeline.

You mentioned in your opening remarks the new products, including the new minimally invasive products that you are expecting in 2009.

Again, it sounds like you are quite excited about those and, again on the other hand, you are somewhat cautious with respect to your forecast on the MIS side.

I am wondering, in light of -- if we could bring the DOJ discussion back into the conversation, and I have had my fair share of problems trying to identify what your indications for use are, and I feel like I have a decent handle on it now, but perhaps you could help us in delineating what indications you do have, and you feel comfortable having your reps market in terms of minimally invasive surgery, and whether there is anything there, any indications that you do not have, or you are seeking that may make you, or advise your reps to be more cautious with marketing the minimally invasive products, and whether that has any impact in how aggressive you are going to be, or how successful you are going to be in growing the MIS product section of your business in 2009?

Sorry about the length of the question.

Thank you, Jason.

Just to clarify.

Our stepping back and taking a more prudent perspective on providing guidance is just for the remainder of the year.

So I think that is a short term position as we see it today.

In terms of our product, our clamping technologies have an ablation or cardiac tissue indication.

Our Cool Rail technology has a similar indication, and our multifunctional pen has an indication which includes ablation of cardiac tissue as well as pacing, stimulating, and evaluating cardiac arrhythmias.

So, those are our three primary products that our ablation technologies are used in our minimally invasive approaches.

We apply the same healthcare compliance policies and procedures, systems controls, and education to those products on ongoing basis, so from our perspective we are continuing on in business as in the ordinary course of business to continue to work with physicians to have those products be adopted for minimally invasive procedures.

Okay.

Thanks, guys.

Your next question comes from the line of Joanne with BMO Capital Markets.

Please proceed.

Thank you for taking my question.

I am a little confused about something, which is that in the quarter you had 63% growth in U.S.

minimally invasive, and flat growth in open heart.

Now, I know October was really not fun for a lot of people economically, but I would have thought that the economy would have started to weigh on minimally invasive procedures August, September.

I mean, we have been sort of in a recession for quite some time here.

Could you address that thought, and also address the time frame between when you actually have a doctor's consult, and then get to booking the procedure?

Well, the time frame from a process of meeting -- first of all meeting with a physician, which we do not meet with, but we have color on that, but certainly the time frame of meeting with patients that are undergoing an evaluation of trying to decide which pathway for continuous treatment for atrial fibrillation, which could be another drug.

It could be drug titration.

It could be an ablation used with a catheter technology.

It could be a surgical ablation, or it could just be a wait-and-see approach.

So, these different treatment alternatives, they are broad in nature and generally speaking it starts off with an evaluation with your primary care physician, and a cardiologist, can escalate to an electrophysiologist.

Some of these patients come to surgeons directly.

But the process to evaluate your treatment alternatives, for a disease state that you have been dealing with for several years, often five or ten years these patients have been afflicted with atrial fibrillation, and it is an ongoing process.

So, when they decide to take the step to look at an ablation alternative it can be quite lengthy.

However, usually once our patients -- I think the more normal course is that once our patients decide on a surgical approach and meet with the cardiac surgeon after their evaluation, and to decide that the surgical pathway is the right pathway for them, under the normal course it has generally been few weeks, two to four weeks, before they come back and schedule the procedures.

When we talk to our physicians we are hearing more and more that patients are interested.

Patients are informing our physicians that it is the right course of treatment for them, however, it seems that some of these patients are not coming back and being scheduled as rapidly as they might otherwise.

So, you are right that certainly the macroeconomic environment started before October.

We, through the 3rd Quarter, felt like our momentum was strong, and we really began to feel more of a moderation in procedure volume during October.

I cannot explain specifically why, but in general I think our sales organization and our customers, we generally fell that during the -- as October unfolded that there was, and is, some level of moderation in procedure volume which we do not have any long term volume on, but our general feeling is it is likely a short term situation.

Let me push you back just a little bit here.

Is it possible that these patients are not scheduling procedures with your doctors but are scheduling procedures for some other catheter-based ablation, or they go back in the clinical pathway?

I think that is certainly possible, but that is not the general feeling that we are getting from our customers, but I certainly think that is a possibility.

Okay, let me change subjects here.

Research and development was up in the quarter sequentially, $500,000, maybe $300,000 to $400,000 or so.

How do we think about R & D tracking now that you have initiated these new clinical trials?

The clinical trials were relatively low expensive clinical trials.

These clinical trials are relatively small in nature.

We talked about the clip being 60 patients, 30 followed for the 90-day window, and 30 followed for six months.

The six months, is a telephonic phone call in the Exclude clinical trial, and the ABLATE clinical trial is a probably low-burdensome clinic from a cost perspective as well.

We have had a tradition of coming out with a series of new products on an annual basis.

We have extended our platforms and we continue to drive toward new product development but I think 2009 is a solid, strong year in terms of new products, but not an extraordinary year in terms of the numbers of new products.

We are conscious of the fact that there are only so many new products that we can bring to market and systematically commercialize.

So, if you look at the cryo probe, that system is for the open heart market.

Our port access multifunctional pen is a minimally invasive product.

Our mapping probe is another product intended for minimally invasive and port access, and then we come back in the second half of the year with a new clamping platform, and again the leading series, the minimally invasive is likely to come out first, and then followed by that would be the open.

So, those new product development activities do not expand our headcount, and are not out of line in terms of product costs or product resources that we have put into the product pipeline over the past several years.

Okay.

My final question is, is given what you are seeing in the broader economy, and your comments on managing the DOJ process, does this change your thinking regarding maybe needing to go back and tap the public markets?

Thank you.

Our think is, like other companies today that we have to tighten our belts, that we have to look at every area of our business.

If it is not an area that is stimulating new growth, if it is not an area that is stimulating new innovation, or enabling us to get our new product pipeline to market, and if it is not an area that is enabling us to execute our clinical trial milestones, then we need to think very carefully about spending in those areas.

We want to continue to invest in growth.

At the same time, we want to make sure that we are as efficient as possible and we are going through some of those adjustments now.

On a going-forward basis, in terms of the impact of the Department of Justice, it is just too early to say.

First of all, we have got to respond to the request for information.

We need to meet with the Department of Justice.

We need to meet with them with eyes wide open, knowing that we are in core to developing very robust systems, policies, procedures, controls, monitored, and education relative around healthcare compliance.

We have to meet with them with eyes wide open as there may be opportunities for continuous improvement.

We will meet with them and we will have much better information in terms of what the capital resources are required following our first series of meetings on a going-forward basis.

At this point in time we feel very good about our 3rd Quarter performance.

We feel good independent of the Department of Justice letter and that investigation, and those potential resources.

We feel very good about our capital position relative to being able to drive toward profitability.

Thank you.

The next question comes from the line of Charley Jones from Barrington Research.

Please proceed.

Good morning, thanks for taking my questions.

Good morning.

Good morning, Charley.

I guess I will just follow up on that line of questioning real quick, get it out of the way.

Julie, do you expect to spend or receive cash in the 4th Quarter due to working capital?

Typically we will have a small utilizatio of working capital in the 4th Quarter, so I think variables to that, Charley, could be, and we just talked about for the early onset of the DOJ situation.

As you saw, we generated positive free cash flow during the 3rd Quarter, primarily a catch up of a heavier use of working capital in the first half of the year, so cash trends have been very positive and I would say sort of DOJ neutral.

We would expect that to continue.

Great, and Dave, how many patients have you enrolled.

Sorry if I missed this in the ABLATE trial.

Can you give us an update there?

Just over 30 patients.

All right.

And can you discuss the mix of open and minimally invasive outside the U.S.

yet, or is it still all open pretty much?

It is primarily open, however, we are developing a number of new accounts for MIS, particularly in the European markets, and we have recently hired somebody to manage the minimally invasive growth opportunity in the European markets.

Can you give us a pretty tight timeline of when you submitted your 510(k) for the cryo probe, in terms of weeks, you know, the third week of September, et cetera?

We just recently submitted within the past days the 510(k) for the cryo probe.

Okay, great, thank you.

Could you also, let's see, do all of your minimally invasive hospitals have the new mapping system and Julie, what was the drag on gross margin for the quarter?

I guess, Dave can answer, do you want to answer first, Dave?

Yes, first of all, all of our minimally invasive do not have the mapping system.

I would say it is fair to say that probably about 40% of the minimally invasive accounts are currently utilizing the ORLab mapping system.

I do not think we necessarily had a drag, Charley, on gross margin.

We expected margins to be 76% to 79%.

They actually sequentially demonstrated a 60 basis point improvement, so you are seeing an increased mix of international business, a little bit of impact of new products, and manufacturing efficiencies are contributing to the expansion here in the 3rd Quarter.

I guess the last question is around the open business, Dave.

Do you look at this weakness more as a factor of less focus there, or do you see it more as a competitive issue, or procedure?

Can you kind of rank those, I guess?

I think certainly our sales organization has been very focused and it is very time consuming.

Whether we go back to our 90 minimally invasive accounts in the United States, and we look at upgrading them to totally thoracoscopic procedures, or Cool Rails and extended ablation treatment, when we look at those activities and from a resourcing perspective, they are fairly intense.

I do think that is part of the equation.

I also think it is part of the equation that there are certain physicians and certain trends in the market towards the minimally invasive open heart procedure, which I think is one of the opportunities for our new cryo probe, and that is one of the reasons why we have been anxious to develop a long, disposable cryo probe.

So, I think that having that new long, disposable cryo probe along with balancing our resources across the board in terms of minimally invasive and open, should be a nice opportunity for us to get back on a higher growth trend in terms of minimally invasive and open procedures.

I am going to add one on actually.

Can you talk to us a little bit about when we are going to see clip results from Europe?

Will we every see those out in the public domain, and just kind of tell us a little bit about how those experiences have gone?

Thanks a lot guys.

Okay, thank you.

To my knowledge there is an abstract being presented to the American Heart on the clip.

We know there is at least one patient from the European trial is out more than a year.

We anticipate that there will be other publications relative to the clip ongoing.

There was recently a publication in the Journal of Thoracic Cardiovascular Surgery comparing our clip to a stapling device, a very favorable comparison, I think was recently published.

Also there was recently published in JAC a look at litigation with standard suture materials as well as stapling devices, and the outcome of that there was incomplete closure of the left atrial appendage in 60% of patients based on the use of imaging systems to evaluate that closure at six months, so we believe that there is a large drawing and significant opportunity for our clip, and then our clip will be presented at the national meeting for the course of 2009.

Thanks again.

Thanks, Charley.

Thanks.

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

Please proceed.

Hey, guys, good morning.

Good morning.

I think we have covered the U.S., and the economy, and the DOJ pretty well.

Dave, can you touch on the international business in terms of a global potential slowdown?

You had a nice, sequential uptake there when the European markets typically to sleep in Q3, so are you seeing the impact globally here and how do you look at that growth trajectory in 2009?

In 2009, we think that the growth trajectory for the international business will be consistent on a full-year basis.

We have not seen or heard of a moderation in procedure volumes in Europe.

I will tell you that we do not have the same feelers on the street.

We work through stocking distributors.

We have a few direct people in work, and the same is due for the Pacific Rim, so we do not have the same level of input and information, but our general impression is that we have not seen the same moderation, and also we do not have the same percentage of minimally invasive business in the international markets.

So, as far as we understand, the international markets are not being impacted at this point.

Okay, and then a follow-up on the cost question earlier.

You have had three, sequential down-ticks in SG& A spend.

I know there were some events, marketing shows, in the first half of the year, but what are your goals?

Is this a sustainable letter?

Have we seen some reductions in spend, and what are your goals going forward in terms of obtaining operating break even?

Our goals going forward, as we have talked about, is to achieve profitability with a revenue earn rate of somewhere between $65 million and $80 million.

We still believe that that is achievable.

We are looking at our operating expenses across the board and, again, operating expense is not being used to stimulate new growth in either open heart or minimally invasive markets.

If it is not being used to facilitate innovation and important new product development, and if it is not being used to execute our clinical trial milestones with Exclude and Ablate, then at that this point in time we are looking to make adjustments in areas to gain efficiencies, to maintain an operating expense that is in line with 2008.

Okay, and finally, maybe a more general, long term question on the product pipeline, as you have some new products coming into the fold with the cryo probe next year, and eventually an appendage clip, your ability to drive a certain sales number per procedure, how does that impact it as you deal with probably a fixed reimbursement rate at best going into the out years, and really how should we be thinking about gross margin long term as you may have to maybe bundle some things together with more products going into the same patient?

Well, I think at this stage we are still in the premium market area.

We have very efficient operations and manufacturing processes.

The cost of our products generally come down fairly quickly after release, and we have been able to sustain our average revenue per product over a long course of time.

Now, because of the macroeconomic environment, and because of pressures on hospitals, I think that is a risk factor that we are not really able to comment on right now, but in general the open heart products, and the minimally invasive products, in terms of the selling prices, they have maintained a very constant basis for the last several years.

So, from our perspective, right now we are not anticipating that our gross margins will be affected or that our revenue per procedure will be affected.

I think that the more likely outcome of the macroeconomic environment is that purchasing patterns might be affected.

As long as can continue to innovate and bring our physicians and patients superior technologies, we think that that is the best way to protect our revenue per procedure.

Okay, and last question.

Did you provide the number of minimally invasive centers practicing, and I guess with your early feedback out of the investigation and the economic slow down, how do you expect the -- you talked about the high volume centers, how do you anticipate the low volume centers to react, or kind of see an impact?

Does the number of centers overall start to go down, or do you see just volumes across the board being hit?

Good question, Matt, thank you.

I think our perception of the moderation of procedure volumes based on the macroeconomic environment would affect all accounts, I think, performing minimally invasive procedures.

The reason that we may be seeing it more in our higher volume accounts is because they do cases more readily and we just have more data points from those accounts, but I do think that it is possible over the short term that some moderation in procedure volume with these elective minimally invasive procedures could be an impact to the 90 centers that perform minimally invasive procedures.

We view this most likely as a short term situation, most likely the short term situation but, again, we are in some unprecedented area and we would like to take some time to digest, analyze, and respond to the circumstances over the course of time with you.

Thanks a lot.

Thank you.

Thanks, Matt.

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

Please proceed.

Good morning, Julie.

Good morning, Dave.

Good morning, Larry.

Good morning, Larry.

So, all of the good questions I had lined up are already answered, but let me try a couple others.

One, Dave, you have answered a lot of questions about a lot of different issues.

You have not talked much, in the interest of time, about the progress on the thoracoscopic side of MIS, which I think from my standpoint looks very, very interesting.

Can you update us on how that could begin to impact MIS as we look forward to '09 and '10?

Well I certainly think that that is a critically important issue and I appreciate the question, Larry.

I guess one of the characterizations is I just spoke to a physician in Virginia, as we were touching people and reaching out to understand their views on the DOJ inspection and what their response would be, and I spoke to one of our key physician on Saturday morning, who told me he has just performed his fifth or sixth totally thoracoscopic procedure and that the patients are going home in two days or less.

This is what he called it a "Band-Aid like" procedure.

We have another center that is about to start up, and this is a very well-known electrophysiologist who has made a commitment, in fact, they have their first cases scheduled today.

They have four cases scheduled and they will be performing them totally thoracoscopically.

It is a very well-known electrophysiologist, and a very well-known surgeon.

Their aim, after their first series of procedures is to perform the procedure in the EP lab.

We think that that is an important step in terms of the overall evolution of our vision of the epicardial frontier in having electrophysiologists and surgeons partner to converge on the disease state.

Initially, we just came back from the Netherlands where we saw four minimally invasive procedures that were done in hybrid fashion, where the cardiac surgeon did the left atrial compartmentalization procedure using our minimally invasive surgical ablation tools, and did endocardial mapping to confirm that the lines of block were fully blocked.

So, we have got hybrid procedures.

We have procedures moving into the EP lab in a small number of centers, and we believe that these totally thoracoscopic trends that we are seeing are very favorable, and will have a big impact on physicians and patients on a going-forward basis.

Thanks, Dave.

Next question for you also.

Surgical ablation has been blessed so far with very nice reimbursement.

Do you have a look, or a sense yet about what the 2009 --

Larry, hello?

His line disconnected, looks like.

Your next --

No, I will try to take the question.

I think the question was do we have a sense of whether or not there are going to be any changes in reimbursement.

CMS has published, I think, for 2009 their most recent updates.

There are some mild adjustments to reimbursement, but they are not significant.

On average, the reimbursement is constant with previous year, and that is our understanding of physician reimbursement as well.

So, at least over the 2009 window of time, we do not see any changes to physician reimbursement as CMS publishes their codes.

Okay.

(Operator Instructions).

Your next question comes from the line of [Erica Sulene] from Stanford Group.

Please proceed.

Good morning, and thanks for taking my question.

When we hear that you have withdrawn guidance on the consumer confidence-induced slow down in MIS, and the potential DOJ impact, it sounds quite negative, but once you have heard all the details it does not sound as bad.

How much does this acknowledgement that right now you are in a penalty box and you kind of want to get all of the pain out, versus just ending up with an opportunity for another round of disappointment, if you would, to set the sights a little bit lower but not quite enough?

Could you just, Erica, I apologize, but could you ask your question again?

I just want to make sure that I completely understand it.

Basically what I am asking is the withdrawn guidance less because you think it is going to be a huge impact, and more because right now we are just getting all of the pain out of the system and realizing that we need to look at these versus setting some level of expectations and not having it be enough, and then having to go through another round of this in your report?

Well, let me step back and think through that with you.

The process and the decision that was made was around the pride that we take in accurately forecasting and estimating our business.

We take a lot of pride in that, and for that to have happened correctly, we have got to go down and do a deep dive as well as look at some macro level issues affecting trends.

And, currently going into October, we have seen what we believe is a moderation in procedure volume, coupled wit the impact of receiving a letter from the Department of Justice initiating an investigation, all happening in a tightly spaced time period.

We thought that it would be more prudent than rather giving a wide range of broad brush, or trying to sculpt fog, if you will.

Yes.

That it would be more prudent or in line with our philosophy and our culture to step back, digest the information, analyze it, look more closely at the trends, take a little more time, and then accurately, more accurately forecast our business on a forward-going basis.

In terms of the quarter, we do feel like the impact on the minimally invasive side could be significant because we have 90 centers, and some of those large volume centers seem to be communicating that the procedure volumes are being impacted.

Okay.

That is definitely helpful.

At this time there are no further questions in queue.

I would like to turn the call back over to Ms.

Piton for closing remarks.

Thank you very much everyone for joining the call today and we look forward to continuing to work with you.

Thank you for your participation in today's conference.

This concludes your presentation.

You may now disconnect.

Good day.