AtriCure Inc (ATRC) 2009 Q3 法說會逐字稿

Good morning, and welcome to AtriCure's Third Quarter 2009 Earnings Conference Call.

My name is Dan and I'll be your coordinator for the call 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 call.

(Operator Instructions)

As a reminder, this call 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, please proceed.

Thank you, Dan.

Good morning, and welcome to our third quarter 2009 earnings conference call.

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

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

Thank you, Dave, and good morning, everyone.

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

If you have not received a copy, please call Sarah Wichman 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, believes 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, governmental approvals, 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.

Additionally, we will refer to non-GAAP financial metrics during the call today.

A reconciliation of these non-GAAP measures is included in our press release, which is available on our website.

I would like to remind everyone on the call today also that the Food and Drug Administration, or FDA, has not cleared our products for the treatment of atrial fibrillation or AF.

A majority of our products have been cleared for the ablation of cardiac 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 use the products for the surgical treatment of AF.

These restrictions do not prevent doctors from choosing to use the products for the treatment of AF, or prevent AtriCure from engaging in sales and marketing efforts that focus only on the general attributes of the products for the current cleared uses and not for the treatment of AF.

AtriCure educates and trains doctors in the proper use of its products and related technologies, and does not educate or train doctors to use its products for the treatment of AF.

AtriCure has provided research grants to institutions for the purpose 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 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.

We will begin with opening remarks, and then address our progress toward achieving our strategic priorities.

Next, we will review our performance for each of our three business sectors, followed by an update concerning the Department of Justice investigation.

At that time, Julie will present a detailed review of our financial performance.

We will then open the call for questions.

Consolidated revenues for the third quarter of 2009 were $13.3 million.

On a sequential basis, revenues declined 3.6%, which is consistent with the impact of seasonality.

The reduction in revenues was primarily attributable to a decline in OR Lab related sales, similar to the previous quarter.

During 2009 we have been focused on factors within our control, execution, cost management, resolving the Department of Justice investigation and related qui tam complaint, and ensuring that we remain focused on opportunities that will enhance patient outcomes, accelerate profitability and restore sustainable high growth.

Although the macroeconomic environment and the Department of Justice investigation have made this a challenging year, we continue to develop new breakthrough products and procedures that we believe will drive growth and increase shareholder value.

Our investments in FDA clinical trials in support of atrial fibrillation approvals is consistent with the large and growing opportunity for effective AF treatments.

The markets for effective atrial fibrillation technologies offer tremendous growth opportunities given favorable trends such as rapidly aging populations, significant unmet clinical needs, scientific and technological advances, and geographic development opportunities.

According to statistics recently released by the Agency for Healthcare Research and Quality, the number of hospitalizations for arrhythmias such as atrial fibrillation rose by 28% between 1997 and 2007.

Irregular heartbeats such as atrial fibrillation are currently the seventh most common reason for hospitalizations.

To address the rapidly increasing prevalence of atrial fibrillation, the US Senate approved a resolution during September of 2009; this resolution designates the month of September as Atrial Fibrillation Awareness Month.

Adopted under unanimous consent by the Senate, the resolution reinforces the need to raise awareness and garner support for atrial fibrillation initiatives.

As the market leader for cardiac ablation products used in open heart and sole therapy minimally invasive procedures, we are well positioned to make significant contributions toward reducing the burden of atrial fibrillation through continued innovation and clinical science.

Turning to a review of our progress toward achieving our strategic priorities.

As a reminder, in rank order, our 2009 priorities are profitability, atrial fibrillation approvals, and the expansion of our market share and leadership position through new product and procedure innovation, including the release of our Cryo1 and AtriClip system designed for left atrial appendage exclusion.

Strategic priority number one, profitability.

Third quarter 2009 non-GAAP loss from operations was $700,000, an improvement of 63% as compared to the same period a year ago, representing our narrowest non-GAAP operating loss since becoming a public company.

We reported adjusted EBITDA of $700,000 for the quarter, representing the third consecutive quarter of positive adjusted EBITDA.

In addition, year-to-date cash generated from operations was $300,000.

Based on these trends, we are pleased with our ability to align costs with revenues in order to accelerate our march toward profitability.

Strategic priority number two, atrial fibrillation approvals.

As a reminder, the ABLATE FDA regulated clinical trial is designed to treat patients undergoing elective open heart surgical procedures.

The ABLATE clinical plan includes a Bayesian adaptive statistical design.

The basic concept of a Bayesian adaptive design is the better the results, the fewer the patients required to demonstrate safety and efficacy.

Our Bayesian adaptive design allows for an interim analysis once data is available for 50 patients in order to calculate the predictive probability of a successful clinical trial.

If the interim analysis is predictive of a successful trial, then the trial design ceases patient enrollment and waiting for all patients to complete their long term follow-up.

We have enrolled 55 patients and completed our interim analysis.

The results of our interim analysis meet the predetermined decision making rules for cessation of enrollment and are predictive of a successful clinical trial.

We have initiated dialog with FDA and we will continue these discussions while we prepare our final PMA module.

We believe that we have followed our FDA sanctioned protocol and analysis plan.

Our aim is to submit the final module of our PMA during the first quarter of 2010, which is in line with our previous communications.

We may, however, decide to enroll additional subjects in some form of a continued access registry to enhance our body of clinical evidence which we would present at panel.

In addition, during the fourth quarter we plan to submit an IDE in support of our dual epicardial, endocardial persistent AF clinical trial, or Deep AF.

Assuming the FDA approves our feasibility study, we plan to begin enrollment during the first half of 2010.

The investigational procedure combines the use of our minimally invasive products with catheter ablation technologies.

Our integrated or hybrid approach strengthens the partnership between electrophysiologists and cardiac surgeons, providing a comprehensive mapping and ablation procedure.

Physicians have performed more than 50 integrated hybrid procedures, and we believe there are significant clinical and market development benefits from combining our minimally invasive products with catheter ablation technologies during the same procedure.

Now, strategic priority number three, the expansion of our market share and leadership position through new product and procedure innovation.

The recent launch of our Cryo1 system was consistent with our product schedule and demonstrates our market leadership and commitment to innovation.

In addition to the second quarter US launch, Cryo1 was released in Europe during the third quarter.

We are highly encouraged by initial sales and physician responses to our Cryo1 system.

We believe that our Cryo1 system is driving new growth opportunities, which will incrementally increase during the fourth quarter and throughout 2010.

Since our US launch in June, we have sold our Cryo1 system into approximately 60 US accounts.

Importantly, AtriCure has the widest range of surgical cardiac ablation products and technologies, and is the only company marketing a series of radiofrequency and cryothermy ablation products.

In addition, the recent approval of our AtriClip system featuring the Gillinov-Cosgrove clip represents a major product and clinical milestone.

As a precondition to commercial release in Europe, we are in the process of successfully completing our European preference, user preference and pilot study.

The AtriClip system has been successfully used in multiple European sites in conjunction with open heart and minimally invasive procedures.

We are highly encouraged by the physician feedback and are planning commercial release in Europe by year-end.

In terms of US clearance, we anticipate submitting our 510k, which will include the results from our EXCLUDE clinical trial, on schedule during the fourth quarter of 2009.

We anticipate US release of the AtriClip system during the first half of 2010.

In terms of the market opportunity for the AtriClip system, there is a growing demand for products that safely and effectively exclude the left atrial appendage.

During the recent 2009 Cleveland Clinic Medical Innovation Summit, the top ten clinical topics for 2010 were announced.

This rigorous selection process surveys clinicians and researchers at the Cleveland Clinic in order to determine what game-changing medical technology device or therapy is anticipated during 2010.

Devices to occlude the left atrial appendage were selected as the ninth top clinical topic, and the AtriClip system was one of the two left atrial appendage devices highlighted.

In addition, we are aware of a publication describing the first human experience from the University of Zurich.

This data was submitted as part of our CE Mark approval process.

We believe this publication will conclude that the AtriClip system is superior to other available surgical technologies and methods for excluding the left atrial appendage.

We remain confident that this key innovation represents a large and exciting new growth platform.

Turning to third quarter sales trends and performance by business sector, revenue from open heart products were $6.5 million, versus $6.7 million during the same period a year ago.

Open heart product revenues benefited from the introduction of our Cryo1 probe, offset by a reduction in clamp sales, driven by seasonality, customer order cycling, and a focused effort on Cryo1 training and launch.

Going forward, based on the strength of our radiofrequency clamps and our new Cryo1 system, we anticipate market share gains and growth from this business sector.

Now turning to our minimally invasive business.

Revenues from domestic minimally invasive products were $4.2 million, versus $5.7 million during the same period a year ago.

Despite the impact of seasonality, on a sequential basis revenues from minimally invasive products were up 7%.

In addition, minimally invasive procedures were up both year-over-year and sequentially.

These results are consistent with our 2009 sales plan to focus on profitable market share by increasing adoption within our install base.

As we discussed during our previous earnings call, the year-over-year decrease in revenues is primarily attributable to reduction in OR related sales and, to a lesser degree, a reduced number of products being used per procedure.

Moving forward, we anticipate minimal impact from OR Lab sales since the bulk of these sales occurred during the first three quarters of 2008.

In terms of trends toward a reduced number of products, which is being driven by a single clamp technique, our new premium clamp platform, Synergy Access, features a wide range of benefits and is specifically designed to facilitate a single clamp totally thoracoscopic procedure.

Pending the timing of regulatory clearance, our US plan is to release the Synergy Access with the AtriClip system in our minimally invasive accounts utilizing a single clamp technique.

We anticipate the launch of Synergy Access in Europe by year-end.

Now turning to our international performance, despite the impact of seasonality, international revenues of $2.6 million were consistent with previous highs.

International revenues grew 9.6% or 11.1% on a constant currency basis.

International growth for the quarter was primarily attributable to our increasing market share in Europe.

We anticipate that these European growth trends will continue as we prepare to launch our AtriClip system, expand our minimally invasive business, and continue commercializing our Cryo1 system.

Moreover, the international markets are underpenetrated and we plan to commit additional resources outside the US.

We expect growth from the international markets to remain strong.

With respect to the Department of Justice investigation, we have reached a tentative agreement with the government aimed at resolving the Department of Justice investigation, and related qui tam litigation.

The settlement will include a provision stating that AtriCure is not admitting any wrongdoing or liability.

We believe the contemplated resolution will allow us to execute our business strategy, maintain our credit facility, and move toward profitability without materially impeding our current capital or ongoing revenue opportunities.

We believe that we have meritorious defenses to the legal issues raised in the qui tam complaint.

However, litigation could potentially last years.

Even if we litigated and prevailed, the cost would have likely exceeded the settlement amount.

Also, we are an emerging growth orientated company with a lean management structure.

The discovery and litigation process would have distracted management from focusing on profitability and growth.

Our financial agreement with the Department of Justice is contingent upon our execution of a Corporate Integrity Agreement with Health and Human Services.

We believe the Corporate Integrity Agreement aligns with our current healthcare compliance systems and focuses on enhanced monitoring and reporting.

In addition, the Corporate Integrity Agreement provides us with a release of potential civil and administrative claims from the Department of Justice and the Department of Health and Human Services.

Moreover, we do not expect the Corporate Integrity Agreement to impair our ability to execute our business plans and expand the markets for our products.

As a result of the tentative settlement agreement, we have booked a reserve of $3.8 million, representing an estimate of the net present value of the financial settlement.

The agreement outlines payments of $500,000 in year one, $500,000 in year two, $650,000 in year three, $1 million in year four, and $1.5 million in year five.

Importantly, over the last 12 months, this process has strained the business and has been a significant distraction to management.

Given the circumstances, we believe the resolution of this matter is in the best interest of our shareholders and allows management to further focus on the execution of our strategic plan.

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

Thank you, Dave.

I will begin by providing the sector information related to revenues.

Revenues from domestic open heart products were $6.5 million.

Minimally invasive domestic revenues were $4.2 million, and international revenues were $2.6 million.

Total revenues were $13.3 million, as compared to $14.8 million for the third quarter of 2008.

Sequentially, total revenues decreased 3.6%, reflecting seasonality.

International revenues were 9.6% on a GAAP basis and 11.1% neutralizing currency fluctuation.

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.

Now turning to gross margin.

Gross margin for the third quarter of 2009 was 75.3% as compared with 77.1% last year, and 77.4% for the second quarter of 2009.

The reduction in gross margin was primarily due to an increased mix of international revenues.

These increases were partially offset by an expansion of domestic gross margins driven by a reduced mix of sales from capital equipment.

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

Operating expenses, excluding the $3.8 million settlement reserve, were $10.7 million, a $2.6 million or 19% decrease, as compared to last year's third quarter operating expenses of $13.2 million.

The reduction in operating expenses was primarily due to reduced headcount related expenses of $1.7 million, driven primarily by our fourth quarter 2008 reduction in force and a reduction in marketing and education related expenses of approximately $400,000.

The reduction in research and development expenses of approximately $400,000 was due primarily to the timing of external costs associated with product development activities, partially offset by increased expenses in support of our clinical activities.

I do not expect us to retain this level of operating expenses prospectively.

Specifically, for the fourth quarter of 2009 I anticipate heavier research and development costs and heavier SG&A costs in support of clinical activities, product development activities, costs associated with launching the AtriClip and Synergy Access system in Europe, training activities to support the hybrid FDA clinical initiative, and increased legal expenses in support of bringing closure to the Department of Justice matter.

Our third quarter 2009 loss from operations, excluding the settlement reserve, was a record low of approximately $700 million -- $700,000, excuse me, representing an improvement of 63% as compared with the third quarter 2008 operating loss of $1.8 million.

Adjusted EBITDA for the third quarter of 2009 was a record of approximately $700,000 as compared with a loss of approximately $500,000 for the third quarter of 2008.

For the first half of 2009, our adjusted EBITDA was a record $1.7 million, compared to negative EBITDA of $3.7 million for the same period last year.

Just to clarify, that's for the first nine months.

In terms of the balance sheet and cash, we ended the quarter with $16.4 million in cash, cash equivalents and investments, and we had $5.6 million in gross debt outstanding under our credit facility.

During the quarter we also recorded a current liability and a related current receivable from our insurance carrier of $2 million related to the potential settlement of the Levine class action suit.

We do not expect to fund any of the settlement directly, and we have exhausted our retention with our insurance carrier related to this matter.

The amount recorded is based on preliminary settlement discussions, and the Company admits to no wrongdoing.

Year-to-date we have generated cash from operating activities of approximately $300,000 as compared with a use of $4.9 million for the same period last year.

This improvement was driven primarily by an improvement in non-GAAP net loss and a reduction in cash used in support of working capital needs.

With that, at this point I'd like to turn the call back to Dave.

Thank you, Julie.

In terms of our outlook, within our markets we have a favorable demographics and significant unmet needs globally.

During the year we have aligned costs with revenues, executed our clinical trial initiatives, strengthened our position as market leaders, and introduced new growth platforms.

Going forward, we aim to increase operating leverage through growth.

In closing, let me add that I am privileged and humbled to work with a group of great leaders and associates who are doing their best to improve patient care and drive value for our shareholders each and every day.

With that, we'll open the call to your questions.

(Operator Instructions)

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

Please proceed.

Hey, guys.

Good morning.

A couple of big picture questions.

In terms of the overall market trends in the intraoperative cardiac ablation market, what type of trends are you seeing?

It seems to me like the overall market has slowed here a little bit and just wanted to get your perspective.

Sure.

We do think that there's been a slight plateau to the market, which is not unusual.

However, we also believe that based on the expansion of our minimally invasive platform and new and exciting procedures and technologies that there'll be an acceleration of growth, both in the open heart and the minimally invasive markets.

And then just in terms of the timing, when do you anticipate that growth in the market occurs?

Is that a mid 2010 type event, or should we expect a couple more quarters here of overall modest market growth?

I think the acceleration of growth in your timeframe is a reasonable way to look at it; sort of the mid 2010 and moving forward we anticipate growth in both the open heart and minimally invasive markets.

In fact, the cardiovascular roundtable predicts that the open heart number of procedures will actually double over the next five years.

So I think, again, it's not unusual for a plateau in emerging growth markets, but with the expansion of minimally invasive procedures, new technologies and solid reimbursement, we would anticipate that growth will reaccelerate over the next year and going forward.

And then just on the ABLATE trial, one, when do you expect to present those results in a scientific forum?

And, two, just in terms of the number of patients, given a lot of atrial fibrillation studies have much, much larger number of patients, and from a statistical standpoint 55 may be the right number, but from a marketing standpoint, trying to convince some physician, hey, this is labeling, this is how it's going to work, is that really enough to get some of the referring physicians to say this is the right therapy for my patient?

Well, certainly, in terms of the 55 patients, we did follow our FDA approved plan.

And the actual -- the study called for 50 to 100 patients.

So at 55 patients, the interim analysis is highly predictive of a successful clinical trial and the statistical plan basically calls for a cessation of enrollment when you meet the decision making rules.

So, we're following our protocol.

In terms of the numbers of patients, we hear you, and that's why we're discussing with FDA some form of a continued access protocol that will allow us to build the clinical body of evidence to present at the panel.

In terms of when we'll see the results from this clinical trial, they'll be first presented at the FDA panel.

Than just one last one.

In terms of specific trials for labeling, when -- do we expect to see something similar on the Cryo1 probe?

Thank you.

We don't have any plans currently to advance any labeling trials for our Cryo1 probe.

The Cryo1 probe I think you know is approved for the treatment of cardiac arrhythmias.

Thank you.

Thank you, Tim.

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

Please proceed.

Hey, guys.

Good morning.

Congrats on the settlement.

Hey, Matt, thank you.

Good morning, Matt.

Just kind of a follow-up, Dave, on the trend side of things.

Can you give us -- you should be returning to growth here in Q4 and obviously there's been a lot going on in your business this year.

Once we see some of those issues subside, like OR Lab anniversarying those sales, procedure volumes being a little bit slower, reduced marketing spend, et cetera, what do you see your base business growing over the next couple of years?

In terms of our base business, Matt, or are we talking about our open business?

Well, the existing business excluding any benefits from, say, AtriClip or a label, et cetera.

Well, we anticipate the restoration of growth to our core business in 2010.

Okay.

So maybe then we can layer in AtriClip.

Can you give us a little more on your plans for penetrating that market?

I think we've characterized it maybe as a few hundred million dollars.

Do you think -- how much of that do you think you can get in the first year or two?

And in terms of labeling, considering some of the patients in EXCLUDE did not have preexisting AF, will that be a population you can target?

Well, certainly the labeling will indicate left atrial appendage exclusion.

So there are 80,000 patients that undergo elective open heart surgical procedures today and the market, as I think you and Tim indicated, is only 35% penetrated and has somewhat reached a plateau.

However, again, we do believe that that will accelerate going forward.

But the clip is really indicated for any patient that has atrial fibrillation, so some of these patients that are not being ablated might be good -- might be a good indication for our clip.

And in addition, as you pointed out, in our EXCLUDE clinical trial, 40% of the patients that received the clip did not have a preexisting history of atrial fibrillation.

So, we do believe that there are physicians in the marketplace that believe if patients have structural heart disease and markers for developing atrial fibrillation that it's a clinically relevant thing to do to exclude the left atrial appendage.

So, we think there'll be a mixed group of physicians.

Some physicians will stick to appendage exclusion for AF only.

And we do think that there's a growing trend toward being more aggressive in those patients that may just have markers for developing atrial fibrillation.

Okay, thanks.

And then on the pace of the rollout, how should we -- how aggressive are you going to be with AtriClip next year?

Well, it'll certainly be somewhat contingent on the timing of our 510k clearance.

We'll submit the 510k actually, which includes our EXCLUDE clinical data, this month, and FDA will have 90 days to respond.

They've already had the technical dossier to review the device itself.

So, we'll certainly wait to hear back from FDA 90 days from the November timeframe and plan to be very aggressive in launching the clip as soon as we receive 501k clearance, which, as we've stated in the past, we anticipate during the first half of 2010.

Okay.

So the -- assuming approval and timing comes in line with expectations, how aggressively are you going to roll the product out?

Highly aggressively.

This is actually one of the products that we have that doesn't require a lot of service.

We've been in Europe and seen people place this clip; once they place it, they're trained.

So we can move the market extremely swiftly with this product.

Unlike, for example, a Cryo1 system, which requires a significant amount of training, this product -- actually once you do one procedure, you are trained on the technology, so it offers the ability to move much more rapidly through the marketplace.

Okay.

And last one, briefly, on Deep AF.

Can you just give us a little more of a timeline on that study, and is there any potential for a partnership on the EP side?

Thanks.

Thank you, Matt.

In terms of the timing of the study, we have an investigator's call tonight.

We anticipate filing the IDE either this month or next month; FDA has 30 days to turn that around.

We believe that we have a handful of investigators that we're talking to and some of which have been selected.

So, once again, we believe that we'll start the clinical trial pending FDA approval of our IDE during the first half of 2010.

We're very encouraged about this solution, by the way.

The concept of combining a surgical approach or an epicardial approach with a catheter or endocardial approach we believe provides the best possible treatment alternative for these patients with longstanding persistent atrial fibrillation which are currently often not being treated today.

So, once again, we're very excited about the concept of entering into the study and the potential contribution that this procedure may be able to make, especially to those chronic forms of atrial fibrillation.

(Operator Instructions)

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

Please proceed.

Hi.

Good morning, guys.

Thanks for taking the question.

Sure.

Good morning.

So just following up on some earlier questions, Dave, in the fourth quarter you don't have the type of seasonality you typically see in Q3.

While you won't have the rollout of some of the new products, seems like, at least sequentially, growth may be a bit better.

What should we look for in Q4 in terms of both open heart and minimally invasive, as well as your stronger push internationally to provide in terms of sequential growth here from the third quarter?

Well, Jason, we haven't provided guidance.

We certainly anticipate sequential growth going into the fourth quarter.

And as you point out, we don't have the impact of seasonality.

In addition, we're not really up against significant OR Lab related sales, so things begin to normalize in the fourth quarter and certainly begin to normalize during 2010.

Okay, that's helpful.

Julie, on gross margins, also with things that impacted gross margins sequentially in this quarter, including a higher mix of international sales, you did mention domestic gross margins were higher.

If you're expecting a little bit better mix of US versus OUS sales in the fourth quarter, can we return to the levels that you saw in the beginning or the first half of the year, or should we expect something between that and what you put up here in the third quarter?

How should we think about gross margins as you move forward?

We generally expect gross margins to fall between 74% and 77% and they tend to fluctuate quarter to quarter for a variety of reasons.

I would expect them in the fourth quarter to actually end up more -- if you wanted to narrow that range a little bit, I would anticipate them to be more in line with the fourth quarter for the upcoming quarter here.

So the fourth quarter of last year?

No, no.

This third quarter, I'm sorry.

Third quarter, okay.

So a bit better on a year-over-year basis, but not similar to what you saw in the first half, then?

That's correct.

Okay.

All right, that's helpful.

And then back to the AtriClip, Dave, how should we think about as you roll that out in 2010?

You mentioned that it'll be -- it's being used initially in preference testing in both open heart and minimally invasive.

How should we think about its contribution to growth in each of those segments as you roll it out post the 501k clearance?

Good question, Jason.

Certainly many more open heart procedures.

So in terms of its contribution, we would envision that it would be much more widely used and adopted initially in the open heart area just based on the pure number of procedures, both patients that are getting ablation and those patients that are not receiving ablation that still might be good candidates for a left atrial appendage exclusion.

Okay, great.

And as it relates to AtriClip, are you seeing any pickup in awareness, at least initially, in Europe as you've launched your product, obviously on a limited basis, in addition to Atritech's catheter-based product and their push in Europe as well?

Are you seeing both products in the market raising the specter of awareness in that market?

And going forward, how do you think that contributes to the number of physicians that do seek to get trained and use the product on a more sort of normal basis?

Well, we're -- we certainly do see Atritech in the market and we certainly believe that the fine job that Atritech has done has certainly raised the awareness, not just of the left atrial appendage but, as you know, their studies linked the left atrial appendage to AF related stroke and was really the first data to do that.

So, we believe that the Atritech system providing an endovascular solution and AtriCure providing an epicardial solution are very complementary technologies.

And certainly, we think that the data that Atritech has provided the clinical community bolsters our position as a company.

Great.

And last question and I'll get back in queue.

Just a bit more in the details on the Deep AF trial, if you can, Dave, just in terms of the number of patients that you're expecting to enroll, I'm sorry if I missed that, I'm not sure if you've gone over it -- what the endpoints are going to be, follow-up, et cetera.

Is there anything in terms of details you can give us at this point?

Well, sure.

This is Phase I, so this will be a feasibility study.

We would hope the FDA would approve five centers and 30 patients.

And while we're executing our feasibility trial we'll be working with investigators to plan a pivotal trial, which we anticipate to be a randomized trial in the order of magnitude of somewhere in the range of 200 to 300 patients.

That's helpful.

Thanks, guys.

Sure.

Thank you.

Thank you.

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

Please proceed, sir.

Good morning.

Congrats on the DOJ.

I'm sure you're very happy about that.

Thank you.

Thank you, Larry.

Dave, on the US open, you mentioned that sales were down year-over-year.

Do you have any sense if the market is down a little bit or is it market share issues?

What's your sense about that number?

I do think that the market is down somewhat.

I think that's choppy.

I think if you talk to certain sites they'll tell you that their volume is relatively steady.

But, I do think in general the market for cardiac surgery is slightly down, so there may be some impact from that.

I also think to some degree we reached a little bit of a plateau phase.

We're in that 30%, 35%, maybe 40% penetration level in the market, and we need some exciting new technologies and maybe some stronger education and some push from new procedures like minimally invasive and hybrid approaches to really re-excite some of the physicians that aren't being as aggressive with the open heart procedures.

The 30% to 35% number you're referring to is the number of atrial fib treatments within open heart, is that what that number is?

Correct.

And then minimally invasive, I think it was last quarter you talked about the fact that there have been a little bit of pricing pressure or you had brought your prices down.

I don't --- I didn't hear you say anything on this call about that.

Could you talk about pricing in minimally invasive?

Yes, good question, Larry.

The pricing -- I'm sorry if there was a misunderstanding on the previous call, but the actual product pricing has remained relatively constant.

What we've seen is, for example, many physicians like to use two clamps.

We have a clamp for the right atrium, or I should say the right -- the right pulmonary veins and the left pulmonary veins.

They have different curves.

So some physicians like to use two clamps to perform a procedure and that's the way we initially trained the procedure.

Now certain key trainers and proctors have gone to using a single clamp technique.

Those clamps are premium products.

So we have seen a fairly high number of centers revert to a single clamp technique, which has not impacted our ASP per product but has impacted our revenue per procedure.

Yes, that's right.

I remember that now from last call, yes.

And that's something that we actually envisioned.

And this Synergy Access platform is designed to be a single clamp product and provide some other features like articulation and facilitates totally thoracoscopic procedures, so the Synergy Access we think is a complement to that current trend.

Plus, we also believe that there are certain ceilings on what we can expect in terms of revenue per procedure on minimally invasive procedures.

So as we launch new products like the clip and other new technologies into the minimally invasive arena, we want to be sensitive to the fact that there are -- there's a likely ceiling in terms of the revenue per procedure that can be derived.

And we also want to maintain our strong gross margins and not discount individual prices.

So we think the Synergy Access really fits into that strategy, and that's why we plan to launch that in the US if the regulatory approvals coincide with the AtriClip system.

No, I think you said minimally invasive was up 7% year-over-year.

Do you think the market is growing that fast, or are you continuing to gain share in that sector?

Just to be clear, Larry, I'm sorry, minimally invasive was up 7% quarter-over-quarter sequentially.

Oh, sequentially.

Okay.

And year-over-year was down?

Year-over-year was down fairly significantly but, again, down related primarily to OR Lab sales.

But the number of procedures year-over-year were up, and the number of procedures sequentially were up.

Okay, so what we're seeing is that the market in terms of procedures is strong.

There's price -- there's not price pressure but there's pressure on ASPs because people are economizing and using fewer clamps.

Yes, I think that's a correct characterization.

And your revenue is down year-over-year because last year had the OR Lab as more of a onetime sale rather than ongoing disposable use.

Right.

And I think you remember that our strategy was to place the OR Lab in the 80-plus MIS accounts, and we did the bulk of that in the first three quarters of last year.

We sold the OR Lab and that OR Lab basically derived about $30,000 worth of revenue per platform; that was the average, approximately the average ASP for OR Labs.

So you can envision 80-plus accounts, $30,000 per procedure, that a significant aspect of our minimally invasive growth last year came from the sale of the OR Lab.

So that if you take 80 OR Labs times $30,000, it's $2.4 million.

If you say that was evenly spread, that would be about $800,000 in Q3 last year, which you didn't have this year.

I think you're in the ballpark, Larry.

Okay, great.

Thank you.

So that big effect is past now, and in Q4 we won't have that tougher comparison.

We'll have a marginal comparison in Q4.

We won't be completely normalized.

In the first quarter of 2010 things really turn to a normalized year-over-year comparison.

Okay, Dave, thanks very much.

Thank you, Larry.

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

Please proceed.

Thanks for taking my follow-up here.

Just two real quick ones.

First, in terms of Cryo1, what was kind of the ballpark revenue contribution in the quarter?

Well, we'd rather not share the average selling price per procedure based on just the competitive landscape and competitive nature of our business, but since we launched our Cryo1 system in June, we've sold Cryo1 into 60 US accounts.

Okay.

And then second here, I know -- I think it was late last year you stopped providing kind of your financial targets just given some of the overhangs that you had.

But now with the DOJ here behind you, would you be -- will you start providing some of your -- maybe some of the financial targets that you'll be looking to hit here maybe in 2010 and going forward?

Julie and I are in deep discussion about -- and guidance and what the best practices for AtriCure should be on a going forward basis.

So, we're not prepared to answer the call on this -- that question on this call, but we will certainly be addressing it during the next earnings call and going forward.

Great.

Thank you.

You bet.

At this time we have no further questions in queue.

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

Drachman for closing remarks.

We thank you very much for the call, and we look forward to our upcoming earnings call in the near future.

Thank you very much.

Bye-bye.

Thank you for your participation in today's conference.

This concludes the presentation.

You may now disconnect.

Good day.