AtriCure Inc (ATRC) 2010 Q1 法說會逐字稿

Good afternoon, and welcome to AtriCure's First Quarter 2010 Earnings Conference Call.

My name is Saley, and I will 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 towards the end of today's call.

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, Saley.

Good morning, and welcome to our first quarter 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 afternoon, 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, let me remind you that the Company's remarks today may include forward-looking statements.

These statements include but are not limited to those that address activities, events or developments that AtriCure expects, believes or anticipates will or may occur in the future, such as revenue and earning estimates, other predictions of financial performance, launches of new products, and market acceptance of new products.

Forward-looking statements are subject to numerous risks and uncertainties, many of which are beyond AtriCure's control, including but not limited to the rate and degree of market acceptance of AtriCure's products, 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 the call today.

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.

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 that the Food and Drug Administration, or FDA, has not cleared our products for the treatment of atrial fibrillation or AF.

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.

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

The primary authors of the papers referred to on this call may also 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 a brief summary of our first quarter revenue results, and then review our 2010 strategic priorities.

Next, we will highlight our performance and ongoing opportunities for each of our three business sectors, followed by a regulatory clinical and product pipeline update.

After my remarks, Julie will present a detailed review of our financial performance.

I will then review our outlook and open the call for questions.

Consolidated first quarter revenues of $14 million grew 2% compared to the same period a year ago.

Notably, international revenues grew 27%.

While our growth was modest, our first quarter revenue performance represents our strongest sales results since the third quarter of 2008.

This is important, as it underscores the positive trend in our performance and, from our perspective, indicates a turnaround from the challenging conditions we experienced throughout 2009.

We believe that our plans to strategically expand our US and international sales and marketing platforms is aligned with increasing sales momentum and the initial physician adoption of hybrid procedures.

As a result, we are anticipating higher growth trends in the second half of 2010.

And we project further acceleration in 2011.

We remain committed to growing our business, and are poised to build on our market leadership position in cardiac arrhythmia surgery, while increasing mindshare and strengthening partnerships in the electrophysiology community.

We continue to monitor and optimize our cost structure while enhancing our sales and marketing platform, launching several new products, advancing our pipeline, and investing in FDA clinical trials and atrial fibrillation approvals.

We see positive indicators and growth opportunities across all business segments.

For 2010, our strategic priorities are growth, the successful execution of FDA regulatory and clinical milestones, and customer-valued innovation.

To capitalize on our wide range of products, we began to strategically expand our US and international sales and marketing organizations during the fourth quarter of 2009.

We believe that we have significantly strengthened our sales organization and are developing traction in new areas and building momentum.

Moreover, the additional sales resources are aligned with new product launches and growth platforms such as Cryo1, our FDA dual epicardial/endocardial procedure persistent AF, or DEEP AF clinical trial, and the physician adoption of hybrid procedures.

Notwithstanding the seven new field sales positions we added in the US and the two new direct personnel in our international markets, our sales force headcount remains below third quarter 2008 levels prior to our restructuring.

We anticipate that these new sales positions will increase sales momentum during the second half of this year.

We will continue to evaluate our sales trends in comparison to our cost structure and assess our opportunities for further sales force expansion during the course of the year.

Turning to first quarter sales performance by business sector, first quarter revenues from US open heart products were $7.2 million, a sequential increase of 7%.

The first quarter open heart momentum was driven by our best-in-class products and stronger sales organization.

In the open heart markets, we offer customers a series of superior bipolar clamping and cryothermia ablation products.

Since we launched our Cryo1 System in June of 2009, we estimate having gained over 20% market share in the US cardiac surgical ablation markets for cryothermia products.

We anticipate that the US launch of our AtriClip Left Atrial Appendage Exclusion System will further distinguish AtriCure as the market leader, and rapidly become a significant new growth catalyst.

We estimate that the US open heart patient pool for our AtriClip System is approximately 185,000 patients, representing a market opportunity for our AtriClip System of roughly $150 million per year.

We believe that upon approval, we can rapidly penetrate and grow the open heart market.

At the upcoming Heart Rhythm Society Meeting, Dr.

Marc Gillinov, the Surgical Director of The Center for Atrial Fibrillation at the Cleveland Clinic Heart Center, will present scientific material regarding the benefits of left atrial appendage occlusion.

He will also be a part of an expert panel discussing left atrial appendage occlusion to reduce stroke risk in AF patients.

During these programs, Dr.

Gillinov will include results from the AtriClip System, along with other technologies for treating a left atrial appendage.

In addition, we have plans to further develop the AtriClip platform for less invasive thoracoscopic and robotic procedures.

We believe that less invasive procedures and our approach of not implanting the AtriClip in the circulating blood pool positions AtriCure to be competitive with the devices being introduced for endovascular left atrial appendage occlusion.

Turning to our minimally invasive business, revenues from US minimally invasive products were $3.9 million, a $200,000 sequential decrease.

During the first quarter, we invested significant time and resources in preparing sites for our DEEP AF feasibility trial.

We believe that the combination of preparing sites for a DEEP AF clinical trial and physicians transitioning their programs from minimally invasive to hybrid approach contributed to the softening of minimally invasive product sales during the quarter.

Moving forward, we anticipate increasing growth trends from our minimally invasive products, driven primarily by the physician adoption of innovative hybrid ablation procedures.

Several high-volume and prestigious centers are in the process of adding the hybrid procedure as an alternative for persistent patients or patients that have failed catheter ablation.

We believe that a large and growing number of physicians who previously did not offer standalone minimally invasive programs are planning or considering the adoption of a hybrid approach.

Further, we believe that the market response to hybrid ablation procedures is growing stronger.

There is an increasing recognition that catheter ablation alone will not reliably generate acceptable outcomes for certain patients with persistent and long-standing persistent atrial fibrillation.

This underscores our disease segmentation thesis that the risk-benefit ratio favors catheter ablation for intermittent or paroxysmal atrial fibrillation patients, but that patients with persistent atrial fibrillation will often require minimally invasive surgical ablation, either alone or in a hybrid procedure.

The compounding issue is that the majority of patients diagnosed with atrial fibrillation present with persistent atrial fibrillation, representing the largest unmet need and the primary focus for our minimally invasive products.

It has been established that catheter ablation treatments for persistent patients require more time-consuming, challenging procedures which can result in safety risks and inferior outcomes.

We hear from EPs that they do not want to routinely spend their time performing long, challenging catheter ablation procedures that often result in suboptimal outcomes.

A hybrid approach strengthens the partnership between EPs and cardiac surgeons, facilitates a coordinated referral development process in the interest of patient care and, most importantly, provides patients with a comprehensive mapping and ablation procedure.

We believe that hybrid ablation will become the standard of care for persistent atrial fibrillation patients and patients that have failed catheter ablation procedures.

In addition, hospitals are dedicating significant resources toward developing hybrid procedure rooms.

Hybrid procedures are being performed in hybrid rooms, operating rooms, and electrophysiology labs.

However, we believe the hybrid room is the best equipped for these procedures.

Importantly, there is a growing recognition that hybrid procedures have benefits for a large and growing number of arrhythmia patients.

Notably, the upcoming Transcatheter Cardiovascular Therapeutics Meeting will highlight hybrid surgical and interventional techniques.

In addition, initial results of hybrid procedures that utilize our minimally invasive product platform will be presented by two prominent medical centers at the upcoming Heart Rhythm Society Meeting.

We anticipate that the results from each of these studies will be highly promising and provide initial evidence advocating the concept of hybrid ablation approaches for the treatment of persistent and longstanding persistent atrial fibrillation patients.

The Heart Rhythm Society Meeting is an excellent opportunity to educate a large interested group of EPs on both catheter ablation and hybrid approaches, as well as the best fit for different subsets of patients.

With this in mind, we will be supporting a continuing medical education event, which will be chaired by Dr.

Ken Ellenbogen from the Medical College of Virginia, a key influential leader in the electrophysiology community, and his surgical counterpart, Dr.

Vig Kasirajan, the Department Chair of Cardiac Surgery, also a prominent thought leader.

The meeting will include data from catheter and minimally invasive surgical ablation procedures.

Dr.

Mahapatra, a practicing EP and Associate Professor of Medicine and Biomedical Engineering at the University of Virginia, will review data from their hybrid approach.

This data will also be presented in the general sessions.

Dr.

Mahapatra will also review our DEEP AF feasibility protocol.

Moreover, we are aware of nine abstracts highlighting the use of our products that have been accepted at the upcoming Heart Rhythm Society Meeting.

AtriCure's exposure at this international electrophysiology meeting is unprecedented for a surgical ablation company and further provides affirmation that our products and procedures are gaining momentum and mindshare in the electrophysiology community.

Turning to our international business, international revenues of $2.9 million grew 27% compared to the same period a year ago.

We remain highly encouraged in terms of our international growth prospects and geographic expansion opportunities.

On a full-year constant currency basis, we believe that growth from the international markets will remain strong, and that we are just scratching the surface of the international opportunity.

As discussed on our February earnings call, we plan to expand our direct presence in certain high-growth European markets.

We are in the process of transitioning one of our highest volume stocking distributors to a direct sales model.

This process will have an unfavorable impact on second quarter as the distributor sells off their existing inventory.

However, we believe that this transition will begin to accelerate our European growth trends during the second half of the year and throughout 2011.

In addition, we have realigned resources to begin working to expand our presence in Central and South America.

Moreover, the Canadian market is primarily using competitive cryo products.

We anticipate receiving approval for our Cryo System from Health Canada by year-end 2010, and plan to launch our disposable cryo products throughout our Canadian distributor.

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

First, a review of our ABLATE pivotal trial.

As you may recall from the February earnings call, our plan was to file the final ABLATE PMA module during the first half of 2010.

We recently engaged with FDA to alert them of the impending submission.

During these discussions, FDA indicated that they now recommend that we wait to file our clinical module until we have data from our continued access study in order to enhance the analysis and conclusions of the ABLATE clinical trial.

These recent discussions are inconsistent with our pre-PMA meeting held in October of 2009.

Based on our understanding from the October 2009 pre-PMA meeting, our plan was to file the ABLATE clinical module in parallel with conducting a continued access study and then present the results from the continued access study as additional information at the panel meeting.

We believe the difference in direction provided by FDA is based largely on the agency having assigned a new reviewer to the program.

We now have a highly-engaged reviewer assigned to the project.

And they are in frequent contact with the agency regarding the PMA.

In light of these circumstances, FDA agreed to an immediate in-person meeting held on April 30 that included the Director of Cardiovascular Division of FDA, as well as the entire FDA Review Team, to evaluate the options for providing additional data in a timely and efficient manner.

We are currently researching several alternatives for meeting the agency's requests for supportive data, including leveraging clinical data from our own RESTORE clinical trial.

In the next several weeks, we will be meeting with the agency again to discuss a variety of options to arrive at a conclusion regarding the format and timing of the final module.

We will also be discussing the most appropriate format, requirements, and use of the data generated from our continued access protocol.

In terms of our DEEP AF feasibility trial, we recently received conditional FDA approval to initiate the study.

The conditional approval allows for up to five centers and 30 patients.

The five prestigious centers have been involved in European training and investigators' meetings in order to develop the protocol and prepare for enrollment.

We anticipate initiating enrollment during the second half of this year.

Our hybrid procedure combines the benefits of both minimally invasive surgical ablation and catheter ablation and mapping techniques.

This hybrid approach leverages the expertise and skills of cardiac surgeons and electrophysiologists to treat patients with persistent and longstanding persistent atrial fibrillation.

The trial will use AtriCure's minimally invasive surgical ablation product portfolio in conjunction with the Biosense Webster ThermoCool catheter product line.

Turning to our EXCLUDE clinical trial in support of US clearance of our AtriClip System, the path to clearance for the AtriClip System remains a 510k process with supporting clinical evidence.

During the fourth quarter of 2009, the FDA shifted the AtriClip review from the General Surgery branch to the Cardiovascular branch of the FDA.

And, as a result, we were assigned a new Review Team.

We discussed the history of our 510k and the filing of an updated 510k submission, which included our clinical report summarizing the results from our 70-patient FDA EXCLUDE clinical trial.

The final results from the EXCLUDE clinical trial were exceptionally strong, demonstrating 95% efficacy with no device adverse events, meeting the study endpoints.

We anticipate that the EXCLUDE clinical results will be presented during the upcoming Heart Rhythm Society Meeting and during other major meetings throughout the year.

In terms of FDA clearance for our AtriClip System, as you may recall from our previous earnings call, we received FDA responses from our November 2009 submission.

Independent of the strength of the human data generated from the EXCLUDE clinical trial, we have received questions, primarily concerning our March 2007 510k preclinical submission and certain documentation associated with animal care practices, protocols, and event adjudication.

We discussed our preclinical studies with FDA, attempting to develop alignment on the level of documentation that we could provide.

And then we submitted our responses in April of this year.

Although we believe there is a body of evidence supporting the safety and efficacy of the AtriClip System, including a series of preclinical studies that resulted in peer-reviewed publications from two prestigious sites, a human study of 34 patients from the University of Zurich and results from our FDA EXCLUDE clinical trial demonstrating that we met our safety and efficacy endpoints, we are unable to provide the specific preclinical documentation currently being requested by the animal reviewer on the FDA team.

Based on recent discussions with FDA, outstanding questions remain, necessitating additional animal studies that the FDA Review Team requires prior to granting product clearance.

We currently estimate US launch of our AtriClip System during the first half of 2011.

Turning to other regulatory matters, our Isolator Synergy clamps were originally cleared by the FDA through a 510k for soft tissue ablation using our Isolator clamps as the predicate device.

After our isolator clamps received clearance for the ablation of cardiac tissue during July of 2007, we considered the advice of our external regulatory consultant and determined that a new 510k was not needed for our Isolator Synergy clamps to change the intended use statement from the ablation of soft tissue to the ablation of cardiac tissue, and that instead we could proceed with a Letter to File.

Our determination was based on testing that demonstrated substantial equivalence of each product through extensive bench and animal data, which we believed was consistent with the Letter to File requirements.

FDA recently evaluated this decision, and indicated that a 510k was required to be filed for us to market our Isolator Synergy clamps for cardiac tissue ablation.

Based on subsequent communications with FDA, we agreed to file a 510k for the Isolator Synergy clamps for a cardiac ablation indication utilizing existing technical engineering, animal, and human clinical data that we had on file.

We submitted our 510k in April, and anticipate FDA responses in July.

We also provided FDA information supporting the safety of Synergy products based on the low incidence of medical device reports in approximately 35,000 human procedures and numerous peer review publications since January of 2007 when the product was cleared for human use.

Importantly, the FDA has not indicated that any compliance action would be required.

However, we have taken the initiative to revert to labeling the Isolator Synergy clamps for soft tissue ablation pending FDA clearance of our recently submitted 510k.

Turning to our pipeline and product development initiatives, in order to further strengthen our market leadership position and stimulate growth we have a series of sustaining innovations planned for release.

The innovations include a new and improved Cryo probe, which we anticipate releasing in the US and Europe in the second half of this year.

Additionally, to further support our Cryo momentum, we plan to launch a new automated highly-featured cryo generator during the first half of 2011.

This generator is designed to fit within our ORLab System, simplifying the process of toggling back and forth between radio frequency in cryothermia ablation devices.

In addition, we have plans to release a Synergy Access and an innovative linear ablation pen.

We remain committed to innovation in order to enhance patient outcomes and to maintain and expand on our leadership position.

At this point on the 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 information related to our revenues.

For the first quarter of 2010, revenues from domestic open heart products were $7.2 million.

Minimally invasive domestic revenues were $3.9 million.

And international revenues were $2.9 million.

Total revenues grew 2% to $14 million as compared to $13.7 million for the first quarter of 2009.

International revenues grew 26.9% on a GAAP basis or 23.3% on a currency-neutral basis.

On a consolidated basis, first quarter 2010 revenue growth benefited approximately 0.5% as a result of currency fluctuation.

As a reminder, revenues from our multi-functional 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 pens' actual usage.

Now turning to gross margins, gross margin for the first quarter of 2010 was 76.5%, as compared with 78.5% for the first quarter of 2009.

The change in gross margin was the result of an increased mix of international revenues and a reduction in international gross margins, driven primarily by the impact of new product sales in the European markets.

Next, an update on operating expenses.

Operating expenses were $12.4 million, a 4.4% increase over first quarter 2009 adjusted operating expenses of $11.8 million, which excludes the $6.8 million goodwill impairment charge we took during the first quarter of 2009.

The increase in SG&A was primarily due to an increase in sales and marketing headcount-related expense to capitalize on our growth platforms and an increase in regulatory and clinical expenses, primarily due to an increase in third-party CRO costs associated with increased clinical trial and FDA-related activities.

These increases were partially offset by a reduction in product development expenses and share-based compensation expense.

Adjusted EBITDA for the first quarter of 2010 was a loss of approximately $250,000 as compared with earnings of approximately $600,000 for the first quarter of 2009 and a loss sequentially for the fourth quarter of 2009 of approximately $200,000.

Turning to earnings per share, first quarter 2010 loss per share was $0.13 as compared to an adjusted non-GAAP loss per share which, again, excludes the goodwill impairment, of $0.08 for the first quarter of 2009.

The increased net loss per share is due to increased operating expenses and interest associated with borrowings on our credit facility, which was put in place during the second quarter of 2009.

In terms of the balance sheet in cash, we ended the quarter with $11.8 million in cash, cash equivalents, and investments.

And we had $4.6 million in gross debt outstanding under our credit facility.

Neutralizing the impact of our initial $525,000 payment to the Department of Justice, our cash used in operations was consistent with the first quarter of 2009.

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

Thank you, Julie.

In terms of outlook, we believe that our strategy of aligning targeted investments in our sales and marketing organization with new products and increasing business momentum is resulting in market share gains.

We view our hybrid approach as a game-changing opportunity, and expect that medical centers will begin adopting the hybrid procedure as a standard of care for persistent patients and patients that have failed catheter ablation procedures.

We are anticipating that these strategic initiatives will result in higher growth trends during the second half of 2010 and further acceleration in 2011, which should be strengthened by the anticipated launch of our AtriClip System.

In terms of the second quarter, we anticipate that revenues will be relatively consistent with the first quarter, primarily as a result of transitioning one of our largest European distributors to a direct selling model.

We anticipate a modest increase in operating expense for the second quarter, driven by clinical research and product initiatives.

The Management Team at AtriCure understands the opportunities and challenges.

And we are passionate about executing the vision that we have for the Company moving forward.

Finally, the men and women of AtriCure remain inspired and united by our mission, and confident in the power of our strategic plan.

We believe that AtriCure is well-positioned to deliver results for patients, customers, and shareholders.

We will now open the call for your questions.

Thank you.

(Operator Instructions)

And your first question comes from the line of Matt Dolan.

Please proceed.

Hi, Dave and Julie.

Good afternoon.

Hi, Matt.

Good afternoon, Matt.

A couple of questions, Dave.

First on growth as being one of your primary initiatives, you outlined the progression here into the back half of the year.

What should we be thinking about in terms of a real achievable growth rate for this business over the course of the next couple of years?

We've talked about inflection points a lot in the past.

But what type of opportunity do you look at?

Well, certainly in terms of growth rates, I'd rather focus on the opportunities that we have.

We have certainly a significant opportunity just in terms of coming back and strengthening our sales organization.

We dipped below 50.

We're now at 55 US reps.

And we have a stronger and more expanded international presence.

So, I think if you look at our business segments, the open business is stronger.

It grew 7% on a sequential basis.

Although minimally invasive was down, we believe that minimally invasive will be up in the second half of the year and that we have significant momentum that will begin to demonstrate that during the second half of the year, and certainly throughout 2011.

And although the AtriClip System has been pushed back to the first quarter of 2011, we think that that's still a significant growth catalyst.

And we look at the international markets growing at 27%.

So, we think each of our business segments is showing performance and beginning to demonstrate significant traction.

In terms of qualitative information, I'd rather hold off until we're prepared to give more context and potentially reinstate guidance.

Okay.

That's fair enough.

And then on the MIS business, now that you have the DEEP AF approval, how do you -- are you seeing maybe some type of slowdown there as centers maybe ramp up their hybrid programs?

And is that why this kicks in later on?

Or how does that dynamic play out for your MIS business?

I think that's exactly right.

I actually just talked to a physician that is in our clinical trial who has several patients that they were going to send for minimally invasive, but they're holding off for potentially being DEEP AF candidates depending upon how quickly they can get through the IRB and contracting process.

So, we certainly saw that the centers that were transitioning and training and trying to come up to speed, either because they were just adopting the approach or because they were participating in the trial, there was a lag in terms of procedures to try to build up a sample size so that they could do some run-in procedures and get more comfortable with the approach.

Okay.

Great.

And then you had an acquisition here recently of ATS.

And can you maybe just talk a little bit about your ability to gain share or what your competitive dynamic might look like in the cryo side of the world?

We think it looks very good.

We think there are certain short-term and long-term advantages.

Certainly in the short term while people are reorganizing, we think that's an advantage.

But, most of all, we've moved the market to two competitors.

There aren't many high-growth, high-potential markets where there are just really two serious competitors.

We think that that's a major advantage.

And, also, when ATS acquired -- when Medtronic acquired ATS, there's certainly intellectual property involved.

But they got a new mechanical valve.

They got a pericardial valve.

They got additional valve technology.

And their valve business, we think, is going to distract, potentially distract, their heart valve reps from focusing on ablation.

And the ablation technologies are relatively complicated, and we're laser-focused.

So, the fact that we have two companies versus three and the concept that Medtronic possibly could be diluted based on what's happening in the heart valve business, both in terms of tissue valves and the movement to transapical and transendovascular valves, we think there's a significant opportunity that AtriCure will be the one Company that's laser-focused and continues be the market innovator and leader.

Okay.

And last one just on the regulatory issues you're facing, is this something you can ascribe to the arrhythmia management market?

Or is this a broader issue of regulatory reform that you're seeing?

I just want to get your thoughts on how you're contemplating approval timelines going forward in what seems to be a new environment here.

I think you characterized it well.

It's a new environment.

I think we're beginning to understand the environment.

AtriCure has a lot of projects for a Company of our size; multiple clinical trials, multiple product releases on a yearly basis.

So, we've got a lot of activity with FDA.

And all of that interaction with FDA has shifted in terms of the process to get our products approved.

So, I think over the last several months we have developed a much clearer understanding of what the requirements are so that we can move expeditiously to change our systems to meet the requirements.

And I believe that the companies that do that will be able to minimize the challenges that all of us are having with the FDA right now in terms of their more rigorous approach to approving products.

Great.

Thanks, Dave and Julie.

Thanks.

Thank you.

Your next question comes from the line of Timothy Lee with Piper Jaffray.

Please proceed.

Hi, guys.

Good afternoon.

And thanks for taking the question.

Hi, Tim.

Just a couple of the hybrid procedure side.

Any sense as to how many centers have started adopting this technology or this technique, I guess, more so than the technology itself?

Yes.

I think by the end of the second quarter there'll be maybe 15 centers, could be closer to 20, that will have had performed hybrid procedures in the US.

And in terms of the reimbursement for these procedures, there's the surgeon involved and the electrophysiologist.

I mean, are they each getting a professional fee?

Or are they splitting the fee?

Or how is that working out?

Well, certainly hybrid procedures, as you know, Tim, is not a new concept.

So, the hospital basically has the same DRG in place that they would for a minimally invasive sole therapy procedure.

And the EP, the codes are the same that they would use for an AF ablation.

And the surgical code for the cardiac surgeon is the same.

So, the physicians have the same reimbursement, comparable reimbursement.

And the hospital has the upgraded surgical DRG.

Okay.

So, again, then there's been no issue on the reimbursement side then, it sounds like?

We haven't run into reimbursement issues.

We obviously -- you know, we're in the early stages.

And we have a small sample of, as I said, somewhere in the range of 15 accounts moving to likely 20 by the end of the quarter, and a relatively small number of procedures.

But we haven't been challenged to my knowledge on the reimbursement side.

And I pay fairly close attention to that.

Okay.

Thank you.

And just in terms of your revenue growth here for this quarter, it was a little less than what we were looking for.

Do you ascribe that as that the market is still taking a little bit of a pause here?

Or did you guys seed some ground in the quarter?

I think we seeded ground.

I think we've -- once again, I wouldn't underestimate the sales organization.

We obviously need to have a strong sales team.

And if you look at last year, EBITDA was $1.6 million, a $7.2 million improvement.

I think sometimes people underestimate the job that we did last year under the circumstances and considering our priorities of preserving our cash and capital structure.

Moving into 2010, we really need to rebuild our sales organization.

And, again, we started to do that in the fourth quarter of 2009.

We now have 55 US sales representatives and have a few additional adds in the international markets.

It takes a few quarters for people to get up and gain some traction.

But I think that's a very positive step.

We had 7% growth in the open market which, yes, you can contribute a lot of that to the Cryo System.

But I think the larger contribution is the fact that we have RF and Cryo, that we have the widest range of products.

I think that's a significant factor.

And on the MIS side, I do think that we're in a bit of a transition phase, which resulted in maybe a lower revenue number for the first quarter.

But we believe that going forward that our revenue will adjust, and that we'll see growth on the minimally invasive side of the business.

Got it.

Thank you.

I'll jump back in queue.

Thanks, Tim.

Your next question comes from the line of Jason Mills.

Please proceed.

Hi.

This is Jamar Ismail for Jason.

I have a few questions.

First, can you just go over what you think procedure growth were for the quarter?

I know you thought minimally invasive procedures were down for you a little.

But can you just talk about the overall market both in minimally invasive and open heart, and what you think about procedure growth going forward?

Well, I think, first of all, we're driving procedure growth right now on the minimally invasive side.

We have, we believe, well in excess of 70% share.

I think procedure growth for us in terms of sequential procedure growth actually really wasn't very different.

It was fairly consistent.

And on a year-over-year basis, we were up 7%.

So, the 3.9 number versus a 4.2 number, some of that is just cycling and not really a reflection of numbers of procedures.

Although, we think, again, the procedure opportunity for growth and revenue opportunity going forward is meaningful.

In terms of procedure growth in minimally invasive, it will happen over time.

I don't want to over-project the time frame.

We believe that there will be incremental growth on the minimally invasive side.

The hybrid programs are not insignificant in terms of the work involved in getting a hybrid program up.

There's training issues from the procedural side.

But there's significant workflow issues.

There's logistic issues.

It's not an insignificant process.

So, it takes time to get a hybrid program up and running.

So, I don't want to underestimate that.

And, also, you need a very talented surgeon to develop a hybrid program.

So, there are very significant opportunities and certain challenges that we have to monitor.

So, I think it'll be a relatively slower growth trend initially.

And I think we'll hit an inflection point once we have 30 or 40 centers that are really up and running and people that are really highly-motivated to get trained.

I think adoption will increase and move more quickly.

In the open business, we're seeing an increase in procedures at AtriCure.

We believe that our share gains are based on procedural gains.

I think the market is still 30% penetrated, and should be 70% or 80% penetrated.

As you know, the Cardiovascular Roundtable projected that the market would double over the next five years.

We think that that's achievable.

The growth catalyst for the market developing on the open heart to a large degree is more sales people.

If we put more sales people out on the street, they can train people on our technologies.

And that's going to lead to surgeons performing more AF ablation procedures.

So, I think more -- a stronger sales organization that's laser-focused on ablation is one of the keys to growing the market.

And later on down the road, one of the key growth catalysts will be the approval because, remember, the cardiologist refers the patient.

The biggest advantage of the approval, I think or we think, is that we can market to cardiologists.

So, if I'm a clinical cardiologist I may not even know that surgical ablation is available or what the results are.

So, if we can market to cardiologists, when they send patients to surgeons, rather than just sending them for the mitral valve, if they have AF they'll ask to have AF fixed, as well.

Right now certain surgeons are concerned that the cardiologist primarily wants the mitral valve fixed.

And they want to make sure they take care of that first so that they maintain that referral.

And they don't want to take any additional risks with the ablation procedure.

So, there's several catalysts.

First, I think we can grow the market with a stronger sales organization and more products, and simplifying the procedures and increasing training on the products.

And, secondly, I think the key growth catalyst is actually an approval that allows us to market to cardiologists and surgeons so that cardiologists can refer patients for not just the mitral valve or the CABG, but also for the atrial fibrillation to be corrected.

Did I answer your question?

Yes.

Thank you.

That's very helpful.

I have one more.

In terms of the P&L, are you talking about targeting sales and marketing growth to revenue growth when appropriate?

When you're thinking down the road, where do you see leverage beginning to come back into the model?

Well, I would think that we would begin to see leverage coming back to the model in mid-2011.

We get the clip to market.

Hopefully physicians begin to adopt the hybrid procedure at the rates that we think they will.

We have expansion and continued strong growth in the international markets.

We'll have reached a level of sales from a -- in terms of just sales headcount that we think is indicative and appropriate considering the circumstances.

And we would anticipate that we'll begin to see leverage return during mid-year 2011.

Okay.

One more.

Just in terms of gross margin, where do you see gross margin going from here on out with the increased OUS sales in the second half and even the clip being put a little bit back?

Where do you see gross margin compared to this quarter?

We previously had said we expect gross margins to be in a range of 74% to 77%.

And for 2010, I think that's still a good range for us to operate in.

Okay.

Thanks a lot.

Thank you.

Thanks, Jamar.

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

Please proceed.

Hi, Dave.

Hi, Julie.

Hi, Larry.

A couple of questions.

Some of the questions that I had were already asked.

So, I just want to understand the FDA situation.

Did I understand on the clip you've done a European human trial, you've done a US human trial, both of which had good results, and now the FDA is reviewing the animal data?

Did I get that right?

Correct.

They're reviewing the animal data from our March 2007 submission.

So, one of the angst that we have, and it's just part of living in the medical device world, is if there were concerns about our animal data, they reviewed -- we submitted that in March of 2007.

It would've been nice to have gotten that feedback at that time.

But that wasn't the case.

Well, from my standpoint, what's more disconcerting here is that you've good human data.

I mean, after all, we're going to be putting this clip in people, not animals, I believe.

So, it just seems pretty ridiculous.

What about the ABLATE trial?

I wanted to understand exactly -- could you elaborate or reiterate the issue that's going on with the ABLATE trial data?

I didn't quite understand what the issue was.

Well, first of all, in October of 2009 we had a pre-PMA meeting with our FDA Review Team.

And the FDA Review Team vetted the ABLATE clinical trial with us.

And they made a commitment to come back to us.

We came to what we thought was an understanding that we would submit the final module of our PMA module, the clinical module, in the first half of 2010.

And the module was written and ready to be submitted.

In the meantime, there was a shift.

And we were given a new Review Team.

The new Review Team, when we called them to give them -- alert them that we would be sending in our final module, they wanted to step back and take a second look at whether or not we should submit the module as it is, and then submit the continued access protocol so we'd have additional data at the panel meeting or whether or not we should wait to submit the module and submit continued access data with the module.

So, is that clear, Larry?

So, basically, they're telling you to not -- they're not sure if they want to see the human data yet, the clinical trial data yet.

Is that -- ?

Right.

The first Review Team said, our understanding, anyway, was, submit the module, and then run a continued access protocol for supportive data at the panel meeting.

That was our understanding.

When we shifted reviewers, the new Review Team thought that they would like to see the continued access protocol and patients from that protocol combined with the ABLATE data into one module and submit the one module.

Okay.

So, when do you finish enrolling the access patients?

Well, we had a -- after we had that discussion with FDA, we immediately requested an in-person meeting.

Okay.

That's what you talked about.

Yes.

We had an in-person meeting that included the Division Head of Cardiovascular Devices and the entire Review Team, our expert consultant statistician, our regulatory consultants, and some of our internal management group.

We were able, I think, to talk to them about why ABLATE with 55 patients, why the statistical argument is a strong argument in terms of the Bayesian statistics.

And that was the sanctioned protocol that FDA put in place with us in 2007.

So, I think we strengthened our position with the ABLATE data by going through the statistics with an expert.

At the same time, we talked about different ways of adding to the body of clinical evidence for the ABLATE trial besides waiting for the continued access study.

And we did run a 39-patient trial called the RESTORE SR II trial here at AtriCure.

We enrolled 39 patients.

But we couldn't complete the trial.

It was just too difficult to enroll.

That's when we back to FDA and renegotiated a clinical trial, the ABLATE clinical trial.

So, we're in a position now where we went back to FDA and said, look, we really don't want to wait.

We don't think that that's necessarily fair to wait and collect the continued access data.

We'd really rather give you other clinical data that would satisfy your need for developing a broader body of clinical data to confirm the ABLATE conclusions, and do that in one module and then use, potentially use, the continued access protocol, potentially as a post-surveillance protocol.

Dave, my takeaway from what you just said is the real question might just be that FDA is thinking that 55 patients may not be enough.

That is clearly the case.

Okay.

Good.

Okay.

Whereas in the past, they had agreed that based on a good Bayesian analysis it would be okay, now they're basically saying, well, we're not so sure now.

That's right.

And what we're saying is we had a plan with one Review Team.

The plan changed, and that's okay.

But rather than waiting for the continued access data, we want to propose certain alternatives to that so that we can given them a greater body of evidence, more patients, that were done maybe outside that protocol but that also add affirmation to and support the ABLATE data so that we can submit the module and move forward with the PMA process.

Right.

And so that's all under debate right now?

That's under debate right now.

However, we're moving quickly with the FDA.

Again, we had the first meeting on April 30.

And that was really only about a week and a half after we had the first discussion with them when we began to understand that we had some potential differences.

And now --

Okay.

That's great, Dave.

Sorry.

Did you want to say something else?

I'm sorry.

I didn't mean to interrupt you.

No, no.

I just think that we'll have the second meeting with them fairly soon, and should be able to clarify our path going forward in the near term.

Okay.

Thanks, Dave.

You're welcome, Larry.

(Operator Instructions)

Your next question comes from the line of Timothy Lee with Piper Jaffray.

Please proceed.

Hi.

Thanks for taking the follow-up.

Just a quick balance sheet question.

It looks like your receivables ticked up both sequentially and on a year-over-year basis from a DSO standpoint.

Anything there that we should be keeping an eye on?

No.

It really, Tim, was due to timing of the revenue stream, what's different this quarter than it was last year's first quarter.

And then we also had a large order that occurred at the end of 2009 that is still outstanding.

And that was another driver of that component, but nothing from a collectability or a risk perspective.

Our DSO is actually consistent and continues to come down modestly.

Got it.

And then in Q2, as you shift that European distributor to a more direct model, does that impact any of the receivables or anything that we should just keep an eye on just from a -- just a note?

Or is this anything on that?

No.

I don't expect much of an impact at all on the receivables side.

Okay.

That's all I had.

Thank you.

Thanks, Tim.

Your final question comes from the line of Charley Jones.

Please proceed.

Thanks.

Just a couple of quick items here.

Julie, what do you think -- how do you think moving to a direct model will affect your gross margins?

I think we'll see a modest uptick in that market, obviously.

Gross margin will go from the distributor margins to the manufacturers' margins.

But, again, as we anticipate higher growth from the international markets, that will be masked to some extent on a consolidated basis.

So, will --

We expect our margins to still stay on a consolidated basis 74% to 77%.

Okay.

And it should have some pick-up in revenue over the long-term because you're getting a higher transfer price?

We would.

We would get a modest pick-up in revenue, also.

You say modest.

I guess I would think 20%, 30% higher.

Yes.

I think in that ballpark for that region.

Okay.

And I guess the final question is in relationship to all the conversations with the FDA, Dave.

Would you say in some ways things are more positive than they have been in the past because of the amount of dialogue you have and the reviewer that you have and their involvement here?

Or do you really feel like you've been sucker-punched here?

I believe that the FDA obviously is changing.

The processes and requirements are rigorous.

Sometimes dealing with the changes can be challenging.

But we're in control of those changes.

We understand very specifically what we need to do to get the EXCLUDE product out to market.

We will understand very specifically what we'll need to do for ABLATE.

And we will resource ABLATE and execute the plan that we agree with with FDA.

So, I think we understand what needs to happen.

We just need to be very interactive with FDA, considering the circumstances on each of our projects, develop a plan, and move quickly to execution.

And Management is in the process of doing that.

So, we feel like the circumstances have shifted a little bit.

But we're in control of the process.

I guess it's a little surprising how quickly some of the meetings have been set up with FDA.

And it sounds like you have a pretty quick follow-up meeting.

So, I guess I just wanted to be careful not to read in too much positivity into this.

But it does appear to me that the speed at which they're moving here is different than the speed at which they've been moving for everything else as far as trying to get you guys shored up here.

We're very engaged in every project.

And FDA has been very communicable with us.

We feel like we have a good cooperative effort.

And we are going to cooperate and work to develop a plan.

And we'll execute those plans.

We're extremely good at execution.

And, again, we feel like we're in control of the circumstances.

It's just a matter of staying with it and seeing it through.

Final question; how do you feel about the balance sheet?

Is it -- Julie, are you comfortable with it?

And should you get a little bit of cash pick-up in the back half of the year as you typically do?

Yes.

That's it exactly.

We're expecting similar trending based on our current visibility, similar trending to 2010 with maybe a slightly incremental usage just because we no longer have access to some grant money for some CapEx that we had in prior years.

So, I do feel good about the balance sheet and our current general cash position.

Great.

Thanks a lot for the questions.

Thanks, Charley.

This concludes the question and answer session.

I'll now hand the call back over to Dave Drachman.

Please proceed.

Thank you very much.

We look forward to talking to you on the next earnings call.

I would just like to say that we very much appreciate your support.

We understand the opportunities and challenges.

And we're very committed to a successful AtriCure.

Thank you very much.

Thank you.

Ladies and gentlemen, that concludes today's conference.

Thank you for your participation.

You may now disconnect, and have a great day.