AtriCure Inc (ATRC) 2010 Q2 法說會逐字稿

Good afternoon, and welcome to AtriCure's second quarter 2010 earnings conference call.

My name is Caitlin, 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, Caitlin.

Good afternoon and welcome to our first (sic) 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 morning everyone.

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

If you have not received a copy, please call Sarah Luken 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 development 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 in the call today.

A reconciliation of these non-GAAP measures is included in our press release, which is also 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 or for stroke reduction.

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, however, do not prevent doctors from choosing to use the products for the treatment of AF or stroke reduction 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.

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 for our second quarter earnings call.

We have been highly productive during the past three months.

Business is strengthening and we have made significant progress with FDA on several critical projects.

We are moving full speed ahead with our strategic plan.

We will begin with opening remarks and a brief summary of our second quarter financial performance.

Then, we will review our AtriClip platform and opportunity.

Next, I will provide an update regarding the regulatory clinical reimbursement and product pipeline initiatives.

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

I will then comment on our outlook and open the call up for questions.

All med tech companies are currently facing uncertainties associated with impending healthcare reform, more challenging FDA enforcement and approvals, and broad economic uncertainty.

Despite these circumstances, the global demand for cardiac medical devices is extremely strong, which can be partially explained by the fact that people are living longer.

According to a survey of 450 US hospitals from the Marwood Advisory Group, hospitals are focused on growing cardiovascular and orthopedic procedure volumes in an effort to increase revenue over the next three years by capitalizing on this trend.

The survey also indicates that devices to treat cardiac arrhythmias are not a target for hospital cost-cutting programs and that evidence-based medicine and peer-review literature will become more integrated into purchasing decisions.

We expect that these trends will benefit AtriCure, and like companies, that provide physicians and patients with cost-effective treatments supported with convincing clinical science.

Further, it is well established that there is a large and growing demand for effective atrial fibrillation treatment alternatives and safer and more effective methods to exclude the left atrial appendage.

We believe our devices provide an important alternative for patients, physicians, hospitals and payors to help satisfy this demand.

Worldwide revenue of $14.2 million was up 3%, or 4% on a constant currency basis.

US revenue of $11.8 million was up 6%.

US revenue was positively impacted by an increase in sales from both open heart and minimally invasive products, while international sales were unfavorably impacted by the transition of a large European market from a stocking distributor to direct AtriCure sales representation.

The unfavorable impact of this transition on the quarter was $400,000, which represents a 3% reduction of our worldwide second quarter reported revenue growth.

This transition was completed during July and we expect that the transition will begin to have a positive effect during the second half of this year and throughout 2011.

Helping to drive growth was a strong performance from our cryo-ablation products where we estimate that we gained approximately 25% US market share since we launched our Cryo1 System in June of 2009.

The AtriClip System contributed less than $100,000 to US revenue, as it was first fully launched in July, following a highly successful pilot release.

We expect the AtriClip System to have a positive impact on third quarter revenue and that our results should be more reflective of a full market launch in Q4 and throughout 2011, as we work our way through a more challenging and time-consuming hospital purchasing environment for new products.

Operating expenses were consistent year-over-year.

In 2009, we invested in new product development, which has provided us with a strong pipeline of new products.

2010 expense trends, as a percent of revenue, are currently shifting to support FDA atrial fibrillation approvals and the expansion of our sales and marketing platform.

We continue to strategically invest in growth, FDA approvals and innovation, while aligning costs with revenue.

As a result, our second quarter are putting loss of $400,000 and net loss per share of $0.05 were our narrowest losses since becoming a public company.

In addition, we generated cash from operations of $1.1 million during the quarter.

Moreover, adjusted EBITDA of $800,000 was an 86% year-over-year improvement, representing record performance.

Our financial performance benefited from gross margins of 79.1%, which represents an expansion of 170 basis points when compared to the same period a year ago.

Based on our current business trends, cash position and our increased borrowing capacity, we believe that AtriCure is well-positioned to fund growth and execute our strategic plan.

Now, turning to a review of our recent FDA clearance and product launch and AtriClip market opportunity.

In June, we announced that our AtriClip System received 510(k) clearance.

Although the final product clearance was a rigorous and somewhat tortuous process, FDA was highly interactive and responsive.

We believe that the strength of the EXCLUDE clinical data was a significant factor.

The AtriClip System is an innovative system that provides surgeons with a rapid, safe and effective method for excluding a left atrial appendage.

We initiated a full commercial launch of the first generation AtriClip System in the US during July.

The current generation product is designed for use in minimally invasive and open heart procedures.

However, this current generation device is better suited for open heart procedures, and we are marketing the product in the US in a manner consistent with FDA cleared indication statement, which is for concomitant open heart procedures performed under direct visualization.

During the third quarter, we will launch the deployment system designed specifically for open heart procedures, which increases ease of placement.

We are highly encouraged by the product performance and enthusiasm from physicians and our sales force.

To-date we have initial sales of the AtriClip System into more than 40 US accounts.

We believe that more than half of these accounts have already secured hospital purchasing committee approvals and are stocking the system.

Based on high marks from key physician opinion leaders and superior success rates of our AtriClip System relative to other surgical devices and techniques, we believe that we will be able to capitalize on our first-mover advantage in this emerging high-profile market.

In addition to the incremental revenue derived from sales of the system, the AtriClip is opening new doors and providing cross-selling opportunities for our ablation products.

There are four distinct clinical applications for the AtriClip System in the US open heart market, which create selling opportunities.

First, AtriCure surgical ablation patients -- implanting this system in combination with AtriCure open heart ablation procedures, which we currently estimate to be over 10,000 procedures per year.

Second, other surgical ablation patients-- implanting this system in combination with competitor surgical ablation procedures, which we estimate to be in the range of 12,000 to 14,000 procedures per year.

Third, open heart surgery patients with atrial fibrillation that are not receiving surgical ablation procedures.

We estimate that the US open heart ablation markets are approximately 30% penetrated.

This would suggest that there are approximately 60,000 patients that undergo open heart surgical procedures, that present with a history of atrial fibrillation, that are not receiving cardiac ablation procedures.

We believe surgeons, that are not currently routinely performing cardiac ablation procedures, will consider using the AtriClip System as a rapid, safe and effective method of excluding a left atrial appendage.

Fourth, patients with risk for developing atrial fibrillation and/or stroke.

During our EXCLUDE clinical trial, we supported 510(k) clearance of the AtriClip System.

More than 40% of patients in which the AtriClip was implanted did not present with a documented history of atrial fibrillation, but presented with risk factors for developing atrial fibrillation and/or stroke.

We estimate that this annual US patient pool for the AtriClip System is over 100,000 patients.

Consistent with these assumptions, the 2006 American College of Cardiology, American Heart Association, and European Society of Cardiology guidelines for the management of patients with atrial fibrillation specifically states the following -- "Because the left atrial appendage is the site of over 95% of detected thrombi, this structure should be removed from the circulation, when possible, in patients at risk of developing postoperative atrial fibrillation, although this has not proved to prevent stroke." As a result of our discussions with surgeons, now that there is a rapid, safe and effective surgical device that is uniquely designed for left atrial appendage exclusion, we believe that there will be a developing trend to exclude the appendage in a broader group of open heart patients.

As a result of these assumptions, we estimate that the US open heart patient pool for AtriClip System is over 180,000 patients per year, representing an annual US open heart opportunity of approximately $150 million.

In addition, once the AtriClip System is through the hospital purchasing system in stock, we expect increased sales productivity, due to the minimal training and minimal ongoing physician support required to implant the AtriClip System.

These current US open heart market assumptions exclude our longer-term annual estimates of 50,000 US sole therapy candidates and the potential for 25,000 minimally invasive or hybrid ablation candidates that will be added when our minimally invasive thoracoscopic and robotic compatible systems are available.

Furthermore, we believe the initial data from the endovascular device clinical trials investigating the Atritech WATCHMAN and the AGA AMPLATZER cardiac plug are building a body of clinical evidence that directly links the left atrial appendage to stroke in patients with atrial fibrillation.

Although we believe the current endovascular approaches have certain limitations, we anticipate that the data from these clinical trials will influence cardiac surgeons to adopt the AtriClip and more routinely exclude the left atrial appendage during open heart procedures.

In the longer term, we believe that our next generation thoracoscopic and robotic compatible AtriClip Systems will have important advantages when compared to the current endovascular approaches.

In summary, the AtriClip System introduces AtriCure into a new and exciting growth market.

We believe that open heart market for our AtriClip System represents a near-term growth catalyst.

In the longer term, we believe that our minimally invasive thoracoscopic and robotic pipeline products and our external, or epicardial approach, positions AtriCure to be a leader in the markets for left atrial appendage devices.

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

Turning to a review of our ABLATE pivotal trial and atrial fibrillation approval for our Isolator Synergy System, when used during open heart concomitant ablation procedures.

Recently we've had two in-person meetings with FDA and the FDA review team assigned to our ABLATE clinical trial.

The Director of the Division of Cardiovascular Devices attended both meetings.

As a result of these meetings, FDA and AtriCure have an agreement on a plan that will allow AtriCure to submit our final PMA clinical module without being required to enroll additional patients in either the ABLATE clinical trial or continued access registries.

We consider this to be a highly positive step, as it removes some uncertainties surrounding the timing and requirements of our final PMA module, the clinical model, and it's evidence of our ability to work productively with the agency.

We reached agreement with the agency that the data collected as part of the original ABLATE clinical trial, which includes a six-month efficacy endpoint, will be used for the primary analysis.

However, in order to support the conclusions of the ABLATE primary analysis, we agreed to obtain a 12-month Holter monitor on all available ABLATE subjects.

We also plan to support the conclusions of our primary analysis with other sources of available data which includes, but are not limited to, our predecessor FDA regulated clinical trial, which successfully treated a total of 39 patients.

In addition to the long-term ABLATE and predecessor clinical trial data, we agreed to continue conducting clinical registries and update FDA on the results from these registries with an amendment prior to our panel meeting.

As a result of our recent meetings with FDA, we plan to submit our final clinical module during the first quarter of 2011 and request expedited review.

We have been encouraged by the fact that FDA has been accessible, provided clear feedback and guidance, and has been supportive of our proposal to address their comments.

We currently project an atrial fibrillation approval during 2012.

In terms of our FDA DEEP AF feasibility trial, which combines the use of minimally invasive products with catheter mapping and ablation technologies in a hybrid procedure, we originally received a conditional FDA approval to initiate the study in five US sites and treat 30 subjects.

We recently received approval for the addition of Stanford as a sixth site.

We anticipate initiating enrollment during the fourth quarter of this year.

We continue to believe that our minimally invasive and hybrid procedures represent a game-changing opportunity for the treatment of persistent and failed catheter ablation patients.

The use of AtriCure's products and the development of hybrid procedures continues to attract considerable attention from both cardiac surgeons and electrophysiologists.

Along those lines, the hybrid operating rooms and procedures were highlighted in the May 2010 edition of Medtech Insight.

The section was entitled "Cardiac Surgery, Hybrid Operating Rooms Offer New Approaches to Cardiac Disease." The article highlights the fact that the large imaging players, who are competing in the hybrid operating room arena, are planning for hybrid procedures to become a standard of care in the next two or three years.

The article also mentioned that there are a growing number of procedures being performed in hybrid rooms, including procedures to treat coronary artery disease, heart failure, cardiac rhythm disturbances including hybrid procedures for the treatment of atrial fibrillation, thoracic aorta disease, congenital heart disease and valve disease.

Vanderbilt, one of our DEEP AF investigational sites was mentioned as a center that keeps their current hybrid room fully utilized and has plans to build three additional hybrid rooms.

To paraphrase GE Healthcare's Marketing Manager for Interventional Cardiology and EP Healthcare Systems, physicians are being drawn to the hybrid rooms as a place where other more difficult procedures can be performed such as chronic total occlusions, bifurcation lesions, electrophysiology procedures and ablation.

We believe that our DEEP AF or hybrid ablation approach strengthens the partnership between electrophysiologists and cardiac surgeons, facilitates a coordinated referral development process in the interest of patient care and represents a new game-changing growth platform for AtriCure.

Now, turning to other regulatory matters.

During the second quarter, we submitted our Isolator Synergy catch-up 510(k) designed to upgrade our soft tissue indication to a cardiac tissue indication.

We recently received, from FDA, questions concerning our submission.

We are currently communicating with FDA and we believe that we have the necessary data to address the agency's questions.

We currently plan to file our responses this month and anticipate FDA clearance this year.

Separately, we recently received FDA clearance for our multifunctional linear pen, an electrophysiology ablation probe designed for cardiac surgeons.

Now, a reimbursement update.

In June of 2010, CMS announced a new ICD-9 procedure code, a unique code for cardiac thoracoscopic ablation procedures.

Prior coding combined thoracoscopic ablation and open heart ablation into the same procedure code and was assigned to MSD or G228, 229 and 230.

We believe this unique ICD-9 code for thoracoscopic ablation affirms a market adoption, clinical acceptance and accommodates anticipated growth in hospital reporting.

The new ICD-9 procedure code is 3737.

Additionally, we learned on Monday that the new procedure code for thoracoscopic ablation has been assigned to MSD or G228, 229 and 230 like its predecessor.

Notwithstanding the CMS 2% to 3% overall reduction in hospital reimbursement, reimbursement for surgical thoracoscopic ablation procedures remains unchanged.

Turning to our pipeline and product development initiatives.

Consistent with our market leadership and culture of continuous innovation, we plan to launch five new products over the next 12 months.

First, at the end of July, we released, on a limited basis, a new AtriClip Deployment System, which is uniquely designed for open heart procedures.

The existing AtriClip Deployment System was designed for both open heart and minimally invasive procedures.

This is our first step towards separating the deployment systems for open heart, minimally invasive thoracoscopic and robotic applications.

A full commercial release of the AtriClip combined with our uniquely designed open heart deployment system is planned for the third quarter of this year.

Next, during the third quarter of 2010, we plan to release an updated cryo probe, Cryo2 or the ICE System.

The ICE System incorporates enhanced handling and ergonomics.

Additionally, it provides an ablation sheet that allows the surgeon to modify the length of the exposed ablation probe.

We believe this enhanced product will further expand our competitive advantage in the cardiac cryoablation market.

Also, during the fourth quarter of 2010, we plan to launch our second generation Coolrail system, or multifunctional linear pen.

The multifunctional linear pen facilitates enhanced tissue contact, resulting in more reliable lines of ablation during minimally invasive thoracoscopic procedures.

In addition, this innovative system integrates temporary pacing, sensing, stimulation and diagnostic capabilities into a linear ablation probe.

This product is an electrophysiology ablation probe designed for cardiac surgeons.

Furthermore, during the first half of 2011, we plan to launch a next generation highly-featured innovative cryo platform.

A new, fully redesigned, cryo generator is compact and is designed to fit within our ORLab System, simplifying the process of toggling back and forth between radiofrequency in cryothermia ablation devices.

Importantly, the new cryo generator is completely automated in places the ablation controls with the surgeon.

Along with the launch of the new generator, we will be launching a next generation cryo probe that will enhance the surgeon's ability to maneuver the probe inside the heart.

In addition, under a sub-grant agreement with the Cleveland Clinic Foundation, AtriCure was awarded a grant of $500,000 from the Global Cardiovascular Innovation Center to develop robotic compatible ablation and left atrial appendage exclusion products.

We anticipate launching these products during 2012.

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

Thank you, Dave.

I will begin by providing information related to revenue.

For the second quarter of 2010, total revenue increased 3%, or 3.8% on a constant currency basis, to $14.2 million.

Revenue from domestic sales grew 5.5% to $11.8 million.

Revenue from domestic open heart products increased 4.7% to $7.6 million, driven primarily by an increase in sales of our disposable cryo probe.

Minimally invasive domestic revenue grew 7% to $4.3 million, driven primarily by procedural growth.

International revenue was $2.3 million and included a non-recurring negative impact of approximately $400,000 that resulted from transitioning a large European market from a stocking distributor model to direct AtriCure representation.

This transition allows us to be more competitive in the territory and will benefit future periods.

The reduction in international revenue was 4% on a currency-neutral basis, compared to 8% on a GAAP basis.

As a reminder, revenue from our multifunctional pen which are used in both open and minimally invasive procedures is allocated between open and minimally invasive product revenue, based on our best estimate of the pen's actual usage.

Additionally, domestic revenue from our AtriClip System is included in open heart product revenue.

The AtriClip System was released on a limited basis in the United States at the end of June and contributed less than $100,000 in domestic revenue during the period.

Now, turning to gross margin.

Gross margin for the second quarter of 2010 was 79.1%, as compared with 77.4% for the second quarter of 2009.

The expansion in gross margin was a result of an increased mix of domestic revenue and a reduction in product cost, driven primarily by manufacturing efficiencies.

These increases were partially offset by an increased mix of newer products such as our disposable cryo probe, which carries a lower gross margin than our existing disposable products.

Additionally, we experienced a reduction in international gross margin resulting from lower international ASPs due primarily to competitive pricing, the reimbursement landscape, and the general economic condition, particularly in the EU.

Given the introduction of the AtriClip System, which currently has a lower gross margin than our disposable products, and anticipated growth in international revenue during the second half of the year, we anticipate gross margins for the second half of 2010 to be in a range of 74% to 77%.

Next, an update on operating expenses.

Operating expenses were $11.7 million, consistent with 2009 second quarter operating expenses.

Research and development expenses, which include clinical activities, decreased approximately $700,000 from $3.1 million, for the second quarter of 2009, to $2.4 million, for the second quarter of 2010.

The reduction in research and development expenses was primarily due to a reduction in external cost in support of the product development initiatives and a reduction in costs in support of clinical trials.

Second quarter 2009 clinical trial expenses included clinical trial enrollment-related cost for EXCLUDE.

As we increased our activities related to ABLATE, DEEP AF and new product introductions, we anticipate an increase in research and development expenditures during the second half of 2010.

Selling, general and administrative expenses for the second quarter of 2010 increased 7.9% or approximately $700,000, due to increased head count related expenses, driven by an expansion of our worldwide sales and marketing team by approximately 10, as compared to the average head count during the second quarter of 2009.

Adjusted EBITDA for the second quarter of 2010 was a record $800,000, or an 85.8% improvement, as compared to approximately $431,000 for the second quarter of 2009.

Additionally, operating loss of approximately $400,000, net loss of approximately $800,000 and net loss per share of $0.05 represented record performances and improvements of 58.1%, 40%, and 50% respectively, as compared to the second quarter of 2009.

Now, turning to a few balance sheet items.

In terms of cash, we ended the quarter with $12 million in cash and cash equivalents and we had $4.1 million in gross debt outstanding under our credit facility.

During the quarter, we generated $1.1 million in cash from operations.

Additionally, we recently signed a commitment letter with our bank, which expands our borrowing capacity under our credit facility.

The terms provide for increased borrowing availability under the revolving loan portion of our facility by approximately $5.5 million, resulting in total borrowing availability under the revolver of approximately $7.5 million as of July 31st.

Finally, you will note an increase in other assets and accrued liabilities on the balance sheet.

This increase is primarily the result of a $2.75 million tentative settlement of a class action lawsuit, to which doing AtriCure admits no wrongdoing.

Although our insurance carrier will fund this settlement in full and we do not expect any cash outlive by AtriCure, we are required to record the settlement and the recovery from the insurance carrier as current liabilities and current assets.

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

Thank you, Julie.

In terms of our outlook, we believe that the men and women of AtriCure are well-positioned to capitalize on our current momentum.

The US launch of our AtriClip System, further cryo and open heart market share gains, new product introductions and the continued expansion of our international markets, combined with further investments in sales and marketing, are expected to fuel momentum during the second half of 2010 and throughout 2011.

Further, we believe that the growing demand for effective alternative procedures for persistent and failed catheter ablation patients will fuel the demand for our minimally invasive products.

In addition, we remain committed to clinical science in atrial fibrillation approvals.

We believe that our commitment and strategic investments in clinical science, atrial fibrillation approvals and innovation will provide the foundation for long-term sustained high growth.

We will now open the call up for your questions.

(Operator Instructions).

Your first question comes from the line of Charley Jones of Barrington Research.

Please proceed.

Hi good morning.

Thanks a lot for taking my questions.

Congratulations on a great quarter.

Hi Charley.

Thank you, Charley.

I was wondering if you could give us an idea of what you are expecting from international in the second half of the year, Dave?

Or maybe, if the third quarter is still a little tenuous what you think this business can do kind of in the fourth quarter going forward?

Well, we've added people in the EU.

The EU remains our highest area for growth outside the US.

We have more direct markets now and we are more competitive based on an expanded sales and marketing platform.

So, we would anticipate that the international growth would be consistent with previous years.

So we remain confident that the international markets are high growth markets for AtriCure, moving forward.

And Julie, can you tell us whether or not current R&D levels can be maintained for a couple of quarters until full pivotal trial for the hybrid approach starts, or you are going to have to start making some investments here in the next couple of quarters?

Yes.

We do not expect R&D expenditures to be consistent with second quarter.

Second quarter was uncharacteristically light and we do expect a ramp in that category for both the third and fourth quarters as well as moving into 2011.

Can you talk a little bit about the need for sales force expansion, Dave, and how many reps you think it takes?

I guess I am particularly interested in how you plan to approach the hospitals for getting the new device approved for purchase and whether or not it just requires a short-term bolus of people and then you can cut that back and how you plan to deal with that?

Well, first of all, we've built our US sales organization up to 55 headcount.

Last year, at one point in time, we dipped under 50.

So, we have added people in the US, we are currently interviewing for expansion territories.

In terms of the product and the time that it takes to get new products into hospitals, there is no question that the Value Analysis Committees have lengthened the period of time that it takes to get new products stocked in the hospitals.

So, currently we think that we are scaled properly given our revenue trends.

We want to align costs with revenue and, as we continue to get new products into hospitals, we will continue to look at expansion territories.

I would anticipate that we will see two to three expanded territories by year end.

So, I guess, with that, Julie, do you think you can remain cashflow positive for the foreseeable future since you probably won't have inventory built until you really start to see higher revenue levels or --

In terms of cashflow positive, are you referring to cash from operations?

Yes.

Okay.

I would expect our overall cash from operations to be slightly more than prior year really in support of working capital needs to support the growth in the business and combined with the fact that we closed up 2009 with relatively light inventory levels.

And so, I think you will see a modest increase in our cash used in operations year-over-year.

Okay.

And then, Dave, I was hoping you could discuss a little bit more detail about your pricing strategy for the clip and then both the different delivery mechanisms?

Well, first of all, our pricing strategy is -- we have a premium product.

We believe our product offers unique advantages over the current surgical techniques and methods for excluding left atrial appendage and we plan to stay the course in terms of pricing.

Our current pricing has actually exceeded our expectation somewhat.

It's early to tell whether or not that will settle in, in terms of pricing that approaches $1000 per unit.

But we are currently encouraged by the fact that physicians have given us very high marks for the AtriClip System and our people are working to get initial orders and then are working with the Value Analysis Committees and purchasing departments to get our products stocked on the shelf.

We sold the product into about 40 accounts and about 20 of those accounts are now stocking the product and that's with, as you know, a July launch.

In terms of the different deployment tools, moving forward we see the open heart deployment tool being the main product that we sell.

This gives the surgeon certain advantages in terms of access.

We continue to improve our minimally invasive and thoracoscopic products and we have plans to expand into a new platform for thoracoscopic and robotic use during 2011.

And I was wondering if you could, I guess, give us a range on what you expect that next generation device to sell for if you are not ready to do that yet?

I think it's a little early in the game in terms of the minimally invasive thoracoscopic standalone products how we'll price that.

I think we need to see how the open heart product settles in, what our pathway is in terms of stocking the products and then we will conclude and make those decisions.

My last question, and I was hoping you could update us on number of minimally invasive US centers and maybe give us the international as well?

And then, finally, I think you have a little over 700 total US accounts.

What percentage of these do you think will end up adopting the clip over time, or maybe over the next 12 months?

Okay.

So, first question is minimally invasive accounts.

Approximately 65 accounts purchased minimally invasive products in the US during the first quarter.

We have approximately 20 minimally invasive accounts in our international markets that routinely perform minimally invasive procedures.

In terms of the accounts on an annual basis, we would anticipate that approximately 50% of our accounts over the next 18 months will adopt our AtriClip System.

Great, thanks for all the questions.

Thanks Charley.

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

Please proceed.

Hi Dave, hi Julie.

Congrats on a good quarter.

Hi Jason.

Thank you Jason.

Good.

Thanks for taking the question.

First question, little bit more 20,000 feet Dave, last year, clearly the industry, the afibrillations, procedures were somewhat sluggish.

I am wondering what you are seeing here as you seemingly turn the corner midyear into the back half of the year in terms of procedures and what you guys can do to help sort of instigate growth overall in the numbers of ablations in the US specifically?

Excellent questions.

In terms of the overall number of surgical procedures, there has been a modest growth in the open heart area.

We think it's in the low-single digits.

As you know, there has been some consolidation of vendors and sales forces.

Our growth is coming from market share gains.

The stimulus that we believe will really grow the open heart market is an AF labeling approval.

We think the ability to market to cardiologists, to market to cardiac surgeons, to market to patients, we think that ability to really have a broad marketing platform for AF therapy and to have affirmation through an FDA approval is the catalyst that we need to really see significant growth in the open heart market.

We also think that the clip will stimulate growth.

We believe that getting the clip out to the marketplace will make people reconsider treatment of surgical ablation patients whether they do the entire ablation or just place the clip.

We believe that's also a significant opportunity to stimulate some growth in the marketplace.

And with respect to the clip, it's early and you are in a relatively small number of accounts now.

But, in our due diligence, we've received some pretty good feedback with respect to the device.

I am wondering, with the new deployment system and the expanded sales force, you said 50% of accounts will adopt AtriClip over time.

I am wondering what sort of the tenor of that adoption curve will be in terms -- as you see adoption will we see a hockey stick at some point, a tipping point at some point and how long will it take to get to that 50% of accounts do you think?

I think the 50% of account penetration -- we'll say it's an 18-month process in terms of the total AtriCure account.

Okay.

I think in terms of the tipping point, as people begin to buy and purchase and stock, the AtriClip System, what we believe we are going to see is more and more continued usage.

I think certain surgeons will adopt the AtriClip System for certain limited usage and we believe that those -- the utilization in the clip will be used more frequently in the accounts that purchase it.

I think once the surgeon gets comfortable with the first series of implants and sees how simple and effective the clip is, they'll be encouraged to use it more frequently.

So to answer your question, I think the product platform does have the ability to create the tipping point or hockey stick, but I think we are 6 to 12 months away from seeing that.

Okay, great.

And I'm sure you've seen, maybe not gone through it all, but the CDRH preliminary internal evaluation from the 510(k) working group came out last night, just the preliminary report and recommendations.

And in it there were several things, but clearly they are trying to streamline the 510(k) process and make it more visible, more certain for both companies and the internal reviewers.

One thing they talk about is more rigorous characterization of predicate devices, et cetera.

The information you gave us today on the ABLATE trial is positive in my view.

I am wondering if you have any knowledge as to whether or not the FDA, in developing the agreements you talk about, consulted some of the preliminary findings that were written in this preliminary report.

In other words, is there is a possibility that vis-a-vis adoption of this preliminary report that there would be any change to the current trend that you've discussed today as it relates to ABLATE and the AF indication?

We feel very positive.

We've had two in-person meetings, one was just a few week ago.

The entire review team was in both meetings, as well as the Director of Cardiovascular Devices who really led the meeting.

The fact that the Director of Cardiovascular Devices has taken an interest in our submission and participated in the discussions, in terms of how we can answer FDA's questions and come up with a plan for product approval, we thought that was very encouraging.

And we are very interactive with FDA right now.

In fact, we are talking with FDA on a weekly basis in terms of our registries and certain aspects of our submission.

So, it's become a very interactive process.

I think that the information that we provided today is very solid.

Okay, great.

Two quick final ones and I'll get back in queue.

With respect to your number of minimally invasive centers, have you seen that number moderate a bit in the last couple of years?

The number we have in our head is sort of -- it was at its peak up in the 70, 80, 90 range.

Forgive me if I am wrong and you can correct me, now you are coming -- about a number a little bit lower than that.

Maybe you could just give us some color on that and as well as plans you have to ramp the number of MIS centers back up?

And I have one final follow up and I'll get back in queue.

That's an excellent question and you are correct.

Fundamentally, our 55 sales people have been highly focused on cryo, penetrating the open market, now the AtriClip launch and getting our DEEP AF clinical trial up and running.

We have focused on developing more volume in the centers that have really adopted this procedure as a standard of care.

So, procedures on both a sequential basis and a year-over-year basis are up.

However, we are performing more procedures in fewer centers.

I think the catalyst to further expansion is, once we have our DEEP trial up and running, we have our clip launch and we begin to generate continued revenue growth.

We have plans to expand our sales organization and have more people that are focused on our minimally invasive business.

And I think those are the key characteristics that will expand the base of accounts that are performing in minus.

That's very helpful.

One last follow up is, out of positive things to be talked about today, and you seemed very bullish about where the company stands and your developments and potential going forward.

I am wondering if you could take a step back and help us understand so that we don't get too far ahead of our sales in terms of modeling the business.

Sort of what challenges that AtriCure faces over the next 6 to 12 months that we should be cognizant of so as to make sure that we are not getting overly aggressive with any of our numbers.

I think some of the challenges that we face is AtriCure is a very busy company.

We have two clinical trials underway.

The ABLATE clinical trial, although the primary analysis is going to be used from a PMA perspective, we are running ABLATE registries that will be used as an amendment prior to our panel meeting.

We are also getting a DEEP AF trial up and running in the US which takes a lot of effort.

We have five new products that we are planning to bring to market.

So, I think some of the challenges that we have is the company has a lot of activity for a relatively small company and the AF space is a complicated space and working on AF approvals is certainly not a simple process knowing that only one product, the ThermoCool catheters, ever received an AF approval.

So, I think those are some of the challenges.

The fact that the company is busy in terms of clinical science, in terms of innovations of new products and we are managing that in terms of our internal structure, we are managing those activities very nicely in terms of the operational performance, while we look to increase our financial performance.

So, the last one and I will get back in queue.

So that would imply that we should be careful, to Julie's earlier comment, to model sort of an increasing level of cash flow from operations or EBITDA at least for the next, call it, two to four quarters.

Is that an accurate assessment?

I think it is Jason.

We believe we have the necessary capital on hand in terms of again to invest in our strategic priorities.

However, I do think that your analysis is correct in terms of how you would view the business over the next several years in terms of our capital structure.

Okay, thanks guys.

Thank you.

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

Please proceed.

Hi.

Good morning and thanks for taking the question here.

Hi Tim

Time Lee; Just, first on the AtriClip side, I appreciate the kind of the market opportunity that you laid out here for us.

How should we think about it from a revenue contribution standpoint here for the back half of '10 and heading into '11.

What type of market penetration do you expect to see, call it, 12 to 24 months out?

I think we are certainly going to go to our top 100 accounts.

So, when we talk about 10,000 procedures and combining the clip in the AtriCure ablation procedures, I think that's the most rapid growth opportunity we have.

And then, penetrating the other say 400 or 500 accounts that purchase AtriCure products, that will be a relatively slower process.

The one thing that we have to evaluate is the market for new products in terms of the purchasing departments and these Value Analysis Committees has become more challenging.

So in terms of the ramp of the clip, the physician feedback is extremely positive but the process of getting the clip on the shelf and stock is not a simple process and it's a time consuming one.

So, we'd rather be out another quarter or two and give you more color on the revenue ramp once we get a better sense of really how long it's going to take to get the product stocked.

Got it, fair enough.

And then, just kind of on the gross margin line, was there any impact from the European transition from going from a distribution to a direct model in that one market and was there any cost tied to taking back inventory or anything on that front that impacted your gross margin?

Yes.

That was just a small impact.

So, the transition is actually effective at the beginning of July but we negotiated the contract, since we knew we would have the returns, Tim.

It was a small impact associated with those returns as well as we didn't benefit from the stocking order during that period.

So, those are the two components that drove to the combined impact of $400,000 US in the quarter.

Got it, thanks.

And then, just again staying on the P&L front here, your operating loss this quarter was much lower than we had expected and it sounds like some of the expenses are kicking back up here in the second half, as gross margins are coming down.

So, we should expect to see operating losses at least for -- the near term kind of go back up, I mean, directionally.

I mean, I assuming that would be the right way to think about it.

So when could we expect to see -- given such strong performance you had here on the operating line, when could we see a similar type of losses?

Is that 12 months away, is that 24 months away, when can we get back to this level?

Yes.

Why don't we stick with operating expenses since the loss is obviously driven by revenue and gross profits?

So, in terms of operating expenses, I would anticipate an increase in the research and development line to get back to more sort of historical normalized levels and probably sustain there for the back end of the year and then some increasing growth during 2011.

And with respect to SG&A, I think you will see modest increases in that line really due to some incremental heads that we will add, as Dave commented, from splitting the territories.

Got it.

And then just one last one, again, I am trying to see if you would back into kind of a top line guidance.

I know you used to -- in the past, you had given some reference to kind of your top line goals.

I know you would pull back on that just given some uncertainty in the market and some of the uncertain dynamics the company was facing.

But with a lot of that kind of behind you now, do you have much better visibility on your top line opportunities to provide us with some of the targets that you are looking for?

We are going to reevaluate the guidance Tim come 2011.

Right now, we are in the process of launching what we think is a growth catalyst in the AtriClip System.

We are in the process, again, of splitting territories and adding some sales people.

So, for the remainder of the year, we like to stay quiet in terms of revenue guidance.

Thank you.

I will get back in line.

Thank you, Tim.

Your next question comes from the line of Vivian Cervantes of Maxim Group.

Please proceed.

Hi.

Thank you taking the question and congratulations on a good quarter.

Thank you, Vivian.

Thanks.

I appreciate your comments on market share gains in US open, it looks particularly in cryo.

Any sense on how sustainable that is given, consolidation gyrations on the competitor front.

And, I guess, I also appreciate comments on new product in the cryo space.

How can you sort of balance those two out together?

Well, we think the penetration that we are seeing and the increased market share gains that we are seeing on the open market are sustainable in part because, for example, we have a new cryo platform or a next generation product that we are going to launch this year.

We talked about the new generator which puts the controls in the surgeon's hands, and a new probe that is much more ergonomic, in the first half of 2011.

So, we are developing our cryo platform.

We think that we can continue to take more market share on the cryo front and we have the AtriClip system which is going to open new doors for the company and allow us to have some cross selling opportunities for ablation device.

So, in terms of penetration into the open market, we continue to see similar share gains going forward.

Okay, that's helpful.

Can you sort of help quantify what the gross margin impact or list would be from the distributor consolidation in Europe?

Right.

So, for that territory specifically, we would expect an uptick to revenues of approximately 30% which would equate to roughly a 15% uptick in gross margins for that territory.

Okay.

And then, Julie, in your prepared remarks you had made comments about noting some pricing pressure in Europe and maybe increased competition and maybe some impact on reimbursement.

Can you elaborate on that a little bit and maybe give a sense on whether or not this is like a low single-digit pressure, high single-digit pressure, any color would be helpful?

There is pressure in the European markets, however, there is significant opportunity.

Our market share in the European markets, as you know, is significantly lower than our market share in the US.

So, even though we are encountering pricing pressure, we have the widest range of products and technologies.

We are bundling those products in certain markets and then we are increasing our direct sales force.

So, going direct in this larger European area, being direct in Germany, we basically doubled our sales force head count over the last 12 months in the European markets.

So we continue to see strong growth in international largely, driven by the European markets, independent of the pricing pressures and some of the economic uncertainties.

Okay.

Very helpful.

Thank you.

Thank you, Vivian.

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

Please proceed.

Yes.

Good morning.

Wanted to look at the clip in one other way here.

Dave, can you tell us what percent of your current open procedure volume involves the exclusion of the appendage with staples at this point and assumedly would this cohort likely all shift to the AtriClip?

Matt, I'd rather just say generically taking the appendage, giving you color on staples versus sutures, I am not confident in trying to break that down, but there is about 80% of the procedures that we perform, there is a left atrial appendage exclusion involved.

Okay, great.

That's helpful.

And then shifting to the MIS piece, in particular the hybrid program, can you give us the number of centers now with hybrid capability, today, in terms of volume?

I know in Q1 you saw some softness in the MIS business as some of these accounts shifted to hybrid.

So do you feel like the second quarter was more normalized or are there are still some accounts that are in transition so to speak?

There are certainly accounts in transition.

We're really trying to focus on getting the DEEP AF clinical trial up and running.

Our major aim is to get the first 30 patients enrolled, get into 2011 and submit an interim analysis that would allow us to move into a pivotal trial of approximately [$0.30].

We think generating that sort of momentum through an FDA regulated process will draw physicians to adopt minimally invasive and hybrid procedures more readily.

So we're going to focus more on the FDA process in doing what it takes to get the DEEP AF clinical trial into a pivotal phase.

Okay.

And then in terms of your growth outlook for the rest of the year, I think in the past you've talked about better growth in the second half of 2010 relative to the rates we've seen thus far and I believe that was excluding or that was prior to the clip's approval at least.

So the underlying assumption looks like you would return to the double digits in the base business, excluding new products.

Is that a fair assessment at this point?

That's an aim.

And I will say that when we talked about a stronger second half, remember the clip was on and off.

We originally projected the clip to be approved around midyear and then we had a snag with the FDA in terms of some of the preclinical data in the GLP studies that we talked about on our previous earnings call and that information came right upon us right before the earnings call.

So we originally were talking about stronger momentum in the second half of the year.

We were thinking that the clip was going to be part of that process.

And then several days before our past earnings call, we got news that we may have a delay with the clip.

So we have been thinking about the clip as part of the second half of the year story in terms of stronger growth.

We also believe that there is growth coming from the international markets and continued penetration with our cryo system.

And we believe the minimally invasive -- that the foundation for minimally invasive is strong and will get stronger especially as the DEEP AF clinical trial gets up and running.

Okay.

I would just add to that Matt, as you think about the back-end of the year, just as a reminder, obviously our third quarter we do realize seasonality also.

So we would expect that to have an impact on the base business for the third quarter results.

Sure.

Okay.

Thanks guys.

Thank you.

Comes from the line of Charley Jones of Barrington Research.

Please proceed.

Thanks for taking the follow-ups here.

I was hoping you could start with the robotic discussion.

I think your products are already able to be used with daVinci so I was hoping you could talk to us a little bit about what kind of enhancements you're planning to make and whether or not there are certain products that can be used and maybe just a little more discussion around that?

Actually our products are not robotic compatible today.

There are certain ways to use our cryo platform robotically, but it's not generally designed for robotic use.

If you look at some of the newer platforms that we plan to be robotic compatible, the clip, we can simplify the clip very easily in terms of stripping down the deployment system and have a very simple approach to a robotic solution for the clip.

And we have also plans for our cryo probe where we can also strip back some of the -- robotic handling of the cryo probe.

So the handle in some of the components that are currently on the cryo probe actually stripping it down will make it more robotic compatible.

So the robotics and getting to robotic platforms actually is not a significant engineering challenge.

Basically what we are doing is taking more product away in terms of things like the deployment tool on the cryo, taking the handle away, and making it again more simplified and more robotic compatible.

It sounds like the clip changes are pretty minor.

Do you think you could have that commercialized earlier than 2012?

And if so, what would be kind of your best guess there?

I think we can have a product ready for human use by year-end.

However, the current indication is for concomitant open heart under direct visualization.

So we would anticipate having a product available for human use by year-end and then working with FDA to understand what the process is to get the product on the market.

Based on our current discussions with FDA, we would anticipate a clinical trial similar to the EXCLUDE clinical trial that would be necessary for clearance for the robotic and thoracoscopic compatible clip system.

Now would that be a standalone clip procedure or would that be still concomitant with an AF procedure using the robot or thoracoscopic approach?

Currently we are thinking concomitant.

However, we have a large group of surgeons that believe that there is a significant opportunity for a standalone robotic clip.

That was actually one of my follow-up questions.

I guess I don't understand why you are not planning on filing an IDE pretty quickly for a minimally invasive standalone clip procedure to show some stroke reductions so you can get a standalone code here?

Well, we think the quicker route to market is a concomitant route.

So our current plans are to file an IDE for a concomitant robotic compatible AtriClip System.

Is there any talk about trying to obtain some additional reimbursement for the clip?

There has --

Or would that require that standalone sole procedure that we were talking about just a second ago?

Well, first of all, if a surgeon performs a clip as a standalone procedure, they have the ability to use what's called an unlisted code.

We've have a lot experience with unlisted codes.

In 2007, CMS pulled back on reimbursement for AF ablation.

So all AF ablation was basically reimbursed.

Physician reimbursement was -- they used an unlisted code and they cross walked that over to similar procedures with similar workload.

So if people adopt a standalone robotic clip, they do have the option of documenting the clinical necessity and working with an unlisted code.

In terms of having a unique code, one of the things that we've done is talk to STS and they plan to sort of follow the endovascular devices and try to piggyback reimbursement onto the endovascular devices.

Yes, on that topic I was wondering -- you obviously know a lot of EPs, some of them that maybe like minimally invasive, some that maybe don't.

Of that second group, have you had discussions with EPs about using the clip in a standalone procedure, but concomitant with the catheter procedure?

We've had discussions --

Interest amongst EPs --

We've had discussions with lots of EPs about doing a thoracoscopic procedure to exclude the left atrial appendage following a catheter ablation.

So, for example, we have centers doing hybrid procedures in the electrophysiology lab.

So we could envision, as we have thoracoscopic tools that are uniquely designed for left atrial appendage exclusion, that EPs will perform catheter ablations and they might choose an epicardial approach or thoracoscopic approach versus an endovascular approach in the EP lab.

Do you think there is high interest for that or it's still kind of early?

I think it's early, but I do think that the interest is fairly high.

I think physicians understand that not leaving something behind in a circulating blood pool, that performing an epicardial exclusion may be a preferred approach.

My final question relates to ABLATE.

I was wondering if you could tell us how many sites are going to be included in the registry, how those sites were picked.

And then finally, are you able to give us an efficacy rate that you saw in the ABLATE clinical trials at six-month results?

And that's it.

Thanks a lot.

First of all, in terms of the registry, a continued access protocol requires you to stay in the same sites that the original clinical trial was performed.

So our continued access protocol will basically be in the same 10 centers that performed the ABLATE clinical trial.

However, we have been working with FDA to expand that and sort of do another registry which would include a broader number of centers.

So we actually plan to have two registries that are very similar in terms of the clinical protocol ongoing over the next several months, so two registries.

The second registry will have new centers.

How many new centers?

We're currently discussing that with FDA now.

In terms of the results, the results from the ABLATE clinical trial in the six-month analysis on permanent AF patients are in the high 70s.

Okay, thanks a lot.

Thank you.

Operator, we will take one more call.

Do you have somebody in queue?

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

Please proceed.

Hi.

Thank you so much for taking my question.

When you were giving gross margin guidance, it was a relatively broad range.

Can you help me understand what would lead you to the bottom of that range versus the top?

Sure.

So this quarter Joanne, we had a higher mix of domestic revenues, which -- there is actually a fairly large spread between domestic revenues and international revenues.

So we talked about -- we are optimistic about our opportunities for revenue during the second half of 2010.

Additionally, the clip carried a lower gross margin currently than our existing disposable products.

So to the extent revenue from the clip mixes in, I think you will see a little bit of impact on the margins.

Incidentally, the 74% to 77% is what we have provided previously for our expected annual guidance.

So I would think about the second quarter as a little bit of an anomaly for those reasons.

Okay, terrific.

Thank you very much.

Thank you.

Ladies and gentlemen, this concludes the question-and-answer section of the call.

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

David Drachman for closing remarks.

Thank you very much.

We look forward to the third quarter earnings call and thanks for your time and attention.

Ladies and gentlemen, thank you for your participation in today's conference.

This concludes the presentation.

You may now disconnect.

Have a great day.