AtriCure Inc (ATRC) 2011 Q2 法說會逐字稿

Good morning, and welcome to AtriCure's second-quarter 2011 earnings conference call.

My name is Regina, 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 toward the end of today's call.

(Operator Instructions).

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

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

David Drachman, President and Chief Executive Officer of AtriCure.

Mr.

Drachman, please proceed.

Thank you, Regina.

Good morning, and welcome to our second-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 earnings press release.

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

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

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

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 or train doctors for the surgical treatment of AF or for stroke reduction.

These restrictions 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 educates and trains doctors in the proper use of its products and related technologies.

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

Thank you, Julie.

Second-quarter 2011 revenue was a record $16.8 million, an increase of $2.6 million or 18% over first quarter 2010.

US revenue was $12.7 million, up 7%, and international revenue was a record $4.1 million, up 75%.

These results reflect our commitment to execution, the impact of our expanding product portfolio, and strong performance from Europe and Asia.

Additionally, during the quarter, we advanced our clinical/regulatory and product initiatives, all of which position us to continue to achieve our near- and long-term strategic priorities.

In reviewing the quarter in more detail, US revenue increased 7% to $12.7 million, driven by sales of the AtriClip system.

US ablation revenue decreased approximately $400,000 or 4% compared to the second quarter of 2010, which reflects a reduction in sales of our products used in minimally invasive procedures, partially offset by an increase in revenue from the sale of open-heart ablation products.

The reduction in revenue from products used in minimally invasive procedures is partially a result of our plan to focus our US sales organization on capitalizing on our first-mover advantage with the AtriClip system, which is resulting in opportunities to increase adoption and share gains from open-heart ablation products.

In addition, during the second half of 2010, we made a proactive decision to limit our physician ablation training activities to FDA-regulated clinical trials, which we believe has had the most significant impact on the physician adoption of products used in minimally invasive and hybrid procedures.

Sequentially, revenue from minimally invasive products increased approximately $400,000.

However, we continue to anticipate a decline in revenue from products used in minimally invasive procedures during 2011.

But we project a return to growth with the commencement of our DEEP AF pivotal trial, which we anticipate initiating during the second half of 2012.

We believe that transitioning from 6 feasibility sites to approximately 35 pivotal investigational sites will expand our presence in the marketplace.

During the second half of the year, we expect the short-term moderation of minimally invasive trends to be more than offset by growth from the AtriClip system and market share gains in our open-heart ablation business, resulting primarily from new product introductions, supported by an expanded sales force, enhanced training programs, and strong momentum from our international markets.

AtriClip sales in the US were $1.3 million.

We are successfully executing our clip launch plan.

To date, we have received reorders from approximately half of our top 250 ablation accounts.

And during the quarter, 13 new accounts reordered the clip.

AtriClip sales were modestly down on a sequential basis.

We believe second-quarter AtriClip sales were impacted by the significant investment of time required by our US sales force to execute the Synergy Access and ICE BOX user preference evaluations, both of which were completed during the quarter.

In addition, we implemented enhanced sales training activities to support these new products and our expanding product portfolio.

As we look to the second half of 2011, we believe that AtriClip utilization will increase and sales will strengthen.

Revenue from our international markets was a record $4.1 million, up 75% over the second quarter 2010.

We are encouraged by these results, as we believe they reflect our investments in the expansion of our direct sales force in Europe, our focus on expanding the adoption of our minimally invasive products, and an increase in sales momentum from Asia.

We are increasingly optimistic about our opportunities and progress in our international markets, and we believe that our recent investments and ongoing efforts will continue to drive growth.

Now, turning to our investments and FDA approvals in clinical science -- as you may recall, the ABLATE clinical trial is designed to expand the product labeling of our core Isolator Synergy System from the ablation of cardiac tissue during cardiac surgery, to include the treatment of atrial fibrillation.

During the second quarter, we worked interactively with the FDA and our physician advisors to respond to questions we received from the agency during the first quarter of 2011.

Based on discussions with FDA, we are currently preparing for a panel meeting, which we anticipate will be scheduled in the near term.

In addition, we continue to enroll patients in our FDA-approved ABLATE AF registry.

To date, we have enrolled 28 patients.

We plan to complete enrollment of this 50-patient registry during the first quarter of 2012.

We believe that the ABLATE AF registry, along with the overall body of clinical evidence, will support the conclusions of our ABLATE clinical trial and an AF indication.

Meanwhile, we are preparing our educational and training plans in anticipation of a midyear 2012 atrial fibrillation approval.

In terms of our DEEP AF feasibility trial, we enrolled our first patient in December 2010.

To date, 17 of the 30 patients approved for the trial have been enrolled.

Our investigators are highly encouraged by the acute results and initial outcomes.

We expect to complete enrollment in the DEEP AF feasibility trial during the first quarter of 2012 and initiate our pivotal trial during the second half of 2012.

We believe that the initiation of our DEEP AF pivotal trial and the expansion to approximately 35 pivotal investigational sites will be an inflection point for our business.

With respect to our plan for a stroke clinical trial in support of the AtriClip platform, this week we are submitting an IDE for a feasibility trial which utilizes our current-generation AtriClip system for minimally invasive sole-therapy placement.

The feasibility trial will evaluate the initial safety and effectiveness of the AtriClip system to protect against stroke in patients with nonvalvular atrial fibrillation who are not suitable for anticoagulation therapy.

We estimate the potential market for a standalone AtriClip system in the US to be a multibillion-dollar opportunity.

Notably, effective October 1, 2011, the ICD-9 procedure code for surgical exclusion of the left atrial appendage will be expanded to include sole-therapy, thoracoscopic, minithoracotomy, percutaneous, endovascular, and/or subxiphoid approaches.

ICD-9 procedure codes are used by hospitals to report surgical procedures performed in the inpatient setting and are assigned to clinically relevant DRGs.

The Medical Severity DRG assignments for sole-therapy, left atrial appendage procedures, reported with ICD-9 code 3736, are pending release of Medicare's Full-Year 2012 Inpatient Prospective Payment System final rule.

This is expected to be published in the federal registrar this month and become effective in October of this year.

CMS approval of hospital reimbursement for sole-therapy, thoracoscopic, left atrial appendage procedures is a major step forward and is expected to reduce the cost of our clinical trials.

We are currently planning to initiate our feasibility trial in the US during 2012.

Moving to our planned product releases and pipeline -- we recently received 510(k) clearance for a next-generation open-heart bipolar radiofrequency clamping system, Isolator Synergy Access.

Synergy Access has several competitive advantages, including articulation with a pivoting clamp, allowing surgeons to more easily position the clamp.

Synergy Access provides our US sales organization with the opportunity to gain new momentum and ablation market share.

During the second quarter, we completed our user preference evaluation process.

And at the end of the quarter, we moved to full commercial release.

Additionally, we received 510(k) clearance during the second quarter for the cryoICE BOX and completed our user preference evaluation in the US and Europe.

As a result of the user preference evaluation, we made minor modifications to ICE BOX, which required an additional 510(k) filing.

In Europe, the modifications to ICE BOX were classified as minor changes.

We completed the product modifications and recently launched the ICE BOX in Europe.

We anticipate full US commercial release by the end of the current quarter.

As a reminder, the ICE BOX places the ablation controls with the physician and simplifies the use of our cryoablation platform.

ICE BOX replaces our existing cryo generator, which was part of our 2007 acquisition of the Frigitronics product line, and was designed and developed over 20 years ago.

The existing Frigitronics generator is technically challenging to operate, which has limited our ability to penetrate a significant number of new cryoablation accounts.

We strongly believe that the ICE BOX, in combination with our cryoICE ablation probe, will lead to share gains and growth in the US and European markets.

In addition, during the first half of 2012, we plan to launch an innovative disposable cryoablation platform, ACE.

The ACE is a novel cryoablation probe designed for less invasive open-heart approaches, and can be positioned with a grasper or robotically.

We believe that the ACE cryoablation probe will further position AtriCure as the market leader.

Furthermore, during the first half of 2012, we plan to release a highly featured thoracoscopic, sole-therapy AtriClip platform for use in clinical trials.

We believe that this innovative version of the AtriClip system will facilitate regulatory approvals and the long-term commercialization and widespread adoption of this novel epicardial approach.

As affirmation of the AtriClip opportunity, in July we were awarded a $1 million grant from the Ohio Third Frontier in support of the development and commercialization of a sole-therapy thoracoscopic AtriClip system.

Over the last year, we have successfully secured approximately $2 million in support of further advancing our leading technologies.

Now turning to other business updates -- during the quarter, we went through a process of rationalizing our product offering in anticipation of our growth trends and our expanding product portfolio.

As a result, we made the decision to discontinue manufacturing our Coolrail device, which was recently replaced with our multifunctional linear probe.

In addition, we plan to discontinue our Cryo1 device, which is being replaced with our cryoICE ablation probe.

As a result of these decisions, we recorded approximately $250,000 or 150 basis points in non-recurring expenses, which had a negative impact on gross margins for the quarter.

I would now like to turn the call over to Julie for a review of our financial performance.

Thank you, Dave.

I will begin today by providing information related to revenue.

For the second quarter of 2011, revenue increased $2.6 million, or 18%, to $16.8 million.

Revenue from product sales in the US grew approximately 7%, or $800,000, to $12.7 million.

Revenue from ablation-related product sales in the US decreased by approximately $400,000, driven by a decrease in sales of minimally invasive products.

This decrease was partially offset by a modest increase in revenue from open-heart ablation products.

US sales of the AtriClip system during the quarter were $1.3 million, as compared to approximately $100,000 in the second quarter of 2010.

International revenue grew to a record $4.1 million, reflecting a 75% increase, or 63% on a constant-currency basis, over the second quarter of 2010.

The increase in international revenue was driven primarily by growth in our direct European markets, as well as an expansion in select Asian markets.

Our European growth was due to increased product sales in our direct markets and an increase in average selling prices, or ASP, driven primarily by going direct in the Benelux region during the third quarter of 2010.

As a reminder, the second quarter of 2010 did not include revenue from the Benelux, in anticipation of transitioning that market to a direct market.

Now turning to gross margin -- gross margin for the second quarter of 2011 was 73.2%, as compared with 79.1% for the second quarter of 2010.

The change in gross margin was primarily the result of an increased mix of revenue from the AtriClip system, which initially had a lower gross margin than our other single-use products; an increased mix of capital equipment sales; and an increased mix of international sales, from 16.5% of revenue for the second quarter of 2010 to 24.5% for the second quarter of 2011.

Sales to international customers have a lower ASP and a resulting lower gross margin than our US product sales.

Additionally, during the quarter, margins were negatively impacted by non-recurring write-offs and expenses for obsolete inventory of approximately $250,000 or 150 basis points, due primarily to the planned discontinuance of Coolrail and Cryo1, which have been replaced with next-generation products.

We continue to anticipate gross margins on a quarterly basis to be in the range of 74% to 77%, with variations driven primarily by product mix, including capital equipment sales, and a mix of revenue from international sales.

For the second half of 2011, we would expect gross margins to be on the low end of that range, however, due primarily to anticipated sales of cryoICE BOX and sales of Synergy Access, which has a higher cost of goods than our other clamps.

Next, an update on operating expenses.

Operating expenses increased 12% on an 18% increase in revenue, from $11.7 million for the second quarter of 2010 to $13 million for the second quarter of 2011.

Research and development expenses, which include clinical activity, increased 19% or approximately $450,000, from $2.4 million for the second quarter of 2010 to $2.9 million for the second quarter of 2011.

The increase in R&D was primarily due to increased cost in support of our clinical trials and regulatory activities.

SG&A increased 10% or approximately $930,000, driven primarily by an increase in headcount and travel-related expenses associated with the expansion of our worldwide sales and marketing team.

Our operating loss for the quarter was approximately $800,000, and adjusted EBITDA was approximately $500,000.

Our net loss was approximately $950,000, and our net loss per share was $0.06.

Now turning to cash and a few balance sheet items -- in terms of cash from operations, year to date we [reduced] our cash used in operations by $1.4 million, to approximately $500,000, due primarily to a reduction in our net loss and a reduction in cash used in support of working capital needs.

Additionally, during the quarter, a class-action lawsuit was finalized, and as a result, our other assets and accrued liabilities each were reduced by $2 million during the quarter.

There was no impact on cash, as it was funded in full by our insurance carrier.

We ended the quarter with $16.4 million in cash, cash equivalents, and investments, an increase of $3.9 million as compared to year end.

And we had $7.1 million in debt outstanding under our credit facility.

Additionally, we had approximately $8.2 million of borrowing capacity under the revolving portion of our credit facility.

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

Thank you, Julie.

In terms of outlook, we believe the addition of the AtriClip platform, enhanced training system support, our sales force expansion, a series of novel ablation product introductions, an anticipated US atrial fibrillation approval, and the continued development in geographic expansion of our international market opportunities will support short- to midterm growth.

Furthermore, we believe strongly that our investments in hybrid ablation and stroke approvals will provide the foundation for sustainable long-term growth.

In summary, we are confident in our people and the power of our strategic plan, which position us for growth during 2011 and beyond.

We will now open the call for your questions.

Thank you.

(Operator Instructions).

And your first question today comes from the line of Thom Gunderson with Piper Jaffray.

Hi, good morning.

Good morning, Thom.

Dave, I want to take a look at a little bit more color from the field perspective on the AtriClip.

Can you give us a sense -- first off, do you consider the sales force fully trained here, number one?

And then number two, how many procedures do they need to be in on before you have the surgeon sort of free and clear?

And of the 250, how many would you estimate are in that zone?

All good questions, Thom.

Well, first of all, in terms of our sales force being trained, there are certainly different levels of training.

One of the ways that we approach the AtriClip system is we typically get it on the shelf at our current ASP, which is $1,100, and we sell the product for specific clinical indications.

So there are different levels of training.

In fact, this past weekend we had a training course for the East Coast reps to go through the AtriClip system again.

So we're continuously adding information and upgrading the core competencies of our training and our sales force capability to sell the clip and other products.

In terms of color, I think the rep being in a AtriClip case -- one case is probably enough to get the surgeon relatively comfortable with a product.

In terms of driving changes in pattern and pattern recognition amongst the operating team to select the clip, I think that's somewhere in the range of five to ten procedures.

Thom, and we would estimate that, of the 250, roughly half of those are stocking the clip.

And so once they get to stocking, they've been trained and up to speed.

Got it.

Thanks.

That's good info, particularly on changing the pattern.

Just doing one doesn't necessarily always get you there, does it?

You have to change the way they think, but, obviously, moving the ball forward.

Then on DEEP AF, you're in the feasibility study.

You're enrolling these feasibility patients at a pretty good rate, and you'll move in to pivotal.

But Dave, is there anything that prevents an academic center from starting to do this on their own, and are you aware, as the word sort of gets out, word of mouth, that maybe some of the colleagues or former fellows of your clinical centers are starting to do this?

Thom, I think the issue in terms of expansion of the DEEP AF procedure approach to other accounts outside the 6 feasibility sites that we selected -- I think the key issue is training.

Hybrid is, we think, a very comprehensive approach to AF treatment.

Obviously, requires two subspecialties to merge together for an effective procedure.

And training in the workflow of the procedure is really critical.

To date, we have made a clear decision to limit our training to those centers that have been approved to participate in the FDA-regulated DEEP AF trial.

I do think, as we get into a pivotal trial -- and assuming that we're in approximately 35 investigational sites -- that physicians will talk to physicians and develop their own network and learn different ways to train each other.

But we will certainly stick to our compliance procedures, which maintain a focus on training in the investigational sites.

I will say that, in Europe, both the trends for minimally invasive as well as, in select parts of Europe, hybrid are certainly trending in the right direction, and we feel very good about our long-term ability to develop this market.

Got it.

Thanks for that.

That's it for me for now.

Thank you, Thom.

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

Hi, Dave and Julie.

Thanks for taking the questions.

Thank you.

Let me go back to AtriClip quickly, if you don't mind.

Could you, Dave, perhaps give us a bit more color on what you're doing now in the US market to drive penetration of the product, drive sales, particularly since you see AtriClip and open sort of offsetting some of the planned pullbacks that you have on the MIS side?

So to drive overall growth, AtriClip is an important component to that.

What are you doing with your sales force in the back half of the year to penetrate new accounts, number one?

And number two, you've talked previously about the opportunity to get your foot in the door at some competitive accounts with AtriClip, given that it's a unique product in your portfolio, and especially to drive a pull-through of your ablation business.

Could you maybe talk about or give us an update on that as well?

Sure.

I think the main issue is really educating our sales force how to sell from a procedural perspective.

For example, a simple concept would be an off-pump CABG, where the clip is a much better technology and is more effective and safer than basically cutting and stapling.

So, basically, helping our reps understand which procedures add the most clinical benefit for the clip.

Obviously, the clip has overall benefits in terms of left atrial appendage exclusion.

But we want to focus our reps on being able to talk at the scrub sink, with physicians, about what procedure is being performed today and how the AtriClip system is going to simplify that procedure in terms of left atrial appendage exclusion and also reduce any potential risk.

The second thing that we're doing is we're helping to educate physicians on the risk of stroke associated with atrial fibrillation.

And we're not going necessarily to stroke directly.

But in our EXCLUDE clinical trial, which was a left atrial appendage technical end point, patients could be enrolled if they were 75 years of age or older; if they were 65 years of age and had a history of hypertension; if they had a previous cardioembolic stroke.

So we're aiming our reps to basically help physicians understand where the left atrial appendage should be removed, based on these markers that certain patients may have for developing stroke down the road.

So the general concept is -- train them on the procedures where the clip can have the most benefit; get them used to using the clip, which will drive more utilization and more procedures; and then also focus on the markers for certain patients -- like age, like previous cardioembolic stroke, like hypertension -- the markers that typically you want to be aware of when a patient is in the operating room, that you have an opportunity to basically treat the appendage and reduce any long-term risk for that patient.

Okay, and then just with respect to the competitive accounts part of the question?

In terms of competitive accounts, this quarter we were really focused on the Synergy Access and the ICE BOX user preference evaluation.

That's a fairly comprehensive process for us, because we have to train our reps first on the new products.

We have to coordinate engineers and reps into accounts.

We collect data on every product.

And, in fact, during this quarter, this is the first quarter that I can recall where we ran two significant user preference evaluations simultaneously.

So in terms of competitive accounts, this quarter we focused more on Synergy Access, focused more on the ICE BOX, made some modifications to the ICE BOX.

But going forward, the AtriClip, as you point out, is a unique and novel technology, and our competition doesn't have a similar/like product.

So every physician that we talk to wants to fundamentally learn more about how they can more safely and effectively exclude left atrial appendage.

So we can begin many of those conversations now with Synergy Access, ICE BOX, cryoICE, and the overall strength of our portfolio we can pull products through.

In addition to that, we think the stroke trial really enhances our image in cardiac surgery.

So the fact that AtriCure is on the heels of what we believe is an AF indication; is running a DEEP AF hybrid clinical trial, which is a novel, new procedure; and is making an investment in the sole-therapy left atrial appendage exclusion procedure -- from a corporate point of view, we want to sell the fact that we're making investments in clinical science, which we think brings patients and physicians over to AtriCure.

That's very helpful.

One more follow-up on AtriClip, then I have one other question about the OUS market.

On the AtriClip, Dave, just simply given what you've said about your refocus on AtriClip in the second half of the year and what you're focused on in the second quarter that took some of your sales force focus away from AtriClip in the near term, would you expect, sequentially, AtriClip revenues to improve quarterly through the balance of the year?

And the other question; then I'll get back in queue.

Outside the US was very strong.

Clearly, you're seeing a benefit from your direct markets, your expanded product line.

From this level, should we expect continued improvement and growth outside the US?

Not necessarily in terms of your year-over-year growth percentage number, but from a nominal basis, do you see any reason why, outside of seasonality, we would see any pullback in the momentum?

Thanks, guys.

Thank you.

In terms of sequential growth, certainly see a strengthening of AtriClip sales in the second half of the year.

Always hard to factor in seasonality.

But in general, we see strong trends for the AtriClip system and a stronger second half of the year than a first half of the year.

And in terms of the international markets, we remain very excited.

I think in Europe our investments in direct sales forces in Germany, Switzerland, and Austria, as well as the Benelux countries, have made a significant impact in terms of growth.

We see increased utilization from our stocking distributors and geographic expansion.

We saw growth from our major markets in Asia.

We're developing new markets.

We put one of our key executives in a position to develop some of the Latin American emerging countries, like Brazil.

So we're very enthusiastic about the short- and long-term prospects of continued growth in the international markets.

But with that said, Jason, I would just caution you that that is the market that is the most susceptible to seasonality for the third quarter.

So in terms of sequential growth patterns there, I would expect a seasonal dip in the third quarter.

And then there is nothing unusual in the second quarter that wouldn't make that a reasonable jump-off point from there into prospective quarters.

Yes, that makes sense.

Unless we can change the vacation patterns for those folks over there.

Thanks, guys.

Thank you.

Thank you, Jason.

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

Hey, guys, good morning.

Good morning, Matt.

Dave, I wanted to touch on new products a bit.

And sort of following up on that competitive question, can you give us maybe your current market share profile and what your expectations are with Access, ICE BOX, and ACE layering into the story?

And maybe include in that some comments on pricing on those things.

Well, one of the things that we're proud of in terms of our market presence is our pricing on a year-over-year basis, independent of the macroeconomic issues.

But if you go back to 2010 versus 2011, pricing is generally consistent.

And obviously, launching new products like the AtriClip system, our average selling price is still $1,100 for the AtriClip system.

So I think that talks to the strength of our products and the positioning of our products in the marketplace by our sales and marketing team.

In terms of new products, certainly Synergy Access is a novel, new product within articulating head, which positions us more competitively against Medtronic, which has a flexible head.

That was the main aim of that technology.

I think the ICE BOX is a product that -- even though hardware typically is not a facilitator, in this case, this hardware is very elegant, puts the controls with the physician, which physicians like, and we're removing and replacing a 20-year-old generator that the OR staff and physicians just struggled to use.

So I think ICE BOX is going to make a very significant impact.

We estimate our cryoablation market in the US to be about 25% share.

I think with the ICE BOX and some other innovations that we're planning for the first half of 2012, that we could exit 2012 being in a 40% to 50% share in terms of the US cryoablation market.

So both these are significant new products.

Then --

Okay.

Hello?

Yes, the only comment I wanted to add to that is the AF labeling.

And I think the AF labeling -- assuming that we achieve success with the agency in obtaining an AF label, we believe that that is a major catalyst, that the markets are underpenetrated in the US, and that the ability to market and train is going to be a significant catalyst for the Company going forward.

All right, okay.

And then following on that, thinking about the significance of the ABLATE registry data, it sounds like it won't be available for the AdCom meeting.

How necessary is that data relative to FDA's deficiency letter and its overall response for your pursuit of an AF label?

Well, independent of -- you have to separate the FDA and panel.

FDA has never -- has not asked us for any additional patients in the deficiency letter.

They were focused on AF classification.

And we had the world leaders in AF classification who wrote the HRS consensus statements adjudicate each patient and put each patient into the new nomenclature for AF classification.

So we feel very strong about our responses in terms of a deficiency letter.

And in interactively discussing it with FDA, the FDA has given us the understanding that we are not going to receive any additional letters, but that we're going to work together to coordinate our plans for a panel meeting in the near term.

Okay.

And then if I could sneak one more in on the stroke trial, do you have any thoughts on the size and scope there, maybe comparing to some of the other products that have come through the process?

Well, certainly, on the feasibility side, we typically would ask for 5 to 6 centers and 30 patients.

In terms of what's going to be required from the pivotal trial, I think one of the advantages that we have in powering the study is we're aiming for patients that are not suitable candidates for anticoagulation therapy.

So we're aiming for patients who are at high risk of complications and high risk of stroke.

So I think we do have some elements of the study design that would allow us to power it in a way that we could hopefully reduce the number of patients.

But at the end of the day, stroke trials are large, and I would anticipate that we'll be somewhere in a similar range as Watchman, which was 750 patients in their treatment group and 250 patients in their control arm.

Great, thanks a lot, guys.

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

Well, I was going to take that conversation offline, but I am curious.

I was kind of wondering why you wouldn't run two stroke trials here to include valvular and then patients that were indicated for warfarin.

So if you do -- since you're going with this approach, can you have a lower end point of a year or two, opposed to three years?

And then would you want to follow on an additional trial that included these other patients that would likely benefit from the clip?

And what kind of timing would that look like?

Well, I think it's too soon to really get into too many details about how we would power the study, number of patients.

I think the question that Matt asked, we gave a general overview.

But in terms of the market, Charley, if you look at dabigatran, apixaban -- so you have thrombin inhibitors.

You have factor Xa inhibitors.

You have a new series of anticoagulation drugs coming to market.

Our general feeling is that when you look at a non-inferiority hypothesis comparing either Coumadin and now these new drugs, like dabigatran and the factor Xa inhibitors -- when you compare these new drugs to a device, we think that many patients would rather go from Coumadin to a new drug and a series of new drugs versus undergoing a fairly invasive percutaneous procedure like a endovascular Watchman or like devices.

So we think the bigger market opportunity is actually for those patients that are not suitable candidates for anticoagulation treatment.

We know that patients are living longer.

We know that AF prevalence is greater in the elderly population.

And this population of patients often are not suitable candidates for anticoagulation treatment.

So we actually think the more obvious market is a thoracoscopic approach where you don't penetrate the left atrium and don't leave anything in the circulating blood pool, and you can take patients immediately off of anticoagulation treatment and antiplatelet treatment if necessary.

So that's our general hypothesis.

Okay, that's helpful.

Could you discuss your best estimate for a panel date?

It sounded like you're getting close, but you talked about this registry data taking till Q1, but it sounds like maybe that's not necessary for a panel; is that right?

Well, first of all, we don't have to complete the entire registry to have data to support the conclusions of our ABLATE trial.

So if we were -- just as an example, if we're somewhere in the mid to early fourth quarter -- and, again, that's just as an example, because that's the information I have in front of me -- we would have 12 patients that were at the primary end point and about 28 patients that were through the safety end point.

So we don't have to enroll all 50 patients to actually be able to utilize that data at a panel meeting to support the conclusions of our overall pivotal trial of late.

In terms of giving you any more color, I think the best color is we're preparing for it and we believe it will be scheduled in the near term.

That's very helpful.

And just one more -- I was hoping you could discuss your expectations for the rough dollar amount at the ICD-9 levels.

And will the change here, do you think, affect physicians' ability to do that?

Do they already have the ability to do different cross-codes to be able to get this procedure reimbursed, and do you think it'll have a big effect on potential opportunity for physicians to do this procedure?

Yes, we think it's a major catalyst for physicians to want to perform procedures.

And this ICD-9 code, 3736, actually covers a broad range of approaches.

So it covers percutaneous approaches, subxiphoid approaches, thoracoscopic approaches.

So how CMS will decide to walk that over to a DRG, and which DRG that'll be, I wouldn't want to speculate because the approaches are too wide-ranging -- again, including percutaneous, subxiphoid, and minimally invasive and thoracoscopic approaches.

So the DRG assignment -- it could be percutaneous; it could be surgical.

Certainly, if it's percutaneous, then we will continue to drive toward the separation of the thoracoscopic approach, as we've done in other areas like minimally invasive thoracoscopic ablation.

But that will be in the 2012 register where people can be reimbursed for the procedure?

Effective October 1 of this year.

Great.

Thank you.

Thank you.

Your next question comes from the line of Jan Wald with Morgan Keegan.

Good morning, Dave and Julie.

Hey, Jan.

Good morning, Jan.

Hey, a couple of more or less follow-up questions.

I guess in terms of the AtriClip, the minimally invasive timeline, if you will -- when will that clip kind of come out, and what are the -- if there are any -- opportunities for getting those, the minimally invasive clip, involved in the clinical trials you have ongoing?

Or are you going to need a new set to prove it out?

Excellent question.

So the current clips that we have were designed for open use.

One of the current clips that we have is long, and the other is short, in terms of the deployment tool.

The long deployment tool has been adopted by our DEEP AF investigators.

All of our DEEP AF patients were implanted with the long, disposable AtriClip system.

So we went back to FDA because of this trend, and we asked if the FDA would amend this study and allow the use of the AtriClip system in a DEEP AF study, since the physicians were using it.

And the stapler was written into the protocol, but the physicians much preferred the clip even though it's not specifically designed for minimally invasive or thoracoscopic use.

The fact that the DEEP AF investigators adopted the clip without us driving toward that, on their own, gave us the incentive or the confidence, I should say, to go forward with a feasibility trial using the current-generation clip.

So the success that the DEEP AF investigators have had implanting our current-generation clip -- which was really designed for open, but they're using it in a minimally invasive fashion and they're being successful with it -- gave us the confidence to go forward with the current-generation clip in a feasibility trial while we designed a totally thoracoscopic product that's highly featured.

That totally thoracoscopic product that's highly featured will be ready for clinical trials during the first half of 2012.

So under the best-case scenario, we start our feasibility trial, maybe complete the feasibility trial with the current-generation clip, and then amend the pivotal trial to include the thoracoscopic clip, which is designed and intended for this procedure.

Okay, thanks.

And I guess just maybe another follow-up question.

In terms of the European market, from what you had said earlier, it sounded as if, even if we assume the seasonality, we should sort of step up what our assumptions are for the European market growth and revenues.

But how should we look at the European market?

What are the key drivers in that market, and how should we see that market growing over the next year to two years?

I think the key drivers in the market, first of all, is just the fact that we didn't have any, for example, European station until 2006.

So we opened up our European BV on the heels of our IPO in 2005 and began to make some investments, and then we made investments in direct people.

Now we have direct people in some of the major countries, like Germany and the Benelux.

So we're making significant headway.

Those markets are underpenetrated in terms of market share compared to the US markets.

So we have superior products, a broader range of products, and our direct people are being very successful in the major markets.

In addition, minimally invasive is taking off, especially in the Benelux and in certain areas of Germany.

We still have some reimbursement challenges to overcome, but there's a significant trend toward minimally invasive procedures and, in certain cases, hybrid procedures.

So the direct markets, the investment in those direct markets, the investment in training for our stocking distributors, since we have more people on the street, to enable training for our stocking distributors in Europe, and the movement to minimally invasive and hybrid procedures, particularly in our direct markets but also in certain areas outside of direct markets in Europe, has been the foundation for growth in Europe.

We're also seeing growth from some mature markets, like Japan.

Japan is a market that we have about 50% market share.

Obviously, the population there is atrophying and cardiac surgery is not growing.

However, they are still continuing to pick up share.

We just launched the Synergy Access in Japan, and we believe that that will stimulate growth in Japan.

And then China is an emerging market, obviously, for most all medical device companies, and AtriCure is included in that as well.

And we're seeing nice growth trends in China, and we'll have to make some decisions about what investments we make in that marketplace.

And then, again, we're beginning to get into places like Brazil and develop strategies in some of the major Latin American markets and other emerging markets outside the major areas that we're currently selling in.

So I think it's a combination of more direct people over time, continued success in our direct markets, continued education with our stocking distributors, geographic expansion, new products, and minimally invasive momentum.

Thanks, Dave, and congratulations on a good quarter.

Thank you, sir.

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

Good morning, Dave and Julie.

Good morning, Larry.

Good morning, Larry.

Those are some tough acts to follow.

Those are good questions we've been getting.

On the minimally invasive side, I wanted to get a little more color on that.

You mentioned that revenue was down.

Is there anything, Dave or Julie, going on competitively that might account for that, or is it, in your mind, strictly that you've deemphasized that activity relative to other things you're working on?

We're not seeing any competitive activity that's having an impact.

I think it's just a matter of deemphasizing -- not training.

You're not basically doing some of the activities that historically we were doing relative to our products in those minimally invasive accounts.

So I think the stricter healthcare compliance environment, the stricter compliance and enforcement environment in -- developing healthcare compliance procedures is the main reason for some of the atrophy in our minimally invasive business.

And then following up on sort of the competitive environment -- if you look at the base business, the open-heart surgery business, of course, Medtronic acquired ATS, I guess it was probably a year, year and a half ago.

I'm sure that created some disruptions.

How do you view that side of the competitive ledger at this point?

I know for a while it had to be benefiting you with some disruptions.

What do you see out there now, Dave?

Well, yes, Medtronic is certainly a very strong competitor.

In terms of surgical ablation, I think they've gone a little back and forth in terms of their investments in this space.

Right now, we view them in the open-heart market to be a strong competitor in the OR with their valves.

We do believe that Synergy Access, the ICE BOX, a series of new cryoablation probes, the AtriClip system, particularly in AF labeling -- we do think that we're doing all the right things and very well positioned to take significant share from Medtronic, which is really our number one and only significant competitor right now in the marketplace.

And Dave, one more question on Medtronic.

There was a time not that long ago when they were doing some clinical trials on an AtriClip-type device.

As I recall, last time we talked or you talked on the call, it looked like they maybe had pulled back on that.

Do you have any update on their competitive activities in the clip area?

They had a cardioblate occluder, which was an O-ring-like device.

We looked at a similar technology.

As you know, the appendage is an elliptical structure, so to try to get acute closure, or even chronic closure, with an O-ring-like system on the outside of the heart might be challenging.

We heard from some of their key investigators that perhaps they didn't make the technical end points of their clinical trial, which was acute left atrial appendage exclusion and exclusion in three months with a CT scan.

So we heard that maybe their clinical trial did not achieve the end points that they were aiming for and that that product might be on hold.

Great.

Thanks, Dave.

Thank you.

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

Thanks for taking the follow-up, Dave.

Larry actually asked one of the follow-up questions I had on the MIS side.

Perhaps just an update, if you will, on your direct sales organization, both worldwide and then broken out by geography.

How has that changed over the last six months?

You've talked qualitatively about it, but quantitatively, can you give us some color?

Sure.

We basically hired an additional 10 people, beginning in 2011.

We came into the year with about [55] people, which was where we were in the third, fourth quarter of 2008, so we added new people.

Now, we added basically ablation specialists and sales managers.

We went from 30 to 39 territories.

What's different about that is that, in the past, we had a group of reps that we called market development representatives that were basically selling our products to electrophysiologists, and basically bringing electrophysiologists and surgeons together for them to understand the attributes of our products.

And that role we've removed from the sales organization, from a combination of different reasons.

Fundamentally stemming from a healthcare compliance perspective, we didn't want to be perceived as promoting the disease versus promoting the technology.

So that was a significant change.

So what we have today is 39 sales territories and a series of ablation specialists that are primarily focused on the open-heart business and selling the attributes of our clip and our ablation portfolio.

And that's on the US side, Jason.

Okay, so that's on the US side.

Dave, what are your plans going forward with some early success going direct in some of the regions in Europe?

Should we expect status quo for a bit as those mature and you learn new things, before you start sort of a second move to go direct in other countries?

Or are those kinds of things in the works now?

Or just any additional color on that front would be helpful.

Well, I think we're definitely going to make some investments in the international markets, particularly Europe.

Now, whether it's sales reps or whether it's physicians -- for example, they can help drive minimally invasive from an educational perspective -- reimbursement consultants, I think there are definitely some adds to be made.

We're trying to basically get together what our operating plan is going to be for 2012 in terms of direct employees for our European BV.

It's very possible that we will pick up a sales head or two.

I think that is a very possible scenario, but it's also -- we want to consider these other potential supportive positions, whether the marketing, or we can hire physicians in Europe to help stimulate minimally invasive.

We need to have some reimbursement support in certain countries.

So we're going to be looking at both direct sales as well as market development activities and headcount.

Great.

Thanks, guys.

Thank you.

Operator, we'll take one more call, please, if there is one in the queue.

Your final question is from Charley Jones with Barrington Research.

Thank you for the follow-ups.

So if a physician had been doing minimally invasive last year, and is not currently enrolling patients or planning to enroll patients in any of your clinical trials, and they are already trained, they already feel like they know how to do a procedure, are your reps allowed to be there, or are they even allowed to buy -- I mean, I would imagine they'd be allowed to buy products from you, given the other uses.

We wouldn't restrict the sale of our products.

We just wouldn't be in the account necessarily promoting and supporting training activities.

So, for example, when we launch a new product, like the multifunctional linear pen, typically in days gone by we would focus our minimally invasive surgeons on the attribute of a new technology.

Now our minimally invasive users in the US -- we're really not educating them on how to apply, for example, new technologies and new techniques to minimally invasive, standalone procedures.

And that practice, I think, is what is, again, at the core of some of the atrophy you're seeing in minimally invasive.

And, again, we think the movement to a DEEP AF pivotal trial will be an inflection point for our business.

And that was my second follow-up.

Could you -- I guess any specifics you can provide, but I was hoping you can discuss your expectations for when you actually start enrolling patients in that pivotal phase, and if you could discuss some of your pre-IDE enrollment completion timelines and whether or not you need to review that data to be able to start enrolling patients.

Thanks a lot.

Well, I think -- we're very, actually, pleased with enrollment.

We started enrollment in December 2010.

In this environment, to get IRB approvals, contract approvals, and CMS approvals in major centers like we're working with in our feasibility trial is not a simple process.

In addition, this is a new procedure for these accounts, so they are required to do a number of running cases.

Typically, it's five running cases.

So the 17 patients are just patients that have been enrolled; doesn't include running cases.

In addition, in the feasibility trial -- in most safety and feasibility trials, you start off with more strict criteria for inclusion and exclusion.

So we've enrolled 17 patients, but I think when we get to our pivotal trial, we'll sort of loosen up some of the criteria, whether it's BMI or ejection fraction, some of these areas that have limited some patient enrollment.

We'll likely loosen up some restrictions once we have the safety and feasibility data and once the centers have a little bit more experience and we have a little bit more experience in terms of teaching these centers how to perform the procedure.

So in terms of actually starting the pivotal trial, we said all along, and we continue to believe, that the second half of 2012, that we'll initiate enrollment in the DEEP AF clinical trial.

Thanks a lot.

Thank you.

Thank you, Charley.

And this does conclude the question-and-answer portion of the event today.

Would management like to make some closing remarks?

Thanks for your participation in the call today, and we look forward to the upcoming third-quarter call.

Ladies and gentlemen, this does conclude the presentation, and you may now disconnect.

Have a wonderful day.

Thank you.