AtriCure Inc (ATRC) 2011 Q3 法說會逐字稿

Good morning and welcome to AtriCure's third quarter 2011 earnings conference call.

My name is Francine, 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.

(Operator instructions).

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

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

Dave Drachman, President and Chief Executive Officer of AtriCure.

Mr.

Drachman, please proceed.

Thank you, Francine.

Good morning and welcome to our third 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 513-304-8931, and she will be happy to 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 earnings estimates, other predictions of financial performance, launches of new products, market acceptance of new products and atrial fibrillation approval by the FDA.

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 approval 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 statements, whether as a result of new information, future events or otherwise.

Additionally, we will refer to non-GAAP financial measures.

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

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

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 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 or marketing efforts that focus 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 technology.

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

Thank you, Julie.

I will begin today's call by reviewing the significance of the FDA advisory panel's recent recommendations for the approval of an AF indication for our Synergy Ablation System.

Then we will review the clinical data from our ABLATE pivotal trial, which is the basis for this approval.

We anticipate final FDA approval during the first quarter of 2012.

This positions AtriCure to be the first company to receive an indication for the surgical treatment of AF.

Furthermore, this is the first approval for a persistent and long-standing persistent atrial fibrillation indication.

This approval signifies a major step forward for cardiac surgery and all interventional ablation treatments of atrial fibrillation.

We appreciate FDA's interactive and responsive review of the clinical evidence.

Most importantly, an AF indication will allow us to thoroughly train surgeons, which will optimize patient care and result in improved patient outcomes.

This anticipated FDA approval will mark a new era of expansion and growth for AtriCure.

FDA's proposed indication is as follows.

The AtriCure Synergy Ablation System is intended to ablate cardiac tissue for the treatment of persistent or long-standing persistent atrial fibrillation in patients who are undergoing open concomitant coronary artery bypass grafting and/or valve replacement or repair.

The advisory panel recommended that FDA approve the Synergy system for this indication.

The FDA approval will represent a pathway to improved patient outcomes by enabling the Company to perform comprehensive training and certify surgeons that demonstrate predefined measures of competency as AtriCure-qualified operators.

Certified surgeons will have successfully completed the curriculum developed in coordination with an education steering committee comprised of physician experts in the interventional treatment of atrial fibrillation.

Now I would like to make three key points concerning the open concomitant AF ablation market.

First, the large majority of cardiac surgery patients with preoperative AF are not receiving treatment.

Our most recent market estimates that there are approximately 85,000 patients per year undergoing coronary artery bypass and/or valve procedures with preoperative AF.

Of these 85,000 patients, approximately 25% are receiving concomitant ablation treatments today.

Secondly, preoperative AF is associated with a significant increase in death and stroke in patients undergoing coronary bypass grafting and/or valve procedures.

The Cleveland Clinic publication of patients undergoing bypass procedures concluded there is more than a 20% increase in mortality within 10 years and twice the number of strokes in patients with preoperative AF.

Moreover, an aortic valve study from the Mayo Clinic found reduced late survival, more postoperative strokes as well as a higher incidence of heart failure in patients with preoperative AF.

A separate Mayo Clinic mitral valve study found an 18% difference in survival at 10 years and a 32% increase in late cardiac events and stroke in patients with preoperative AF.

The primary conclusion of these three major publications is that patients undergoing coronary artery bypass grafting and/or valve replacement or repairs with preoperative AF have increased late morbidity and mortality.

The third point is that training and education is needed to optimize patient care and improved patient outcomes.

The 2007 HRS consensus statement recommends that all patients with documented AF referred for other cardiac surgeries undergo an ablation procedure at an experienced center unless they will add significant risk.

Please note that the key referenced in this HRS recommendation is an experienced center.

One condition of FDA approval is a requirement to initiate a comprehensive surgeon training program.

The program curriculum has been submitted to FDA.

Training and education will create more experienced centers, which will result in improved patient outcomes and make safer and effective treatment more available to a broader population of patients that are indicated for concomitant surgical ablation procedures.

To this end, we are developing an institute of surgeon training.

Furthermore, we believe an AF indication will create a halo effect for our AtriClip system and that our approval will be recognized by physicians as well as hospital administrators as an opportunity to use accurately labeled product and increase awareness for concomitant surgical AF treatments.

Another condition of FDA approval for our AF label is a post-approval study.

We have been in the process of collaborating with the FDA to design a post-approval study.

We anticipate that the study will be conducted in 50 sites and include approximately 350 patients.

The aim of the study is to enrich the clinical signs for open concomitant AF treatments and provide feedback on the effectiveness of our training program.

We believe that executing our open concomitant strategy sets the foundation for sole therapy surgical approaches.

We are currently investigating our products used to perform sole therapy hybrid ablation procedures in our DEEP AF FDA feasibility clinical trials.

Now a review of the ABLATE clinical data, which is the foundation of our AF approval -- the primary safety outcome was a composite of major adverse events that consisted of death, stroke, TIA, myocardial infarction and bleeding within 30 days post procedure or prior to hospital discharge, whichever was later.

The ABLATE clinical trial enrolled patients with severe structural heart disease and permanent atrial fibrillation as defined in the 2006 guidelines of the management of patients with AF.

Because the ABLATE patients were elderly, had significant left atrial enlargement, presented with a long history of permanent AF and heart failure, the ABLATE study patients would have been highly unlikely to respond to catheter or drug treatments.

Importantly, only one primary safety endpoint was associated with the ablation procedure, and none of the primary safety endpoints were associated with our Synergy Ablation System.

Despite the severity of cardiac disease and the complexity of the primary surgical procedures, the ABLATE study met the primary safety endpoint with a 9.1% rate of the primary safety endpoint events.

In terms of the rate of pacemakers in ABLATE, the need for a pacemaker in the ABLATE population is linked to a long documented history of permanent AF.

The patient's normal rhythm is overridden by the AF and often takes months to recover.

During this recovery period, an implantable pacemaker may be required.

Importantly, one of the patients that received a pacemaker following surgery has been paced at last follow up.

Once again, importantly, only one of the patients that received a pacemaker following surgery was being paced at the last follow up.

In terms of efficacy, the ABLATE clinical trial met the primary study endpoint.

At six-month follow-up, 74% of patients were AF-free and off anti-arrhythmic drugs.

In addition, 84% of patients were AF free at six months with the use of an anti-arrhythmic drug.

In conclusion, the ABLATE trial met both primary safety and efficacy endpoints as agreed upon with FDA.

Now, moving onto third-quarter business trends, third-quarter consolidated revenue of $15.2 million is a 5% increase compared to the same period a year ago.

US revenue increased 2% to $11.8 million, driven by sales of the AtriClip system of $1.4 million.

US revenue from the sales of open ablation products increased modestly on a year-over-your comparative basis.

We believe revenue from our open ablation products in the US was negatively impacted by an estimated 10% reduction in primary open-heart surgical procedures during the quarter.

We estimate that we have increased our open market share during 2011 and continued to strengthen our position as the market leader in this key segment of our business.

US revenue results reflect a reduction in sales of products used in minimally invasive procedures consistent with previously communicated expectations.

As you recall, during 2010 we limited our training to FDA regulated trials, which has temporally impacted the physician adoption of our products using minimally invasive and hybrid procedures.

We believe that revenue from products used in minimally invasive procedures will be relatively consistent on an ongoing basis.

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

Turning to our international markets, revenue from our international markets increased $3.5 million or 19% compared to the same period a year ago.

The economic conditions in Europe have not materially impacted our growth strategy, as the majority of our business is in the northern European countries.

We remain optimistic about our ability to sustain growth in Europe and Asia.

In addition, we are registering our products in Brazil and continuing to invest resources in geographic expansion.

Turning to an update on product releases and pipeline, we received 510-K clearance during the third quarter for enhancements that maybe Ice Box cryoablation generator more user-friendly.

As a result of these enhancements, we are in the process of initiating a second manufacturing pilot in both the US and Europe.

We are targeting the first quarter of 2012 for full commercial release.

As you recall, Ice Box places the ablation controls with the physician and simplifies the use of our cryoablation platform.

We believe the Ice Box, in combination with our currently marketed cryoICE ablation probe, will lead to share gains and growth in the US and Europe.

Furthermore, during the first half of 2012, we plan to release a new AtriClip platform.

We believe that this innovation will be used in clinical trials and will facilitate the long-term commercialization and widespread adoption of a sole therapy epicardial left atrial appendage exclusion procedure developed for patients who are contraindicated for anticoagulation drugs.

With respect to our plans for a stroke clinical trial in support of the AtriClip system, we submitted our IDE for a feasibility trial to FDA.

The agency responded to the filing and we plan to resubmit an amended ITE during the fourth quarter.

At this time I would like to turn the call over to Julie to provide a detailed review our financial performance.

Thank you, Dave.

I will begin by providing information related to revenue.

For the third quarter of 2011, which is a seasonally impacted quarter, revenue increased 5.2% to $15.2 million.

Revenue from product sales in the US grew 1.8% to $11.8 million.

Revenue from the ablation-related product sales decreased by approximately $150,000 in the US, driven by a decrease in sales of products used in minimally invasive procedures.

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 $1.4 million as compared to $1 million for the third quarter of 2010.

International revenue grew 18.7% or 14.3% on a constant currency basis to $3.5 million as compared to the third 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.

Now turning to gross margin, gross margin for the third quarter of 2011 was 72.8% as compared with 77.2% for the third quarter of 2010.

The change in gross margin was primarily the result of an increased mix of revenue from the AtriClip system and cryo devices, which have lower gross margins than our other single-use products, an increased mix of capital equipment sales and an increased mix of international sales.

Additionally, in anticipation of an AF labeling and transitioning to manufacturing PMA products, we are in the process of making a variety of modifications to our manufacturing and quality systems.

As a result, we are experiencing an increase in our manufacturing overhead cost, a portion of which we expect to be a temporary increase, and we have temporarily realigned internal resources.

These changes include a revalidation and documentation of our manufacturing processes and the implementation of an enhanced training program for our manufacturing personnel.

Additionally, during the quarter we experienced an increase in our manufacturing scrap rate and inefficiency variances, which was driven primarily by higher scrap related to new product manufacturing.

We anticipate to continue to experience some pressure on our gross margin over the upcoming quarters, due to incremental product and manufacturing cost.

Next, an update on operating expenses -- operating expenses increased 2.3% or approximately $270,000 from $12 million for the third quarter of 2010 to $12.3 million for the third quarter of 2011.

Research and development expenses, which include clinical activity, increased approximately $130,000 from $2.9 million for the third quarter of 2010 to $3.1 million for the third quarter of 2011.

The increase in R&D expenses was primarily due to increased costs in support of our clinical trials and regulatory activities, partially offset by a reduction in product development expenses, which was due primarily to a temporary reallocation of some personnel from product development activities to manufacturing support activities.

This also resulted in a reduction in product development-related project expenditures.

SG&A increased approximately $140,000, driven primarily by an increase in headcount and travel-related expenses associated with the expansion of our worldwide sales and marketing team of approximately $500,000, partially offset by a reduction in variable compensation for administrative personnel.

For the fourth quarter we expect an increase in SG&A sequentially of approximately 10% to 15%, due primarily to expenses to be incurred in anticipation of an AF approval and an increase in variable compensation.

Our operating loss for the quarter was $1.2 million as compared with approximately $800,000 for the third quarter of 2010.

Adjusted EBITDA loss was approximately $65,000.

Our net loss per share was $0.07, consistent with the third quarter of 2010.

Now turning to cash and a few balance sheet items, in terms of cash from operations, year-to-date cash used in operations was approximately $860,000.

This represents a 45% improvement over the first nine months of 2010.

We ended the quarter with $15.2 million in cash, cash equivalents and investments, an increase of $2.6 million as compared to year end.

We had $6.8 million in debt outstanding under our credit facility and approximately $8 million of incremental borrowing capacity under the revolving portion of the facility.

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

Thank you, Julie.

The peer-reviewed literature suggests that preoperative AF increases the risk of morbidity and mortality.

We believe that being the first company to receive a recommendation from an FDA advisory panel for a surgical AF indication is a major milestone for cardiac surgery and AtriCure.

We are planning for a final FDA approval during the first quarter of 2012.

An AF approval will allow us to thoroughly train surgeons, which we believe will result in improved patient outcomes.

This anticipated approval will mark a new era of expansion and growth for AtriCure.

In conclusion, we remain confident in our people and the power of our strategic plan.

We will now open the call for your questions.

(Operator instructions) Vivian Cervantes.

I'd like to start off with the comment that you made that there was a 10% reduction in primary surgical procedures in the US.

Is this temporary?

And if so, when do you expect demand to kick back in?

Well, it's certainly hard to say whether or not this is temporary or just a current trend that we are seeing.

Our indications are that seasonality is typically challenged during the third quarter.

And when things like procedure volumes are also challenged, there can be sort of a double dip in terms of both seasonality and procedures.

So we're optimistic going forward that procedures will begin to trend more in a favorable direction.

Okay, that's helpful.

As then my follow-up, very nice momentum in Europe, and happy to note your commentary that you expect that to continue.

Can you do a bit of a compare/contrast on how your sales force traction has been in Europe versus the US, with the US not having an AF label?

Well, I think the biggest issue that we face in Europe is that we were just very late.

We actually didn't initiate a full effort in Europe or really start the effort until post-IPO, which was August of 2005.

So our European subsidiary was basically set up during the first quarter of 2006, and then we began to hire direct people.

So we started commercializing our products in 2003 and didn't really start a serious effort in Europe until 2006.

So in terms of comparing and contrasting, it's hard to do.

In terms of our direct markets, we have very high-quality people in Germany, which is a rapidly growing market and, as you know, the biggest market with 85 million people and represents a very high percentage of the overall cardiac surgical procedures performed in Europe.

We also have a very strong direct group in the Benelux, which is another very fruitful area for the Company, and we're considering taking other key markets direct over the next 12 to 24 months.

So overall, I think we're picking up market share in both the US, despite that procedures are down.

We believe that our open market share has increased during 2011, and we are certainly picking up market share, particularly in our direct markets, and the European countries.

Great, thank you.

If I may just sneak one quick question in, gross margin -- I know you had commented that it's probably going to drag a little bit.

When do you anticipate maybe some stability with some of the transition that's currently ongoing?

Probably the back end of 2012, Vivian.

Okay, thank you, I'll get back in queue.

Matt Dolan.

Congratulations on the panel recommendation.

First question is on that topic.

Assuming Q1 approval, I guess two parts.

One is, what's the level of investment you will make in the post-market study, the training and probably, I'm guessing, sales force adds?

And then against -- assuming approval in Q1, when do you expect the label to actually begin taking hold in terms of driving your top line?

Well, I think, first of all, in terms of the post-approval study, right now, FDA, we believe, is sort of in the -- changing the way that they look at these studies.

So, for example, we used to call them post-surveillance trials which were more observational in nature.

A post-approval study, the way that it's framed today, is actually power to demonstrate safety and efficacy.

So we are in the process of negotiating and collaborating with FDA in terms of what the final trial design is, and that will have a lot to do with what the relative costs are.

So I'd rather we put that on the back burner until we have a final post-approval study protocol before we begin to talk about cost.

In terms of the training piece, you asked two questions.

One is cost.

Well, there's a significant cost now in terms of flying salespeople around and trying to train physicians on the attributes of our products.

We cannot go out and train physicians, obviously, on how to apply our products to treat atrial fibrillation.

So there will be a significant increase in cost, but in terms of looking at this we also intend to leverage STS.

So, for example, satellite symposiums at STS, satellite symposiums at ATS and [S-NIX].

So all of the major surgical societies we tend to try to leverage satellite symposiums at the major societies as well as at smaller, more regional meetings.

Also, we have an institute of surgeon training that we've developed, and we plan to invite surgeons in groups to come here and actually get educated here as well.

So, really, the cost of the training program has to do more with moving physicians from place to place or sending some of our own clinical educators to those sites, which they will often be in anyway.

So I think we can -- it won't be insignificant, but I think the cost going forward is certainly manageable.

Okay.

And the second part of that question had to do with when you think you will start to see the benefit of the label in your top line.

And I guess what I'm asking is, anecdotally, what is your at least feedback from clinicians as to what this means and how quickly you could ramp because of that?

A little bit mixed in terms of the feedback -- so we have surgeons -- I believe I heard of a surgeon yesterday that, when he heard about the approval, they wanted to be with a more accurately labeled product, one that was more on label.

And this account seems to be shifting over to AtriCure just about on the original panel recommendation.

And then we have groups of other surgeons that don't fully understand either what the current products are labeled for or what an AF labeling means or what the certification to be an AtriCure-qualified operator means, knowing that the certification process is governed and [comprised] of the experts in surgical AF ablation treatment.

So I think, to answer your question, there will be some shift with the announcement of approval.

We think that will be relatively minor.

We think, once we begin to get out and talk about the approval and the training, which is not overbearing -- it's very comprehensive, but the curriculum is systematically put together.

We can do the training either on-site or the physicians can come to one of our locations for group training.

And I think, once these physicians and hospital administrators realize the advantages of using an on-label product, we're going to see a significant trend in terms of market share.

But also, maybe more importantly, as we talked about earlier, there's about 60,000 patients that are currently undergoing valve and bypass procedures that are not being treated.

And with our ability to basically educate and train surgeons that are less comfortable using these ablation technologies, we think there should be significant penetration into that population of untreated patients today.

If you could just shift maybe to AtriClip real quick, you have kind of flat-lined here on a quarterly basis.

Can you recalibrate us on your expectations for the Clip and any metrics you can provide around that commentary will be helpful.

Thanks.

We think that the AtriClip system is still a very significant growth catalyst for the Company.

We're in the third quarter; we're tied up with multiple launches of the Ice Box product.

I think this was a distraction.

We talked about procedure volumes in cardiac surgery.

It didn't help our cause in the third quarter and just the general seasonality issues.

So we continue to be very optimistic about the AtriClip platform, and we also think that entering into a stroke trial as a sole therapy approach to left atrial [dependent] exclusion for patients that are contraindicated for anticoagulation treatment will stimulate interest amongst the surgical community for our AtriClip system.

In addition, our post-approval study will include the AtriClip system.

So we continue to be optimistic.

It's still a relatively new product.

There may be some choppiness along the way, but over the long haul we are very optimistic about the ability for the AtriClip system to grow and expand in the US markets.

All right, thanks for the time.

Jason Mills, Canaccord.

Congrats on the panel again.

So first question -- I'm going to follow up Matt's question on AtriClip.

It's our understanding that that product is received very well when you are in the lab with the physician.

It's a new product, as you mentioned.

There is still a little bit of hand holding that the Company's reps must do.

I'm wondering, as you get the labeling, you have a robust training program in place for your ablation franchise.

You mentioned the halo effect.

Perhaps give us a bit more commentary on that because it seems like, as you are in more accounts more often, that perhaps that halo effect has some validity.

Perhaps provide a little bit of color on that and how we could see sequentially AtriClip trend post FDA approval of synergy.

I think that's an excellent point, Jason, and thank you for expanding on it.

I think you've pretty much said the story, which is that as we are educating physicians, we will we will be educating them on the advantages for the on-label use of the AtriClip system.

In fact, we just started training program at a major center for the AtriClip.

That training center had good turnout, and I think physicians as they begin to do more complete Maze procedures -- so in our ABLATE clinical trial, as you know, the Maze IV, which is a biatrial procedure, as we teach them the more complete Maze procedures, they will also want to take the most -- least burdensome approach to left atrial appendage exclusion, which is the AtriClip system.

So I think the fact that we are training surgeons to do more complete lesion sets -- they will want to reduce their time in terms of excising and sewing the appendage and also reduce the complications.

And we can also educate them on the benefits of the AtriClip simultaneously, since both the ablation and the clip will be on-label products.

That's helpful.

So, just as a follow-up to that, just as we think about quarterly progression, would it make sense that we are in the $1.5 million range now, that we are probably within that range to maybe up to a couple million, $1.5 million to $2 million a quarter for maybe the next couple of quarters, and then Q1 approval of ablation of synergy in combination with a midyear second-half launch of the stroke trial, we could see maybe the quarterly progression accelerate perhaps in the back half of the year?

Is that a good way to think about it?

I think that's a very reasonable expectation to believe that as we begin to put together the pieces of our institute of training and further develop our training programs, our education steering committee and all the elements that are required to meet our FDA mandate for training and education -- as we put that together in the first half of 2012, that we'll begin to reap the benefits both from the ablation side as well as from the clip side in the second half of 2012.

I think that's very well said.

And then you have got to ICD-9 code that started on the first of this past month, I suppose helps as well.

Okay, the second question for me is -- or sort of question area for me is on the ablation front.

It's sort of an interesting juxtaposition, it seems, whereas the penetration of surgical ablation patient candidates is still really low according to our estimates.

But we are seeing ablation growth still growing but at a modest pace.

I'm wondering if you could give us a sense for growth in ablation in this country and what we should expect that growth to do next year or the year after.

And then I'll sneak another one in for Julie.

With respect to your commentary on gross margins, do you expect us to go a little bit lower here before we start turning up?

Or, is this the range of the low water mark for your gross margins?

And I'll hop back in queue, thanks guys.

Jason, I can answer your first question.

There's clearly -- and this was mentioned by FDA during the advisory panel meeting -- there is clearly an increased awareness of atrial fibrillation and the associated morbidities and increased mortality with AF.

And I think, as you know, September, Congress passed September a resolution that September would become AF awareness month.

So it's well known that AF is a growing epidemic, that the incidence and prevalence of AF is expanding.

And I think that there's also an awareness that there have not been a complete set of treatments to address the problem.

So with the AF approval and the concomitant setting and the ability to not just educate and trade surgeons, but also educate referring physicians as well as patients, we think that this is the key to actually stimulating growth in the undertreated population of concomitant patients.

Along with that, we need to make sure that as we basically train the surgeons, that they get outcomes that are consistent with the ABLATE clinical trial.

In the past, because we haven't been able to train surgeons, a lot of the outcomes have been wide ranging in the concomitant area in surgical ablation, and only really a few of the highly experienced centers have been able to consistently get good safety and efficacy outcomes.

So with the training program, with the ability to educate and train patients and get surgeons doing biatrial complete lesion sets and increasing the efficacy and maintaining a good risk to benefit ratio as well as with the overall awareness of the problem and the scope of the problem, we would anticipate a very bright future for ablation at AtriCure.

Thank you.

On gross margin, Jason, I would like to think of this as the low water mark within, let's say 100 basis points and hopefully upside to that.

But cautiously optimistic about the upside in the short term.

Thom Gunderson, Piper Jaffray.

Dave, you said you're looking to register the products in Brazil.

That opens up a question of -- can you remind us or give us a view of what you think might be the low-hanging fruit.

And would you go after Russia, India and China as well?

We are already selling products in Russia, and we do very well in China.

Actually, when we look at our two major markets in Asia, it's Japan and China.

And we are growing in Japan, but we have significant share there.

If I look at the major cities -- Beijing, Shanghai and Guangzhou -- there is a significant opportunity for growth in China.

And we are looking and evaluating different sales and marketing scenarios to support our stock and distributor and partner in China.

In terms of Brazil, I think the issues of cost per procedure could be somewhat constraining.

There's certainly a large population of patients and a big interest in surgical ablation, so I think that could be a very opportunistic market for us in the second half of 2012.

And in terms of India, I don't really anticipate a lot of movement in India.

Based on transfer pricing and what the end-user pricing is in India, currently we are not really well configured to enter that market.

We're looking at basically some low-cost options of our products for some of the third world underdeveloped countries and markets as a potential way to enter these markets.

But right now, I think China very strong, Brazil, good opportunity.

But I think those are two main areas of new market penetration.

Got it, thanks.

And then if I switch to the FDA, you said you expected approval for the AF indication in Q1.

That fits with our common sense.

Have you had any post-panel conversations or any data that would help us put error margins around the first quarter, when we've got this hard-to-define FDA?

Only the typical sort of handshaking.

We certainly let FDA know, following the panel meeting, that we fully appreciate their interactive and responsive nature to our submission.

And it has been that way throughout the entire process in putting together the panel pack for the panel members and in reviewing all that information.

The FDA has just been very interactive and responsive.

And when we look at what FDA has to basically decide, we believe the two major issues are product labeling in terms of clinical data, how they will label the product.

And then secondly is a refinement of the post-approval study, which we have had a conversation about the post-approval study which was part of the panel pack that went out six weeks prior to panel.

We've had conversations about a post-approval study now for probably four or five months.

So we feel pretty comfortable that we are fairly close because the clinical data speaks for itself and the post-approval study has been an ongoing discussion.

And we just had a good sensation following the meeting that FDA would view a sooner than later approval as a positive thing for patients and the industry.

Got it, thanks.

And then just a quick clarification from Julie -- could you repeat what you said about SG&A for Q4, please?

I expect a sequential increase of 10% to 15%.

Thanks.

(Operator instructions) Charley Jones, Barrington Research.

Congratulations, thanks for taking my questions.

A couple questions on the Clip.

I was curious if you had started to detail that to competitive accounts.

And I'm curious also, is it being held back at all by product review boards?

And then finally on this topic, is it really just up to the surgeon 100%, or is there any reason that you need to go after referring physicians here to increase volumes?

Well, I think, Charley, good questions.

Certainly, the value analysis committees are dragging it out.

So typically, we like to think about Phase 1 selling as selling the physician on the superiority of your product and Phase 2 selling is selling the physician on helping you get the product on the shelf.

And the Phase 2 part of the selling with value analysis committees that are very cost-conscious and hospital administrators that are a little bit more challenged in today's macroeconomic environment is a longer process.

Overall, we think that the feedback from the Clip has been very positive.

We have made some modest what we call running changes, improvements to the performance of the product and we also have a product that we anticipate coming out by midyear 2012 that will be an enhancement to our current platform.

And as we've said earlier, we think that the initiation of a stroke trial within cardiac surgery should really raise the level of awareness.

And then I think somebody mentioned earlier the halo effect of training and education and being able to combine our ablation tools with the AtriClip system should also stimulate growth in this area.

So would you say there are physicians that aren't using the product pretty regularly, the way you thought that they would, that have given a good reason for it?

And is there a next-generation product that they are waiting for or data, or is it just experience that you think will be required to get them over the hump?

I think it's -- number one, it's peer-to-peer communication.

So as we train and educate surgeons and they talk about the benefits of the AtriClip system and as we train and educate surgeons to do biatrial Maze IV procedures, as we talked about earlier, I think that will also facilitate more Clip usage because that will reduce the overall time of the procedure.

And at the same time, we've had some running changes to the product as it exists today to help improve the performance of the product.

And then, with the next-generation platform coming out around mid-2012, that should also help.

So I'm not sure that I'm answering your question is directly as I'd like to, Charley, but we are still very optimistic about the AtriClip system.

We still believe that it has significant advantages.

We're still improving the platform.

It is our first fully implantable device.

And our sales organization, I think, remains confident about their ability to sell the Clip.

A couple questions on your competition -- could you remind us where they are in their surgical AF indication process?

And then you've talked about a little bit with Matt -- can you discuss hospitals' appetite for switching over into your products and -- from Medtronic and how the Clip plays into all this?

If I were to give you any information about -- any real information about where our competition stands in terms of also having an AF indication, it would be more hearsay than fact.

So I'd rather stay away from that.

It is our interpretation that we have a fairly significant lead in this area.

So it would be surprising to us if we didn't have a 6-to-12-month lead in terms of having a first mover advantage in the indication.

I'm looking here at clinical.gov website, and I see one trial completed for cardio ablate, but it's just for pulmonary vein isolation, which I don't think has any chance of showing the efficacy that you need.

And the others say active and not recruiting.

So we've heard that they're really not in a trial right now that's going to be able to get them to that approval.

Can you lead us to someplace we can look to be able to confirm that?

I have no additional information than what you cited, Charley.

I think, again, we feel like we have a significant first mover advantage but we don't have full visibility to our competition.

So we will focus on executing our plan and getting ahead of the power curve as much as possible.

Well, maybe you can leave it at this, then.

So when you talk to this hospital that switched over to your products as a result of the panel's recommendation, what are the advantages for those hospitals to use your products on-label opposed to using products that aren't on-label and that appear to not be in a trial at this moment in time?

Well, I think if you put yourself in a physician's position, if you have the choice of using -- first of all, we are the market leader in the surgical treatment of AF in the US.

We believe we have superior technologies and products and we have a wider range of products and technologies.

So if you are a physician and you want to work with a single company and that company happens to have a product that's labeled for atrial fibrillation and you are using it to treat atrial fibrillation, and other companies have labels for cardiac tissue ablation, we think that there would be a preference in terms of using, from a physician's perspective, using a more accurately labeled product.

And then when we look at hospital administrators, we also think that there is risk committees and risk analysis and hospital committee levels that would prefer to use more accurately labeled product.

And once again, the hospital also enjoys the benefit of working with the market leader and working with the company with the widest range of products and technologies in this space, and the company is offering training.

So if you're a hospital administrator and there's an FDA mandate to train surgeons, wouldn't you rather have your surgeons be trained and certified [atric] operators or trained in the surgical treatment of atrial fibrillation, which is the only formalized concomitant surgical AF program for training and education?

And then lastly, I think hospitals want to promote the fact that they have the widest variety and the most comprehensive treatments for this disease, atrial fibrillation, which has become a national epidemic and certainly has a lot of national awareness.

So I think those are some of the reasons why we believe we have a competitive advantage going forward.

Could you remind us of Medtronic's market share in the US?

Our best estimate of Medtronic's overall market share in the US is about 40%.

I'll jump back in queue, thanks.

Larry Haimovitch, HMTC.

Can you make some comments on the standalone market?

I don't think I heard anything in the prepared remarks.

That was a very promising area for you.

It seems to have slowed down.

You talked about it on the last conference call regarding its impact of deep AF.

Any updated comments you can share with us?

Well, first of all, I think we are very optimistic about the sole therapy treatment of atrial fibrillation and actually believe that the concomitant surgical AF indication marks a significant event for surgical ablation and allows us to do a better job in treating patients that undergo surgical procedures and have preoperative AF.

If we do a better job and expand that market, we think that bodes very well for a sole therapy market.

Then there's more and more patients being treated with catheter ablation.

And, obviously, many of those patients need second and third procedures, which we think, if we can get more exposure for a surgical treatment of atrial fibrillation with an indication, that people will take a second look at sole therapy procedures.

And as we've talked about on previous calls, we've lessened our training in 2010 in this minimally invasive hybrid area and constrained it to only FDA-regulated studies.

So we are taking a more long-term view on the minimally invasive or sole therapy hybrid approach and want to make sure that we are compliant and work with FDA on getting the proper approvals in place.

We believe that, once this DEEP AF trial -- we anticipate it getting into up a pivotal phase sometime in late 2012 and then going from six to approximately 35 sites that are investigating this procedure will also create exposure and potentially result in physician adoption of these types of procedures.

I think, just to add on to that, Larry, the prepared comments, I think, were consistent with our second quarter commentary.

From a revenue perspective, the business is performing in line with what we expected it to do.

And we expect those trends to be in place really until the second half of 2012, when we anticipate moving to the pivotal trial.

We have enrolled 24 of the 30 patients in the DEEP trial, and as Dave said, still very optimistic about that large market opportunity.

Were sold-therapy procedures down Q3 over Q3 last year, Julie?

Yes, they were.

They were -- any order of magnitude -- 5%, 10%, 20%?

We really don't have that order of magnitude to provide to you.

I would say they were relatively consistent with the second quarter of -- sequentially, they were relatively consistent with what we have been seeing.

And ASPs still in the 10, 11, 12% -- 12 million -- 12,000 range, rather?

ASP has continued.

Okay, thanks.

Charley Jones, Barrington Research.

How many centers are you going to have included in your post-approval study that were traditionally Medtronic accounts?

Have you already seeing that benefit where they have started to trial your devices, or do you expect to see that more as the trial begins or as we move in -- the post-approval study begins or as we move into 2012?

I can't say how many specific Medtronic users we will have in this study.

We anticipate being approved for 50 sites.

And based on our current thinking is that we would have 10 what we called new users so that 10 of the sites would be new users.

And part of the reason for that is so that we can measure the effectiveness of our training program and see how the 10 new users do in comparison to the patients that are enrolled in the ABLATE clinical trial.

And on the DEEP AF, can you remind us what types of results you are seeing there from single centers?

And if we use the more strict guidelines from HRS of anti-arrhythmic 3 and 6 months, what do those results look like for a single center?

It's really too early within the deep AF trial.

We haven't adjudicated all the results in that trial yet.

But our general sense of things is that the results are trending very favorably in terms of both safety as well as efficacy.

We would anticipate that it would be somewhat consistent with some of the peer-reviewed literature in physician reports, which range from 80% to 85%, typically speaking, in this population of patients with persistent and long-standing persistent AF patients that may have also failed a catheter ablation.

So the DEEP AF is persistent, long-standing persistent, and also patients can be enrolled in the trial if they have persistent -- or long-standing persistent with or without atrial catheter ablation.

So I think the past you've talked about this 80% to 90% range.

Is it fair to haircut that number for the anti-arrhythmic drugs or is that just the way we've been looking at it now?

And so when you go 80% to 90%, you are actually thinking of it from the perspective of getting them off anti-arrhythmics?

In the physician reports, which are not prospective randomized controlled trials and are typically not as rigorous in terms of their reports, but they are in that 80%-plus range, I think one thing that you can take away is that in the sickest patients -- so take a look at our ablate and ablate AF data -- these are obviously patients that 25% of them had double valves, for example.

And 45% of the patients had two primary reasons for their cardiac surgical correction procedure -- for example, CABG and a valve procedure.

And if you look at those 40% of two primary indications and 25% of double valves and a median 61 months of pre-existing atrial fibrillation preoperatively, and then a median age 72 years old and a median left atrial size of 6 centimeters, than the 6-month results on non-paroxysmal patients when you combine ablate and ablate AF was 75% off anti-arrhythmic drugs.

Well, we anticipate performing basically the same lesion sets through a thoracoscopic approach combined with thoracoscopic approaches and catheter optimization in our hybrid procedure.

So when we look at that history, that gives us optimism that the results from the DEEP AF trial should be somewhat in line with the independent physician reports.

Last one here -- could you discuss the importance of including paroxysmal patients in the post-approval study and your appetite for that?

And, sorry, I missed your response.

Have you started detailing the Clip to competitive accounts yet?

In certain situations we have started to detail the Clip to certain targeted competitive accounts.

And in terms of the post-approval study, we are not necessarily in a position to talk much about including paroxysmal patients.

It was something that came up in panel, but typically at post-approval study -- and again, some of the landscape is changing here from a regulatory perspective.

But typically, post-approval studies actually include the indication that was approved.

So right now, persistent and long-standing persistent AF is what's in the proposed indication.

So a typical post-surveillance trial in previous days would not really allow you to include an extended indication in your post-surveillance trial.

Again, the landscape is changing.

We are now conducting these post-approval studies that are powered to demonstrate safety and efficacy.

So we will have to see as we get into further discussion with FDA about whether or not -- what their views are and what the pay/cost issues are of including a paroxysmal population.

Thanks again.

Thank you.

Operator, we'll take one more question, please.

Jose Haresco, JMP Securities.

Congratulations again on that panel vote.

Just a quick question here -- as you start to look forward to 2012 and approval of the device, or expansion of the device, rather, could you walk us through your plans for your infrastructure in terms of sales, marketing, training, in order to be able to train all these centers without distracting from the regular pace of business?

Should we build that into our models as we look forward?

I think there is a place in terms of building a surgeon training model into our cost structure.

I think, if you look at the program, we are looking at a VP of Clinical Education.

We're trying to fill that position now.

We've already hired Dr.

Sidney Gaynor, who is a well-known expert in the surgical treatments of AF and was the first author of some of the early Ralph Damiano Maze IV procedures coming out of Washington University.

We have 3 or 4 other positions that we want to fill to sort of initiate this surgeon institute of training.

And so I think there will be some additional cost.

Again, we're going to try to leverage the major meetings as well as our institute, as well as our VIP visits, as well as the fact that Sidney and some other clinical educators will be able to basically perform training on-site.

So we haven't gotten to a range and a time point where we've completely vetted the increased cost structure.

But we are in the process of doing that now.

Okay, great, thank you very much.

Ladies and gentlemen, I would like to turn the call back over to Mr.

Drachman for closing remarks.

Thank you very much, again, for your support, and we look forward to our upcoming fourth-quarter earnings call.

Thank you very much.

Ladies and gentlemen, that concludes today's conference.

We thank you for your participation.

You may now disconnect.

Have a great day.