AtriCure Inc (ATRC) 2011 Q4 法說會逐字稿

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  • Operator

  • Good afternoon and welcome to the AtriCure fourth quarter and full year 2011 earnings conference call.

  • My name is Deanna, and I will be the coordinator for today's call.

  • At this time, all participants are in listen-only mode.

  • We will be facilitating a question-and-answer session towards the end of today's call.

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

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

  • David Drachman, President and Chief Executive Officer of AtriCure.

  • Mr.

  • Drachman, please proceed.

  • - President & CEO

  • Thank you, Deanna.

  • Good morning and welcome to our fourth 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.

  • - CFO, VP Finance & Admininistration

  • Thank you, Dave, and good afternoon, everyone.

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

  • If you have not received a copy please call Sarah Luken at 513-304-8931, 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 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 statement, whether as a result of new information, future events, or otherwise.

  • Additionally, we may refer to non-GAAP financial metrics.

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

  • I would like to remind everyone that the Food and Drug Administration, or FDA, has not approved certain AtriCure products for the treatment of atrial fibrillation, or AF, or for stroke reduction.

  • The Company and others acting on its behalf may not promote these non-approved products or trained doctors for the surgical treatment of AF or stroke reduction unless the product is so indicated.

  • 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 product for the current cleared uses.

  • AtriCure educates and trains doctors in the proper use of its products and related technologies, including for the treatment of atrial fibrillation in accordance with the product's specific indication.

  • - President & CEO

  • The AtriCure Synergy Ablation System is the first and only surgical ablation system FDA approved for the treatment of AF, and the only ablation technology approved for persistent and longstanding persistent atrial fibrillation.

  • We believe this system's recent FDA approval for the treatment of AF during open concomitant surgical procedures is a major milestone for cardiac surgery and provides AtriCure with new opportunities for expansion and growth.

  • Our highest strategic priority is accelerating US growth.

  • We plan to leverage our AF approval by providing surgeons with comprehensive training.

  • We also believe that a well executed concomitant AF training and market development plan is the foundation for an advanced, minimally invasive thoracoscopic ablation approach, which represents a major growth opportunity.

  • Our research suggests that in the US 85,000 patients per year undergo coronary bypass and or valve procedures with a diagnosis of pre-operative AF.

  • Of these 85,000 patients, approximately 25% are currently receiving ablation treatment.

  • Our growth strategy is designed to improve patient outcomes, gain market share, and increase penetration above the 25% level through comprehensive training and carefully, well selected patients.

  • Going forward, we anticipate stabilization of the macroeconomic pressures impacting hospitals and procedure volumes.

  • We believe in our technology and our clinical leadership and powerful market development drivers.

  • As a result, we are planning for accelerated US growth throughout the year and strong growth from the international markets during 2012.

  • In preparation of our expansion and growth plans, we enhanced our executive leadership team with the addition of Andrew Lux as our Chief Operating Officer.

  • Andrew has held positions with Medtronic's cardiac surgery division, Johnson & Johnson, and General Electric.

  • He has a proven track record of implementing world-class manufacturing systems and developing innovative technologies, which have been widely adopted in the marketplace.

  • Andrew has responsibility for worldwide operations, as well as product research and development.

  • Turning to our training program, as a condition of FDA approval, we agreed to train and certify existing Synergy System users within 18 months and to train new users prior to their purchase of the system.

  • Our professional education team has plans to make training accessible and convenient for all surgeons.

  • Our first training event was held in Ft.

  • Lauderdale in conjunction with the recent STS meeting, and attendance exceeded capacity with approximately 100 participating surgeons.

  • In order to leverage our AF approval and training plans to accelerate growth, we recently realigned our US sales organization into nine regional rhythm management teams.

  • The aim of our sales realignment is to support our training initiatives and monitor the effectiveness of our training investments.

  • We believe our sales realignment will facilitate an increase in the use of our ablation products and the AtriClip system through the halo effect created by our surgeon training programs and approval.

  • Moreover, our sales alignment promotes effective partnering strategies with physicians and administrators in order to raise awareness, improve patient outcomes, and increase penetration in appropriately well selected patients.

  • Moving on to fourth quarter results, consolidated fourth quarter revenue of $16.8 million grew 2% compared to the same period a year ago.

  • US revenue of $12.4 million was down 5% compared to prior year.

  • Fourth quarter US results were impacted by a decrease in minimally invasive product sales.

  • This decrease in minimally invasive sales was primarily a result of strong capital equipment performance from our ORLab in the prior year.

  • Furthermore, our research suggests a high single-digit decline in open heart procedures during the fourth quarter of 2011.

  • On a sequential basis, minimally invasive product sales increased, and US revenue was up 5%.

  • International revenue for the fourth quarter of 2011 was a record $4.4 million, representing 32% constant currency growth.

  • We anticipate continued high growth in Europe as the majority of our business and growth opportunity is in the northern countries which are less affected by the macroeconomics and austerity measures in southern Europe.

  • Importantly, Europe benefits from our ability to train physicians on the use of our products for minimally invasive thoracoscopic ablation procedures.

  • Sales of products used in minimally invasive procedures has continued to demonstrate high growth and currently accounts for approximately 40% of sales from Europe.

  • Similar to other emerging medical device platforms, we believe that our minimally invasive performance in Europe provides insight and affirmation for our investments in minimally invasive FDA clinical trials.

  • Additionally, we anticipate continued growth from Asia and have plans for geographic expansion.

  • As a result, we anticipate strong growth from our international markets.

  • In terms of gross margin trends, pricing from our disposable products in the US and our international markets has remained generally consistent, which we attribute to premium products.

  • During the second quarter of 2011, we implemented a quality system improvement plan that included a revalidation of our manufacturing processes, which resulted in short-term inefficiencies and increased scrap rates.

  • This plan was in response to the receipt of a Form 483 in February of 2011, and to prepare for the requirements associated with PMA manufactured products.

  • Our 483 is listed on the FDA website as voluntary action indicated, and we received an Establishment Inspection Report in October of 2011.

  • We are highly focused on implementing quality in manufacturing systems that are increasing efficiencies and reducing scrap rates.

  • As a result, we anticipate significant gross margin improvement throughout the year.

  • Turning to our investments in clinical science and FDA approvals, as a condition of our approval, we agreed to conduct a post-approval study.

  • The primary post-approval study requirements were outlined and agreed upon prior to the final FDA approval and the recent submission of our clinical plan.

  • Our post-approval study is designed to monitor the safety and efficacy of the Synergy System to perform the Maze IV procedure during commercial use in carefully selected, well trained sites.

  • The post-approval study will enroll and treat 350 patients at a maximum of 50 sites and is designed with safety and efficacy endpoints.

  • Notably, following completion of our ABLATE pivotal clinical trial, we initiated an FDA approved continued access registry ABLATE AF.

  • We completed enrollment in our 50 patient registry and received an extension to enroll an additional 25 patients.

  • To date, we have 53 enrolled patients in the ABLATE AF registry, and we are continuing to enroll while the post-approval study is being reviewed by FDA.

  • Importantly, the FDA has agreed that all patients enrolled in the ABLATE AF registry will be transferred to the post-approval database and counted as post-approval study patients.

  • Therefore, we will be initiating enrollment in the post-approval study with patients from ABLATE AF, leaving less than 300 patients to enroll.

  • The primary efficacy endpoint will be the proportion of patients AF-free as defined in a 2007 HRS consensus statement and three-year follow-up based on 48-hour monitoring.

  • The primary safety endpoint is the proportion of patients with a serious device or ablation procedure related adverse event within 30 days post procedure.

  • Now, moving to the DEEP AF clinical trial, based on a series of meetings with our investigators and FDA, we submitted our staged DEEP AF feasibility protocol to FDA.

  • The patient population for stage DEEP AF is the same as our original protocol.

  • The aim of this study is to assess the safety and technical feasibility of treating patients that are refractory to anti-rhythmic drugs and present with persistent or longstanding persistent AF with or without a previous [held catheter] ablation.

  • This study is expected to enroll a maximum of 30 patients at up to 6 sites.

  • This investigational procedure combines our platform of product designed for minimally invasive thoracoscopic ablation with catheter mapping and ablation technologies in order to replicate a complete Maze procedure.

  • Following the thoracoscopic ablation, a separate staged EP optimization procedure is performed during the same hospitalization.

  • The staged approach alleviates the scheduling challenges of a combined single-session procedure and places the surgeon and EP in the most familiar environment.

  • Developing this protocol, we had a successful meeting with FDA and accomplished our primary aims.

  • First, FDA agreed on a primary safety endpoint of pre-specified, serious adverse events through 30 days.

  • This differs from the catch-all approach that was required for the first same-session hybrid trial.

  • In designing the staged DEEP AF approach, FDA helped develop pre-specified, serious adverse events that are most consistent in terms of the level of severity for determining the primary endpoint.

  • Importantly, FDA agreed to review safety data 30 days after the patient's ablation procedure.

  • We plan to initiate enrollment in the staged DEEP AF feasibility trial during the second half of 2012.

  • Now, turning to our stroke trial, on December 21, 2011, we received full FDA approval to conduct an IDE feasibility study for the AtriClip Left Atrial Appendage Exclusion system to assess stroke prophylaxis when delivered through a sole-therapy procedure using a thoracoscopic approach.

  • The aim of this project is to start the process of demonstrating that the AtriClip system reduces the risk of stroke and systemic embolism in patients with nonvalvular atrial fibrillation for whom long-term, oral anti-coagulation therapy is contraindicated.

  • This safety and feasibility trial will enroll up to 30 patients at 6 sites.

  • Notably, the IDE is approved with our current AtriClip system.

  • However, we are developing a more advanced AtriClip platform which is designed for use in open and minimally invasive thoracoscopic procedures.

  • This advanced AtriClip design has received positive feedback from our stroke clinical investigators.

  • Therefore, our strategy is to supplement the approved IDE with a new generation AtriClip system and initiate enrollment in the trial during the second half of 2012.

  • In addition, because the new AtriClip system is designed for both open and minimally invasive thoracoscopic procedures, we plan to submit a 510(k) at the same time we submit our IDE supplement in support of our stroke feasibility trial.

  • The aim of our 510(k) submission is to receive FDA clearance for open concomitant procedures, which is consistent with the labeling and support of our current AtriClip system.

  • Julie will now provide a detailed review of our fourth quarter financials.

  • - CFO, VP Finance & Admininistration

  • I'll begin by providing high-level financial information related to 2011 and will then focus my comments on fourth quarter results.

  • Our 2011 revenue was $64.4 million, representing growth of 9%.

  • Our US business grew 3% and our international business was up 35% on a GAAP basis and 31% on a constant currency basis.

  • Our gross margin was for 2011 was 73%, as compared to 76.9% for 2010.

  • Gross margin reduction was primarily associated with an increase in manufacturing overhead costs, variances and scrap.

  • As we enter 2012, we expect these increased manufacturing related costs and inefficiencies to reduce resulting in improved gross margins over time.

  • Gross margin also reflects an increased mix of international sales.

  • Our operating loss was $4.7 million and our net loss per share was $0.35.

  • Now transitioning to our fourth quarter financial performance, for the fourth quarter of 2011, revenue increased 2% to $16.8 million.

  • Revenue from product sales in the US was $12.4 million.

  • Revenue from ablation related product sales in the US decreased by approximately $800,000, driven primarily by a decrease of approximately $600,000 in sales of products used in minimally invasive procedures.

  • Note that fourth quarter 2010 minimally invasive product sales benefited from an unusually high number of ORLab sales.

  • Sequentially, revenue from minimally invasive product sales increased 9%.

  • US sales of the AtriClip system during the quarter were $1.4 million, as compared to $1.3 million for the fourth quarter of 2010.

  • International revenue for the fourth quarter of 2011 grew 32% on both a GAAP and constant currency basis to a record $4.4 million compared to fourth quarter 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 fourth quarter of 2011 was 70%, as compared with 75.1% for the fourth quarter of 2010.

  • The change in gross margin was primarily the result of increased manufacturing overhead, inefficiency and scrap related expenses which accounted for substantially all of the gross margin fluctuation.

  • During the quarter we experienced an increase in our manufacturing scrap rate and inefficiency variances.

  • Under the direction of Andrew Lux, our new COO, we will, over the upcoming months, be highly focused on establishing enhanced operational processes to drive to increased efficiencies and reduce scrap rate.

  • We anticipate continued pressure on our gross margins over the upcoming quarters due to incremental product and manufacturing costs.

  • However, we expect gross margins to incrementally improve throughout 2012.

  • Next, an update on operating expenses.

  • Operating expenses increased 7.1%, or approximately $900,000 from $12.5 million for the fourth quarter 2010 to $13.4 million for the fourth quarter of 2011.

  • Research and development expenses, which include clinical activities, decreased by approximately $550,000 from $3.5 million for the fourth quarter 2010 to $3 million for the fourth quarter of 2011.

  • Included in R&D during the quarter was a $300,000 non-recurring gain on the sale of a patent.

  • Further, the decrease in R&D expenses was primarily due to reduction in product development expenses associated with the reduction in new product expenditures as compared to last year's fourth quarter.

  • These reductions were partially offset by increased cost in support of our clinical trials and regulatory activities, particularly expenses associated with our panel meeting and expenses to support our AF approval.

  • SG&A increased $1.4 million, driven primarily by an increase in headcount and travel expenses associated with the expansion of our worldwide sales and marketing team of approximately $600,000, and increased training, education, and marketing expenses of approximately $500,000.

  • Our operating loss for the quarter was $1.7 million, as compared with approximately $200,000 for the fourth quarter of 2010.

  • Adjusted EBITDA loss was approximately $600,000.

  • Our net loss per share was $0.13.

  • As we look forward to 2012 from an expense perspective, we would expect net incremental expense for R&D of approximately $1.5 million to $2 million.

  • The increase is primarily due to incremental expenses associated with the open heart AF post-approval study and expenses with the development of a next-generation RF generator.

  • Additionally, we expect costs in support of the education training program during 2012 to be approximately $1.5 million.

  • However, about half of these expenses relate to a realignment of internal resources.

  • As a result, the net year-over-year increment is expected to be approximately half of the $1.5 million, or roughly $750,000.

  • Now turning to a few balance sheet items.

  • We ended the year with $14.2 million in cash, cash equivalents and investments.

  • Additionally, we had approximately $8 million of borrowing capacity under the unused revolving portion of our credit facility.

  • During February we amended our credit facility providing for a new five year term loan of $10 million, which resulted in incremental cash of approximately $3.8 million and expanded the overall facility to a $20 million facility.

  • We believe our current cash position will support the execution of our strategic plan.

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

  • - President & CEO

  • Thank you, Julie.

  • In terms of outlook, we entered 2012 with a strong balance sheet, well positioned to accelerate US growth and profitability trends throughout the year.

  • Additionally, we are poised for strong growth from our international markets, gross margin expansion, and to advance our minimally invasive thoracoscopic ablation and stroke initiatives.

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

  • We will now open the call for your questions.

  • Operator

  • (Operator Instructions).

  • Thom Gunderson, Piper Jaffray.

  • - Analyst

  • I was hoping we could get a little bit more color on next steps now that we finally have the FDA approval in hand, and that would be, I believe your first large training, maybe your first training post-approval, was down in Ft.

  • Lauderdale.

  • Dave, can you give us a little color on how that went, maybe the proportion of existing and new doctors, and the overall tone and what you gained coming out of that?

  • - President & CEO

  • In terms of the training and education initiative, first of all we look at this training and education initiative first to improve patient outcomes, which we believe will increase adoption and penetration into the market.

  • In terms of the 100 physicians that came, about two-thirds of the physicians were existing users.

  • Most importantly, I think what we've learned was that there's a significant interest in the development of this marketplace, but there's been a lack of training.

  • Our product has been available for about 10 years, and yet we had overcapacity and 100 physicians, 71 of which were current users, coming to learn more about how to treat atrial fibrillation, both in the pre-operative, intra operative, and postoperative periods.

  • The second thing that we learned is that the surgeons that come to training, and training the surgeon is not really the main initiative.

  • The main initiative is to train the surgeons and make them confident in their ability to treat complex structural heart disease and integrate the ablation procedure into those complex structural heart disease corrective operations, and then to increase the utilization.

  • So, just by training physicians and certifying them, that's phase 1.

  • What we need to do is go deeper than that.

  • We need to stay close to these physicians and monitor the effectiveness of the training and in some cases, provide more training and more follow-up to make sure that we take advantage of this access of opportunity that we have to the community of cardiac surgeons to improve outcomes through training, but also to increase utilization and adoption, and to create a halo effect for not just the approved product but the ancillary products that support it, as well as the AtriClip system.

  • - Analyst

  • An then, the follow up would be with regards to guidelines, whether they're STS guidelines or otherwise, I'm getting a sense that these are improving for AtriCure.

  • Dave, if you could, what's the current status and where do you expect these to go in 2012?

  • - President & CEO

  • Well, the current status is basically the HRS guidelines is recommending treatment for patients that are undergoing corrective surgical procedures that have pre-operative AF that are symptomatic or non-symptomatic patients where there's not a significant risk of adding the ablation procedure.

  • The FDS also recommends the use of ablation, and the society ISMICS, which is the minimally invasive society for cardiac surgery, also has evidence and is recommending treatment of pre-operative atrial fibrillation with surgical techniques.

  • I think the evidence is building.

  • Certainly the major societies are supporting the treatment of pre-operative atrial fibrillation.

  • I think where we see this going is that the patients that undergo corrective surgical procedures with pre-operative atrial fibrillation, most of these patients are refractory to all other types of treatments.

  • While their chest is open, while they are in the operating room, we can make scars, reproducible scars, which are required to create the maximum treatment for this disease, and we can get high cure rates.

  • I think the trend is, while the patients are in the OR, give the surgeons the skills to understand how to integrate the ablation procedure into the open surgical corrective operation.

  • Operator

  • Matt Dolan, ROTH Capital.

  • - Analyst

  • First question is following up on the first comments around the label, Dave.

  • Obviously, you have some heavy lifting ahead of you in terms of training and certification and the post approval study.

  • Maybe you could just give us -- you did say you expect sales to begin to accelerate again.

  • Maybe help us with how we should think about the timing of the impact of all this once you get your ducks in a row as it relates to training and the post approval studies.

  • Secondly, competitively what companies should go after competitive share with the label in hand?

  • - President & CEO

  • Certainly we would anticipate that the growth would be stronger in the second half of the year as we get further on down the road.

  • Not just, again, in the training and education and certification processes, what we call phase 1.

  • Phase 2 is implementing the strategy for increasing utilization based on the training and education program.

  • There's, again two phases.

  • We train and certify physicians, and while they're being trained and certified, and as a prerequisite to training and certification, we're prioritizing surgeons in terms of their ability to increase utilization, and that's a strategic approach that requires follow-up work after the training and certification process.

  • We do think there will be a build up of momentum throughout the year.

  • We anticipate US growth throughout the year, but accelerated growth and stronger growth in the second half of the year.

  • In terms of competition, we believe that Medtronic, as the number two domestic competitor, we believe that Medtronic is the target in terms of bipolar ablation technology, and that most of our share gains would likely come from Medtronic bipolar users.

  • - Analyst

  • Maybe you could just touch on the Clip.

  • It looks like it's plateaued here at the about $1.4 million level on the last several quarters.

  • Is that something with reorders that you think are coming in slow?

  • Are you not seeing as many new accounts as you may have thought previously?

  • - President & CEO

  • We think the Clip is still very strong, and we're encouraged by the platform.

  • As you point out, the trends have somewhat flattened out.

  • We think the biggest opportunity to accelerate growth on the Clip is through the training program.

  • During our training programs, we demonstrate our ancillary products which are used with our Synergy Ablation System, such as Cryo and our Bipolar Pen.

  • We also demonstrate the AtriClip.

  • We think the AtriClip system should continue to increase.

  • As we increase our open ablation market the AtriClip system will increase along with that.

  • In addition, we mentioned the launch of a [Boa] 2 technology, which is a more highly featured product designed for minimally invasive and open use.

  • That product should be released into the marketplace in the US in the third quarter of this year, and will provide another option and another means of going back to physicians with another platform technology for left atrial appendage exclusion.

  • We also think that the stroke trial, by initiating a stroke trial, that this is going to gain a buzz and momentum within cardiac surgery that will drive people toward Clip and Clip-like technologies.

  • - Analyst

  • If I could sneak one more in for Julie on the gross margin, can you quantify what the manufacturing inefficiencies are?

  • I know you're going to build through the year, but what is the optimized number based on what you did Q4?

  • - CFO, VP Finance & Admininistration

  • I think ideally, essentially all of our gross margin softening was driven by the inefficiencies.

  • I would stick with our historical range of 74 to 77.

  • Certainly if international growth out paces US, then that would be impacted by that on the lower end.

  • I would expect, hopefully by the end of the year, we're back to those types of trends.

  • Operator

  • Jason Mills, Canaccord.

  • - Analyst

  • Dave, I want to go back to your marketing strategy for Maze IV here in the US, and specifically, can you give us more color on specific events that you have planned in the first half of the year, how that might impact your results as the year moves on?

  • You mentioned a focus on increased utilization.

  • Could you also talk about your plans for getting new hospitals on board throughout the year?

  • - President & CEO

  • For example, our strategy for training and education is not necessarily to do what we did at STS, which was to try to train 100 surgeons at the same time, but for example, we have a major university hospital.

  • We had the EP is going to present the ABLATE and ABLATE AF clinical results to the cardiac surgeons.

  • At the same time, we have a world leading cardiac surgeon coming in to do the certification process with all the surgeons in the room at the same time.

  • And during that process, we're going to have a vetting discussion with this group of cardiac surgeons, in terms of what their aims are for the program for surgical AF ablation.

  • Rather than just training and certifying people in large numbers, our goal is actually to do more customized approaches where we go out to centers, major centers, meet with all the physicians, maybe capitalize on one of the surgeons there that may be a more experienced Maze surgeon, but bring in our educators, go through the certification program.

  • Then talk to them about what their goals and aims are for surgical AF ablation in the pre-operative setting, and maybe what their longer term goals are for sole therapy and hybrid-like ablations.

  • At the end of those meetings, what we would like to develop is a best practices approach to pre-operative atrial fibrillation.

  • If I go to Dr.

  • A and I have a mitral valve and a CABG that needs to be corrected, Dr.

  • A does the ablation, and Dr.

  • B does the same ablation.

  • We believe that standardization in terms of best practices with individual groups and individual physicians is a better approach to capitalize on the training and education program than is trying to certify and train large numbers of surgeons at the same time.

  • I think that was phase 1 of your question.

  • - Analyst

  • It is.

  • If I were to follow up on that, I'd ask, so you mentioned 25% penetration into the target number of procedures done annually the United States.

  • If you take the centers that you will be targeting through this customized approach, maybe talk about what your penetration is within those accounts, and where you think it could go over the next, say, two years.

  • - President & CEO

  • It's interesting that you mention two years.

  • If you just take the 85,000 patients with pre-operative AF, and if we're at 25%, let's say the math is 21,500 procedures and we increase that by 500 basis points, or 5%, we would be at 25,500 procedures, which would be an incremental increase, over a two year period of time, of 4,000 procedures with an average selling price of $3,000 per procedure.

  • You can see, as you incrementally increase penetration, you don't necessarily need large percentage increases to drive significant revenue growth.

  • That's why we're focused on quality, not quantity.

  • That's why we're focused on aligning our sales organization around current users where we think there's more opportunity to take people from 30% utilization to 60% utilization, and as well as targeting high users of competitive technology, where they're experienced Maze surgeons and where they understand the advantages of using on-label AtriCure product.

  • - Analyst

  • Assuming you hold share, which I presume you expect to grow it, but assuming you're holding it, based on that math, it would seem like you expect or look to get somewhere in the range of 10% compound growth each year over the next two years, with share gains something north of that in terms of your US revenue base.

  • - President & CEO

  • I terms of a general discussion, I think you're looking at the opportunity accurately.

  • - Analyst

  • Outside the US, you mentioned geographic expansion into China, and outside of southern Europe expecting to continue to do well.

  • This year you had a phenomenal year, up 35% off of a relatively easy comp in 2010, up 9%.

  • In 2009 you grew fairly well off an easy comp, as well.

  • With a difficult comp here this year, and a strong performance in '11 outside the US, can you give us some sort of quantifiable range we should be in, in terms of what you expect your International business to grow in 2012?

  • - President & CEO

  • I think, Jason, the simple answer to that would be, we would anticipate strong double-digit growth.

  • Operator

  • (Operator Instructions).

  • Jose Haresco, JMP Securities.

  • - Analyst

  • On the sales force you mentioned that you had restructured it into nine territories.

  • One, will you be adding to the headcount that you had, and if you're minus what we ended '11 at and if you are adding to that?

  • Two, in addition to splitting them up geographically, are there changes in the way they're working within those geographies because there's such a focus on training now and following up on the training?

  • - President & CEO

  • When we begin to prepare for the AF approval, we thought to ourselves, and we ran some panels and discussed with physicians how they would view being asked to go to training after they were using our products for some period of extended time, and we had a lot of mixed feedback.

  • What we did was, we aligned our sales organization into nine regional rhythm management teams.

  • Each rhythm management team has a leader.

  • That leader is one of our best tenured AtriCure sales representatives.

  • The concept is that the sales representatives have support on a regional basis with one of the top sales professionals in our organization that talk to the surgeons at the different hospitals and plan for training, and communicate the benefits of training to physicians and administrators in a more powerful way.

  • We believe that some of our sales reps that are not quite as experienced might be moved out of the way, so we want to make sure that our top people were in front of our physicians, especially early on in the process, because as other sub specialties, as you know, cardiac surgery is a small network.

  • Once we begin to develop momentum and the community of surgeons understands the advantages of basically standardizing approaches and best practices, and the opportunity for AF and the opportunity to label for cardiac surgery to develop an AF market, we think that the physicians are going to come along and really comply with the program, and actually be enthusiastic about going for certification and looking to work with their partners, and their groups, and their hospital administrators on what the best approach to treating pre-operative atrial fibrillation is as a group or a hospital system.

  • - Analyst

  • Turning to the concept of training and emerging best practices out of any group that you're working with for a second, can you help us understand a little more about what that time line looks like?

  • Let's say you are holding a training session on, call it January 1, best practices emerge out of that meeting.

  • What happens after that?

  • A lot of times we start to see other committees have to have get involved, particularly if you're talking about bringing more technology, and that might have a price tag attached to it.

  • Does this turn into a 60-day selling process for you guys at this point, or is it a 90-day process?

  • Because it seems like it still requires a lot of hand holding at that point to get it to the where you want to go.

  • - President & CEO

  • I think there are several ways to look at that.

  • When we come in and train a current user, automatically we begin to reignite their interest in surgical ablation.

  • We anticipate that the current users, especially the ones that are already bought into treating a reasonable percentage to a high percentage of their pre-operative AF patients, that these current users will actually increase their utilization.

  • They will be restimulated by the training program and by the interactions and by the vision of developing an AF program.

  • In terms of people that are less experienced and less confident about integrating the procedure, they will require more of a phase 2 training, and that may include proctoring.

  • What we've done in many situations is, we have taken physician at major institutions that are the Maze surgeon, and we've developed relationships with that physician within the group, so that physician can actually educate and teach and proctor beyond the certification program and take responsibility for bringing the other surgeons in that practice or that group up to the same level of competency and confidence in integrating the ablation into the main surgical procedure.

  • That's one way to handle it.

  • Obviously, we also have expert proctors that we can bring in from the outside if the political dynamics don't work well for an internal expert to continue on with phase 2 proctoring for less experienced surgeons.

  • To summarize, the experienced surgeon and current user is going to come out of the certification process with a new-found enthusiasm for treating atrial fibrillation more often than not.

  • The surgeon that isn't treating it on a very high percentage basis is likely going to require some additional training and follow-up which would likely include proctoring and some preceptorship before they begin to gain enough confidence to integrate the surgical ablation into their procedures.

  • - Analyst

  • I'm sorry if I missed this, but what was your headcount in sales and marking at the end of '11 and what would it expect it to be at the end of '12?

  • - President & CEO

  • The field group was at 62 and we're at 58 right now.

  • - Analyst

  • Would you expect to grow that organically, or would it be steady for the rest of the year?

  • - President & CEO

  • We're obviously very cautious about aligning revenues with expenses.

  • What we've tried to do with our current field headcount is align around the current users, because we've got 18 months to train those current users.

  • We've tried to align our resources around current users and high-volume competitive accounts.

  • And as we get further into the process, we'll have a better idea of what we need, whether that's additional sales reps, additional clinical support people, or additional training resources.

  • Right now we're a little bit too early to say what type of sales and marketing skill set would best benefit our utilization objectives and sales growth objectives.

  • Operator

  • Charley Jones, Barrington Research.

  • - Analyst

  • I wanted to go back to Jason's question earlier about trying to figure out what growth opportunities there are from the new label.

  • And I wanted to try and slice it a little bit of a different way.

  • I was a little surprised to hear about 10% growth because that implies 5% market growth if you're growing 10%, and assuming Medtronic can't take share without an approval.

  • Curious if you are comfortable with those growth rates you talked about.

  • Also curious what you have learned about what types of procedures surgeons are doing, because we never have understood why there's only 20%, 25% of procedures being done given the efficacy and given the chest is open.

  • I'm wondering if you could talk a little bit about the types of procedures that some doctors do relative to maybe the 80/20 rule of the 20% that don't do as many procedures.

  • You talked about some of these more complicated procedures that you need to do some training on, and how big of a number is that?

  • And what kind of opportunity is there to grow into that procedure?

  • Is it somewhat kept to the university centers?

  • And again, trying to get back to this 10% number, it seems kind of low to me.

  • - President & CEO

  • Charley, I'm not sure exactly about your opening comments about how you characterized 5% versus 10%.

  • - Analyst

  • To Jason's comments, you said about 4,000 procedures and about 10% growth.

  • I was assuming you are going to get a lot of the market growth, given your approval and the lack of Medtronic's approval.

  • I'm wondering is that 10% market growth you're assuming over the next couple of years per year, or is that 10% for AtriCure?

  • On the open side.

  • - President & CEO

  • In terms of the overall 10%, that was a number I think Jason offered up in terms of a number that he came to based on our looking at increasing levels of penetration and we, more or less, generally agree that that's a reasonable approach and a reasonable way to look at it.

  • It in terms of these more difficult procedures and the types of procedures that people are performing, the growth in the number of cardiac surgical procedures has not only been impacted by interventional cardiology advancements, but it's also been impacted to some degree by the fact that patients between 54 and 65, the demographics have slowed.

  • There's very little growth between the ages of 54 and 65.

  • The growth between 65 and 75 has increased significantly.

  • The demographics of what we see in the operating room are typically people that are older that have multiple, not just cardiovascular co-morbidities, but are sicker in general.

  • The types of operations, for example, that you saw in the ABLATE trial, we had 20% of the patients had double valve procedures, which is not something you would necessarily have seen 10 or 15 years ago.

  • The patients are actually fairly old in nature.

  • Our ABLATE population was on an average 70 years old with a pre-operative age of atrial fibrillation of almost 4 years.

  • They had left atrial size of 6 centimeters, so these are typically sick patients.

  • The concept of getting surgeons that hasn't been trained or doesn't come from a training program where they've performed a lot of Maze procedures, to integrate the surgical ablation into a relatively high risk surgical candidate takes another level of training.

  • And as you stop and think about it, part of your challenge is how do you choreograph the procedure.

  • If I'm doing a CABG, I choreograph the procedure differently than if I'm doing a mitral valve or a mitral valve and an aortic valve, so the steps in the procedure change depending upon what the baseline operation is.

  • That's the type of training and experience that we need to share with the surgeons that are not currently performing procedures, which there are many cardiac surgeons that don't treat pre-operative atrial fibrillation at all, and there are a high percentage of surgeons that treat pre-operative atrial fibrillation less than 20% of the time.

  • We've done some surveys at some leading centers where you have the top Maze surgeon is treating almost 90% of his pre-operative AF patients, yet the surgeon that in this experienced Maze group that treats the least percentage is down around the 10% range.

  • There's a wide range of confidence levels based on previous experience and training, and what I'm suggesting is that the surgeons that have little experience in treating pre-operative atrial fibrillation will require follow-up proctoring and follow-up training which can come from inside the group or from outside the group.

  • What I'm also suggesting is that we'll get an immediate stimulus in terms of utilization just by going through the certification process and those physicians, for example, that have adoption rates that are in the 50% to 70% range.

  • Maybe they'll become surgeons that treat atrial fibrillation 80% to 90% of the time.

  • There's a wide range of level of experiences, and what we believe is that we need to provide a programmatic approach that walks into a hospital and says this surgical group, what are your aims and goals for pre-operative AF treatment and how do we work together to get everybody treating the same patients with a similar ablation treatment?

  • - Analyst

  • To make sure I do understand it, I've always thought of minimally invasive as being a little bit more complicated, not necessarily done by your local surgeon.

  • The way I've heard you characterize the open surgical approach, I would think that the majority of surgeons could complete the large majority of procedures that are currently being done at that 90% hospital, for example.

  • It's not like 75% or 50% of the procedures out there are too complicated for the average surgeon to do?

  • - President & CEO

  • I think you're exactly right.

  • No matter how much we would train, for example, minimally invasive thoracoscopic surgeons, there's still going to be a fairly high percentage of surgeons that really wouldn't be able to be very competent at performing a minimally invasive thoracoscopic ablation procedure with high safety and high efficacy.

  • I think that's true.

  • I think what's also true is that a very high percentage of cardiac surgeons can learn to integrate the Maze through an open procedure, but it requires training.

  • And if I had experience, and I come from an experienced center, then the training threshold is much lower.

  • If I haven't had experience, and I'm currently not doing the procedure for a combination of whatever reasons, then it's going to require more than just a didactic practicum training and certificate to get those surgeons to be more comfortable in terms of being able to integrate ablation into their patients.

  • I think the key is to go to the surgical community, center by center, and meet with the groups and individual surgeons and develop goals and aims for treating pre-operative atrial fibrillation, and to talk to the key surgeons.

  • We just came back from a meeting of the top surgeons, it's a fairly private meeting of top cardiac surgeons, and there were a series of the top people in the industry that attended.

  • We were invited.

  • We explained our training plan in terms of creating standardization, best practices, and working with centers and physicians to come up to a certain standard that's in line with their groups, goals, and aims, and we got very high marks for this type of strategy.

  • I think these leading cardiac surgeons thought this would be a very well-accepted approach, and were very supportive of it.

  • I think we're on the right track, we just have a lot of work to do.

  • - Analyst

  • Wondering if you could give us more detail on this new Clip.

  • It sounds like the new design is not complete.

  • When do you expect that to be complete, and do you need that to be able to get the IDE approved?

  • Could you explain a little bit more about the 510-K process for the next-generation Clip?

  • I'm a little bit confused about that.

  • Wanted to make sure there are no new product committees necessary for the Synergy System with its approval.

  • I would assume that's not the case, but wanted to make sure there's no strange hiccups at certain hospitals relative to pricing, reimbursement, or getting the product in there, even though it's already been there.

  • - President & CEO

  • Well, in terms of, I think the second question first, if the product is already on the shelf the fact that the labeling is updated, we haven't seen any challenges with that.

  • - Analyst

  • Any changes on reimbursement or pricing here?

  • - President & CEO

  • No, no changes on reimbursement or pricing in the current users.

  • It's been basically where we've trained current users, what we've seen is, once again, the more experienced current users go back and are they are reenthused and typically do more procedures.

  • The less experienced physicians, we need to have a phase 2 plan in place to get them more confident in the adoption of integrating the technology into their procedures.

  • In terms of the Boa 2, what we call Boa 2, which is a new generation AtriClip platform, designed for both open and minimally invasive procedures, this is the system that has full range of motion at the end effecter, and you can lock it into position.

  • The shaft is designed uniquely for minimally invasive and open procedures.

  • Our current Boa 1 doesn't perform as well in the minimally invasive setting, so we designed Boa 2 to overcome some of the limitations of Boa 1 in minimally invasive procedures, but also to be an open product so that we could take advantage of this technology in open procedures.

  • It can be used with a grasper or a robotic arm and the acceptance, at least from the cadaver level work we've done with a large number of physicians, have been that this is a significant improvement in the minimally invasive thoracoscopic approach and also has advantages in open cases as well.

  • We're excited about that product.

  • Now, the IDE for the stroke feasibility trial is already approved, but it's approved with the Boa 1.

  • Our plan is to take the current approval, submit it to the IRBs, get IRB approvals, contracts, and CMS approvals all in place, while we wait for the Boa 2 to be available for human use.

  • We anticipate the Boa 2 IDE supplement to go in mid year this year, and for the 510-K to be approved sometime during the third quarter.

  • I hope that answers your questions.

  • I'd be happy to --

  • Operator

  • Jason Mills, Canaccord.

  • - Analyst

  • Just to make sure I've got your guidance for SG&A right for 2012, Julie, could you go over that again?

  • I thought I heard you say an incremental increase of $750,000.

  • Did I hear that right?

  • - CFO, VP Finance & Admininistration

  • On the SG&A side, just related to the training, we had received questions about what the training and the post approval study would cost.

  • I just wanted to be responsive to that.

  • The training program, the all-in cost, is roughly $1.5 million, and about 50% of that will be incremental year-over-year, and so that's not our total expected increase in SG&A.

  • It's just the cost of that program.

  • - Analyst

  • As we think about total SG&A, would you expect, given that incremental amount of training, that your spending on SG&A as a percentage of total revenue will increase modestly here in 2012?

  • - CFO, VP Finance & Admininistration

  • Yes, outside of that program we don't have any other major initiative that I would anticipate funding.

  • As Dave commented earlier, we'll certainly be opportunistic in terms of adding headcount as appropriate, once we have a clear vision of how the business performs, particularly here domestically.

  • Certainly that would be a modification to that should we have that come together.

  • - Analyst

  • Just so I've got it though, you're not expecting this year to be a year of leverage to the SG&A line either?

  • - CFO, VP Finance & Admininistration

  • The overall OpEx line, I don't expect substantial leverage, but I think you will see some modest leverage or flattening of leverage year-over-year.

  • Remember, we also have R&D expenses, which I commented I expected to ramp $1.5 million to $2 million.

  • - Analyst

  • That equates to, depending on where you are in revenue range, $70 million, let's say, for an example sake, would be around 20% of your revenue.

  • SG&A, if we're modeling it after the fourth quarter, again, assuming some of these training expenses, if you're in the $44 million, $45 million range for the year are we that far off?

  • - CFO, VP Finance & Admininistration

  • We haven't got any guidance for total expenses.

  • I think the earlier comments would be as much as we've provided at this time, Jason.

  • Operator

  • There are no more questions at this time.

  • - President & CEO

  • Well, thank you very much for joining the call.

  • We look forward to talking again on our first quarter earnings call.

  • Thank you so much.

  • Operator

  • Ladies and gentlemen, thank you again for your participation.

  • This concludes today's conference.

  • You may now disconnect, and have a great day.