AtriCure Inc (ATRC) 2013 Q2 法說會逐字稿

Good afternoon and welcome to the AtriCure second-quarter 2013 earnings conference call.

My name is Julianne and I will be your coordinator for the call today.

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

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

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

I would now like to turn the call over to Lynn Pieper, AtriCure's Investor Relations consultant from Westwicke Partners for a few introductory comments.

Please proceed.

Thank you Julianne.

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

If you've not received a copy, please call 513-755-4136 to have one emailed to you.

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

Forward-looking statements are subject to numerous risks and uncertainties, many of which are beyond AtriCure's control, including 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.

AtriCure undertakes no obligation to publicly update any forward-looking statement.

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 on our webpage.

I'd like to remind everyone on the call today that the Food and Drug Administration, or FDA, has not approved certain AtriCure products for the treatment of atrial fibrillation, or Afib, or for stroke reduction.

The Company and others acting on its behalf may not promote these non-approved products to train doctors for the surgical treatment of Afib 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 Afib or stroke reduction or prevent AtriCure from engaging in sales and marketing efforts to focus only on the general attributes of the product for their current, cleared uses.

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

With that, I would like to turn the call over to Mike Carrel, President and Chief Executive Officer of AtriCure.

Mike?

Thank you Lynn.

We are making continued progress in building our commercial, clinical, and education focused teams and have a strong second quarter.

This includes adding many new conversion accounts and hiring some critical people throughout the Company.

Based upon these accomplishments and our year-to-date results, we are increasing our full-year financial guidance for 2013 to 10% to 12% topline growth.

I will start today's call with a quick overview of our results for the quarter followed by an update on the business and our strategy for capitalizing on our AF approval, new product developments, and our clinical trial progress.

Then I will turn the call over to our CFO, Andy Wade, who will provide an overview of our financial results.

After that, I will come back to make concluding remarks and we'll open it up for questions.

We are pleased to announce record revenue of $20.4 million, which is growth of 12% versus last year.

Strength in the quarter was driven by record US sales which were up 15% versus 2012.

We experienced a good balance across our various product and solution areas.

Our momentum is strong and we are starting to see the results of our commercial and training focus.

Key strengths for the quarter were US Clip, US MIS, the UK and Germany.

Analogues in Russia were a little softer than expected.

Before turning to our business trends and clinical trial update, I want to provide some information on recent accomplishments we made in four key areas -- our presence at key tradeshows, new additions to AtriCure, sales and marketing, and our progress in establishing AtriCure as the education leader for atrial fibrillation.

We continue to be pleased with the growth in the left atrial appendage, or LAA, market.

And positive industry activity is ongoing.

At HRS this year, there was increased interest from the EP's in collaborating more closely with their surgeons on treating AF and managing the LAA.

There was an entire day's symposium on LAA management which was standing room only.

Industry stalwarts have all been quoting that they believe this to be a $500 million a year market by 2017, up from approximately a $50 million a year market today.

With our safe to use clip technology, this trend and interest is great news for AtriCure.

Over the next few years, we expect LAA management to grow meaningfully and become more ubiquitous and eventually be considered the standard of care.

We also held our ninth Barcelona meeting in which we had over 60 teams of EPs and surgeons, 120 physicians in total, to review and discuss live cases and how to better collaborate on Epi ENDO approaches using our technology.

The conversations were driven by leading institutions in Europe and topics covered included clinical technique, the science and better results behind combining the two procedures, how to manage reimbursement in Europe, and the benefit of excluding the LAA.

There was so much demand that, next year, we may have two such events.

In combination with our strong results, we believe the increasing interest in managing the LAA from the surgeon and EP community and in working together to treat the toughest Afib patients is proof of concept and proof of our vision.

AtriCure is in the right place with a great suite of products.

Moving on to new hires, I am pleased to report that we have 26 net new additions to the AtriCure team since the beginning of 2013.

Key senior hires include David Francischelli, VP of R&D who starts next week and is an accomplished innovator in the medical device industry with over 23 years of experience.

David spent much of his career at Medtronic and has been granted over 50 patents with an additional 80 more pending.

David is a proven leader and will be invaluable as we strive to lead the industry in the treatment of Afib.

Additionally, we added a new VP of Human Resources, a new European medical director, as well as a leader of professional education.

All are making an immediate impact.

On the sales and marketing front, we remain focused on our C-4 sales rep training.

This includes clamp, cryo, clip, and confirmation, or pen, on every case to ensure the best results for patients.

Additionally, with the increased case volume and competitive conversions and training necessary, we have almost doubled our team of ablation specialists.

These specialists take about six months to get up to speed and are critical for case support.

And on the education front, as most of you are aware, as a condition of our PMA, we have been working feverishly to deliver on our commitment to train surgeons and certify hospitals.

I am proud to say that, as of today, we have trained over 1000 surgeons, certified almost 600 centers, and held over 200 courses.

After providing this detailed list of progress, we received some positive news from the FDA this quarter.

The agency is very pleased with our progress and while they expect us to continue to uphold our commitment to training, we have no formal obligation other than updating them at the end of the year on what we have done.

In addition, Dr. Cox is spearheading the development of an initiative that includes a Phase II Maze IV course.

This course will focus on driving greater adoption of the (inaudible) procedures by focusing on common technical issues faced in performing the procedure and providing a more thorough understanding of the mechanisms of Afib so that surgeons can educate the referring physicians about the benefits of the treatment.

We expect this level II course to begin this quarter and continue throughout next year.

It is also important to note that we are expanding all of our education experience and resources beyond the US market and held our first training at ISMICS in June to a standing room only crowd.

All of this is evidence that we are starting to gain traction.

Turning to the business fronts, in the second quarter, US open-heart revenue was up 9.2% compared to the same period a year ago.

Our investments and strategic priorities continue to build momentum and result in sustainable growth opportunities.

As mentioned earlier, AtriClip contributed meaningfully to our US growth rate in the quarter as we saw volume of the AtriClip Pro roughly double from the first quarter.

Clip sales in the US were up 58% and reached $2.8 million.

We believe this in part is due to the growing belief in the management of the LAA as a viable treatment option.

In the US, procedure trends have remained generally stable throughout the second quarter.

We are continuing to capitalize on our investments in support of our Afib approval through our education activities designed to increase awareness and improve patient outcomes.

We are successfully expanding this program which, as anticipated, is resulting in increased utilization, competitive share gains, and cross-selling opportunities.

Training levels and the conversion of competitive accounts is providing inroads into new hospitals.

We expect to continue our focused efforts on education, marketing, and the development of a strong referral base.

MIS sales in the US were up 7.5% in the second quarter, which was again higher than expected.

While we are encouraged by the year-to-date results, we do not anticipate a meaningful resurgence of growth throughout 2013.

Rather, we are optimistic we will experience stabilization at MIS as our efforts to get our clinical trial underway begin to take hold.

Internationally, revenues were up 2.4% for the quarter, achieving sales of $5 million, a new record.

We saw strong growth from Germany, where we are starting to realize the benefit of our recent sales force additions where we have direct sales.

Benelux and Russia were a little softer than anticipated.

Operationally, our gross margin was 74% for the quarter and our net loss was $1.8 million, or $0.09 per share.

This performance is right in line with our expectations.

Moving to an update on our clinical programs, we continue to invest in clinical science and FDA approvals.

We now have enrolled 154 patients in our ABLATE post-approval study, or PAS.

Importantly, we have over 32 sites enrolling and several others in the final stages of approval.

This is up from 21 sites last quarter.

Enrollment is now ahead of plan and gaining momentum.

This landmark three-year 350 patient study is intended to build additional evidence on the safety, efficacy, and long-term durability of AtriCure Maze IV (inaudible) for Afib using AtriCure's proprietary surgical devices and supports our goal to increase penetration and market share in this market.

Moving to the Staged DEEP feasibility trial, we now have all six sites enrolling patients and have enrolled 25 of the 30 patients required.

This study supports our goal of accelerating our growth for sole therapy and working closely with EPs as it is a staged hybrid procedure.

We held to scientific advisory board meetings this quarter comprised of cardiac surgeons and EPs to evaluate our protocol and ensure we are on track for the pivotal trial.

The discussions have been informative and we remain confident that the DEEP AF procedure will bring together cardiac surgeons and EPs to diagnose and treat complex atrial fibrillation.

We will be going to the FDA by the end of the year with the results of this feasibility study and will be ready for submission of our pivotal trial protocol in the first quarter of 2014.

The work of the scientific advisory board, which includes leading clinical and research institutions across the world, has been instrumental in our approach.

Moving to our stroke trial, we have made the decision to move forward with a feasibility study to evaluate the AtriClip.

We expect to enroll up to 30 patients in six sites, all of which have been identified and expressed interest in participating.

We are currently in discussions with the FDA on our protocol and we are optimistic that we can begin enrollment in late 2013, early 2014.

Primary safety evaluation of the patients will occur at 30 days and patients will be followed for six months.

We anticipate having results from the feasibility study by the second half of 2014.

We anticipate that, on the heels of a successful feasibility study, we will move on to a pivotal trial for which planning is already underway.

We are in the process of building a world-class scientific advisory board for this pivotal trial, and it will include stroke neurologists, EPs, interventional cardiologists, and surgeons, and we have been in touch with over 10 sites today.

The interest in this potential seminal study is very strong.

At this point, it is too early to provide more detail than that, and we look forward to updating you on the progress of our feasibility and pivotal trials and the results in the upcoming quarters.

In summary, 2013 is off to a strong start.

We are investing in clinical and educational endeavors while we strengthened our team globally, which we believe will fuel long-term growth.

I will now turn the call over to Andy Wade, our Chief Financial Officer, to provide more detail on first-quarter financial results.

Thank you Mike.

For the second quarter of 2013, revenue increased 11.8% to a record $20.4 million.

Revenue from product sales in the US was $15.4 million, an increase of 15.2% from the second quarter of 2012.

Revenue from open-chest ablation-related product sales in the US increased by approximately $769,000 to $9.2 million, and US sales of products used in minimally invasive procedures increased approximately $245,000 to $3.5 million.

US sales of the AtriClip system during the second quarter of 2013 were $2.8 million as compared to $1.8 million for the second quarter of 2012.

International revenue grew at 2.4% on a GAAP basis and 1.1% on a constant currency basis as compared to the second quarter of 2012 to $5 million.

The increase in international revenue was driven primarily by growth in Germany, the UK and China.

Sales were softer in Russia and the Benelux region.

Gross margin for the second quarter of 2013 was 74% as compared with 69.6% for the second quarter 2012 and 72.5% for the first quarter of 2013.

Note that the medical device excise tax expense for the second quarter was approximately $128,000, or 60 basis points.

So, after removing the impact of the MDET, gross margin would have been roughly 74.6% in the second quarter.

Pricing remained relatively steady with some realized decreases in product costs.

For the remainder of 2013, we continue to anticipate modest pricing pressure on pricing in the US.

The increasing gross margin was driven primarily through volume leverage, lower mix of international sales, and the strong ASP of the AtriClip Pro.

Operating expenses increased 19.5%, or approximately $2.7 million, from $14 million for the second quarter of 2012 to $16.8 million for the second quarter of 2014.

Research and development expenses, which include clinical activities, were $3 million for the second quarter of 2013, or 15% of sales, an increase of $163,000 over the second quarter of 2012.

As we discussed previously, we expect clinical costs to increase modestly in support of our key clinical initiatives, namely the post-approval study in DEEP AF, along with continued investment in our product pipeline.

SG&A increased approximately $2.6 million from the second quarter of 2012 to a total of $13.7 million, or 67% of sales, due primarily to increases in selling, marketing, and training costs.

Our operating loss for the quarter was $1.6 million as compared with approximately $1.3 million for the second quarter of 2012.

Our adjusted EBITDA loss was approximately $324,000 compared to a positive $396,000 in adjusted EBITDA for the second quarter of 2012.

Our net loss per share was $0.09 for the second quarter of 2013 compared with $0.08 for the second quarter of 2012.

We ended the quarter with $34.9 million in cash, cash equivalents, and investments.

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

Lastly, we are updating our guidance for 2013.

We now anticipate topline growth of approximately 10% to 12% year-over-year on a GAAP basis, or revenues of approximately $77 million to $78.5 million.

We anticipate gross margin to be in the 70% to 72% range for the year, which implies a modest price decline consistent with what we've been seeing.

We expect R&D to be 17% to 18% of sales and SG&A to be roughly 65% to 67% of sales in 2013, a slight increase in spending levels versus 2012.

We anticipate increased spending related to previously described commercial activities, including clinical science, training and education, and international expansion.

We continue to expect adjusted EBITDA for 2013 to be a loss in the range of $3 million to $5 million.

This includes the impact of the medical device excise tax which we anticipate to be in the range of $800,000 to $1 million for 2013 and is reflected in cost of goods sold.

Finally, we continue to anticipate an increase in net cash burn for 2013 versus 2012 due to additional investments in operating expenses to fund commercial development and product development activities and international expansion, along with working capital and capital expenditures needed to support our growth strategy.

At this point, I would like to turn the call back to Mike for closing comments.

Thank you Andy.

We are pleased with our sales performance and other accomplishments in the second quarter.

Following are our key goals for the remainder of 2013 -- achieve a revenue guidance which calls for sustainable double-digit growth; and continue to gain market share in the US by driving training and education initiatives and conversion of competitive accounts.

We also plan to make progress investing in our clinical and commercial efforts to further accelerate this growth sustainably.

As the only company in the world with an FDA approval to treat the most serious forms of atrial fibrillation, we are committed to advancing the field.

By achieving these goals, we will continue our path towards becoming a leading innovator in atrial fibrillation and left atrial appendage management.

We look forward to keeping you posted on our progress.

And we will now open the call for questions.

(Operator Instructions).

Jason Mills, Canaccord.

Thanks Mike and Andy.

Congrats on a great quarter.

Can you hear me okay?

Great.

The first question, Mike, is about AtriClip.

Clearly a phenomenal quarter.

I guess the ultimate question has to do with just how much growth we could see going forward in this.

And you gave a little bit of color with respect to how you see the market progressing over the next five years or so.

But I wonder if the best way to ask it is sort of within your account base, and you're increasing your account based on the ablation side, what your attachment rates are for the AtriClip and sort of what, if any, low-hanging fruit exists to continue to penetrate or drive penetration of Clip into those accounts.

And perhaps talk about, outside of your accounts, where you're doing clip that you could cross-sell ablation.

That's a great question.

So the first piece is really what some would call your batting average relative to that.

We have seen our batting average on the open side continuously increase over the past six quarters or so in a row, where we are kind of now in that 60% to 70% of the customers who are actually buying from us who buy the -- we don't know when they are using a specific case, but we do know, from an open procedure standpoint, those that use our open products, it's in that 60% to 70% range that are also using our products for the Clip as well in the open side.

On the Pro side, so on the MIS side, we are also kind of look at that same kind of batting average.

Obviously, about 1.5 years ago, that was zero, and we are moving nicely.

We are not at 70% quite yet, but we are moving nicely through those numbers.

We are in that 30% to 40% range at this point.

So that's very helpful.

So, clearly, you do have some landgrab left I presume.

The growth of 57% is difficult to model.

I suppose it's doable, but it probably gets us above the top end of your guidance, all things equal.

So how should we think about the second half of the year on that side?

And I have one follow-up, and after that I'll get back in queue.

Sure.

We feel comfortable with the guidance in terms of where it is.

In terms of the -- a lot of that is just we are kind of hedging our bets relative to the international market that, as you saw, was a little bit lighter.

We just want to make sure we're being conservative on that front.

We do see continued growth on the AtriClip.

Like you said, 57% is tough to model and to look at can we continue that kind of path.

Obviously, we are coming off of smaller numbers.

As the numbers get bigger, it may be more difficult to kind of achieve that in that area.

But we are looking at that as a continued growth driver for us for many years to come.

That's helpful.

One last question maybe for you, Andy, on the gross margins side.

Your gross margin guidance for the year sticks out a little bit as perhaps conservative given what you've done thus far in the first half.

You gave a little bit of granularity, but presumably your margins in the second half of the year will have to be down sort of 68%, 69% to be at the midpoint of that range.

So help us get there if that's in fact where you are telling us to go.

Sure.

Some of it, it is being a little conservative.

Part of what Mike said in terms of the weakness in international, assuming if that pops, then the margin on the international business, as you know, is lighter.

So we do anticipate a little bit of that.

And some of it is just being conservative on the (inaudible) Pro, and some of those types of things.

We are seeing good leverage on the sales in terms of manufacturing costs, but I'm -- we are just hesitant to raise that margin guidance significantly.

So --

Thom Gunderson, Piper Jaffray.

Hi.

Good afternoon.

So, Mike, if we look at the US market that you're penetrating, what was the feel in Q2 or maybe year-to-date as far as procedure growth or stability?

Do you get a sense that there's more or less CABGs and valve implants out there right now?

Our perspective is that procedure volume is pretty flat, that it is not growing and that a lot of our growth is really due to increased penetration into the accounts that we are in and then also competitive conversions that we've had over the course of the last six to nine months.

Yes, the competitive conversions, last quarter you mentioned some high-profile medical centers -- Duke and Texas and USC.

Is there any update either on those centers or new centers that you added in Q2?

Both of those centers drove revenue for us this quarter, which was great.

They continue to use our products.

We added about 14 net new centers.

They didn't driving any revenue in this quarter, but they were net new centers in the US and six net new centers outside the US that we brought into the fold as well.

Again, those typically take anywhere from -- once we get them signed up and they are starting to use our products, it takes anywhere from six -- really three to six months to get some revenue.

So we'll start to see some of that revenue in the fourth quarter likely.

Got it, thanks.

Then if I look at international, a little weaker than you expected, a little weaker than we expected.

Can you -- when we look at medical device sales in Europe, generally Germany and the UK lead the pack as far as total volume size, Benelux not so much, and Russia more an emerging market.

Can you tell me how strength in Germany and the UK was counterbalanced by, what would seem to be much smaller markets?

I think that you articulated it mostly pretty well, which is that Germany and the UK are obviously two of our very large markets.

They are showing good growth for us and continue to and take share in those marketplaces.

So we feel really good about that, especially in Germany as we are adding more coverage from an ablation specialist and sales perspective, which I talked about probably about six months ago.

Relative to the other markets, the Benelux is a smaller market, but it's a high-concentration market for us.

So as a result, it's probably larger than the population size would otherwise indicate in terms of historical revenue that we've generated from them.

So you see a little bit of that.

And Russia is the same.

We've had a lot of success there historically.

We think it's a very market-specific thing that we're working through right now.

We just took a trip over there recently and believe we'll get that back on track, but it was definitely something that -- that was probably the biggest European hit overall or internationally.

We were fine in the other markets internationally.

China was as we expected.

Japan is as expected.

So those other markets are really kind of moving along nicely.

It was really primarily the Russia and Benelux area.

Got it.

I was going to ask about Japan and China, but you answered that for me, so I'm good.

Thank you guys.

Danielle Antalffy, Leerink Swann.

Thanks so much, guys.

I was just hoping you could comment on the competitive landscape.

Obviously, you're taking personnel from Medtronic at least.

Any sense of your competitor's commitment to the market?

If they do exit the market, how incremental could that be to AtriCure?

You know, when we look at the competition, St.

Jude used to be in the market.

They actually publically announced back in the February timeframe that they were exiting with the products they had.

Whether or not they get in the market another way with a different product, we are not seeing them now, but they've publically done that.

That's helped us out a little bit.

Medtronic is still in the market.

We are competing every single day against them.

They are a formidable competitor with excellent products out there.

So we continue to compete day in and day out, especially over in Europe where they're incredibly -- where they have more market share than we have, and so they are a good market player out there.

We don't anticipate that they are going to go away.

We are just going to continue to sell to our strengths, which we have many, and continue to take some of their customers.

Okay, great.

That's helpful.

So obviously a strong quarter for AtriClip.

I was just wondering what your thoughts were -- this is further down the road, but when a competitor does come on the market with an approved indication -- obviously I'm talking about Boston Scientific in the Watchman device -- how do you see that as impacting AtriClip's growth, just qualitatively, directionally speaking?

I think that is very positive for us because when you look at that, they can't treat all of the patients.

As collaborative care becomes the norm and you're having the EP working closely with the surgeon on this, when they can't put the Watchman in, it's going to raise awareness to manage the left atrial appendage.

When they do that, they will look to another option if they can't use the Watchman or whatever other device they're going to be using.

So from our standpoint, the more activity around the left atrial appendage is really good activity for us.

We anticipate that we'll have spillover effect relative to that and relative to whatever marketing they do around that.

Okay, perfect.

Thanks so much.

Charley Jones, Barrington Research.

Thanks for taking my questions.

Good afternoon.

Nice quarter.

A quick question on Benelux.

So I think last year, if I remember correctly, you guys went direct there last year.

Is that right, Andy?

No, it's been a couple of years.

It's been a couple.

So was it a tough comp last year?

I'm just wondering if Benelux is in a position to regrow after a quarter or two, or if you lost an account or two or something there that's leading to lower sales.

We haven't lost an account.

I just think that you're having fewer procedures done.

We don't have any indication that it's a lost account relative to that.

Okay.

And I know you --

(multiple speakers) you've got surgeons that are busy doing some other procedures, but we don't have anything that would indicate that it's a lost account.

Okay, that's helpful.

Are they still doing a lot of DEEP AF over there?

They are doing some DEEP AF over there for sure.

Both Amsterdam, or AMC, and Maastricht in Brussels are actually part of that.

So we are seeing a couple of cases come through that DEEP AF trial.

But that is not a meaningful number.

They're doing a lot of hybrid procedures at both those locations.

You mentioned China did well in the quarter.

Was Asia in total down?

No, it was basically flat, which was what we had expected for the quarter.

That's helpful.

As far as pricing goes on the Clip and the Pro, can you give us any update on ranges or ASPs or thoughts?

They are staying relatively constant, and we are seeing new market entrants that are coming into the market that are basically at or even a little bit above us on the open side.

So, you see the TigerPaw that's come in with Maquet.

They've come in at a price that's a little bit more expensive than ours, and we think we've got a better product obviously, so there's not as much pricing pressure relative to that.

There's always pressure against the sutures and everything because they've been out there for a long time, but the pricing has remained relatively constant.

And on the AtriClip Pro, obviously it's expensive relative to the [HCH], but it's actually inexpensive relative to the Watchman and considerably less expensive to what they're charging out in the marketplace.

And was pretty much entirely all the growth from Pro, or did open at least grow 10-ish%?

Both of them grew nicely.

Okay.

And I've got a few more.

Maybe I'll jump back in queue, but a quick question on your trial hopes for the Clip.

Do you think you'll do a trial eventually for both open and minimally invasive, or do you think you will focus on more minimally invasive?

We are going to focus on -- that's part of what we are working with the scientific advisory board on, which is the exact protocol relative to the -- the feasibility study that has been approved by the FDA is a minimally invasive procedure, a TT procedure.

And so that's what's on the books right now that we will do for the feasibility study.

Whether or not we expand it to the open side is one of the items that we will be discussing with that board, and will that drive and change referral patterns if we do it.

That's great.

I'll jump back in queue.

Thank you.

Thank you.

You have no questions at this time.

I would now like to turn the call over to Mike Carrel for closing remarks.

Thank you very much and have a good evening.

Thank you for your participation in today's conference.

This concludes the presentation.

You may now disconnect.

Good day.