Cardiovascular Systems Inc (CSII) 2009 Q2 法說會逐字稿

Good day, ladies and gentlemen. And welcome to the second quarter 2009 Cardiovascular Systems Incorporated earnings conference call. My name is Misall, and I will be your coordinator for today. At this time, all participants are in a listen-only mode. We will be conducting a question and answer session toward the end of this conference.

(Operator Instructions)

As a reminder, this conference is being recorded for replay purposes. I would now like to turn the presentation over to your host for today's call, Mr. Larry Betterley, Chief Financial Officer. Please proceed, sir.

Thank you, Misall. Good afternoon and welcome to our fiscal 2009 second-quarter conference call. Before we begin, I'd like to remind you that during the course of this conference call, we'll make forward looking statements that are covered under the safe harbor provisions of the Private Securities Litigation Reform Act of 2995. Any such statements are subject to risks and uncertainties that could cause actual results to differ materially from those anticipated. Such factors are described in the Company's Form 10 and other reports filed from time to time with the Securities and Exchange Commission.

This conference call also includes non-GAAP financial measures. In accordance with SEC Regulation G, a presentation of the most directly comparable results calculated in accordance with GAAP as well as a reconciliation of the differences between such measures are available on the Company's website at www.csi360.com in the Investors section. I'll now turn the call over to Dave Martin, CSI's President and CEO. Dave?

Thanks, Larry. This is CSI's first quarterly release. We are pleased to announce strong revenue growth as well as product development advancements. I'd also like to provide an update on our pending merger agreement. And Larry will provide a detailed review of the financials.

Second-quarter revenue, driven by the Diamondback 360 Orbital Atherectomy System, reached $14 million, a 200-plus percent increase over $4.6 million in the year-ago period.

For those of you who may not be familiar with the Diamondback system, let me briefly describe its competitive differentiators. We offer a minimally invasive catheter system for treating peripheral arterial disease or PAD. PAD is blockages in the leg arteries that could adversely affect quality of life through immobility, pain, and in some circumstances can lead to potential catastrophic risk of limb amputation.

We designed the Diamondback system to give physicians a safer, more effective tool to treat the 8 million to 12 million Americans who suffer from PAD. The Diamondback system is capable of treating a broad range of plaque types and addresses many limitations of other treatments. It's got a short treatment time. It's differential standing minimizes the potential for arterial perforation or dissection. And it's effective in treating calcified lesions.

CSI has conducted three clinical trials involving 207 patients to demonstrate the safety and efficacy of the Diamondback 360. To date, the Diamondback system has helped treat more than 9,000 patients and is quickly becoming a first-line therapy for saving limbs in the battle against PAD.

The Diamondback 360 provides a platform that could be leveraged across multiple market segments. We have plans to launch products to improve our effectiveness in all plaque types and in larger vessels, as well as expand our capabilities into coronary applications.

The Company's quarterly revenue has grown consistently since the introduction of the Diamondback in September 2007. Second-quarter growth reflected increases in both hospital counts and physician users. The number of hospital counts rose to 400 from 283 at the end of the first quarter fiscal 2009 and is up from 39 in the year-ago period.

We sold a total of nearly 4,400 Diamondback 360 devices, up from 3,600 at the end of the first quarter fiscal 2009 and more than triple the 1,400 sold in the second quarter of fiscal 2008. Our 90-day disposable reorder rate exceeded 90%. And about 75% of our quarterly revenue was from customer reorders.

Our growth has been driven by our (technical difficulty) sales organization. [And during] second quarter fiscal 2009, we had built our sales team to nearly 90 direct sales professionals versus just 20 a year earlier. The expansion allows us to reach more physicians and more hospitals with our technology and leading products. We have moderately grown this team entering our fiscal third quarter this year with nearly 100 direct sales professionals in the field.

With that overview, let me comment on our pending merger. In early November, CSI signed a definitive merger agreement with Replidyne Incorporated, a biopharmaceutical company in Boulder, CO. A joint proxy statement and prospectus relating to the proposed merger has been mailed to the shareholders of CSI and Replidyne. And both companies' special shareholder meetings to vote on the transaction are scheduled for February 24. If approved, the transaction is expected to close on or about the next day.

CSI shareholders will own approximately 83% of the combined company on a fully diluted basis. And we calculate this using treasury method for outstanding stock options and warrants. The combined company's name will be Cardiovascular Systems Inc. And we have applied for listing on the NASDAQ Global Market under the symbol CSII.

After an extensive evaluation of our options in exceptionally difficult financial markets, that have only gotten worse in the last few months, we concluded that this merger was our best path for raising capital and to become listed on a major US stock exchange. This provides our shareholders the opportunity to realize future value. And through this transaction, we expect to receive $35 million to $37 million in net assets, primarily cash, which should bridge us to profitability and positive cash flow. Now Larry will provide a summary of our financial results.

Thank you, Dave. As Dave pointed out, revenue grew to $14 million, a more than 200% increase from the $4.6 million in the year-ago period. Currently, all revenue is generated in the United States. We have no international business at this time. Diamondback device revenue was 92% of the total revenue for the quarter versus 90% in second quarter last year.

The gross margin improved to 70% from 53% in the same quarter last year due to higher disposable volumes and greater manufacturing efficiencies. We achieved this improvement even though we implemented a deferred pricing alternative for our controller, the capital equipment portion of our system. Through this program, controllers can be paid for over time through a modest upcharge on the disposable device rather than an upfront payment.

This arrangement reduces the gross margin at the time of the controller's shipment, when the cost of the controller is expensed, and recovers it in future periods as disposable devices are purchased. In the second quarter, the gross margin on the Diamondback devices alone, excluding controllers and other revenue, was over 75%.

SG&A expenses rose 55% to $14.9 million. Two major factors are behind the increase: the planned buildup of our field sales organization and infrastructure investments to support our growth. A $3.2 million reduction in stock compensation expense somewhat offset, these expense increases.

Last year's fiscal second quarter included a charge for the issuance of stock options to replace expiring options. Those options were fully vested at issuance and immediately expensed in that quarter last year.

R&D expenses grew to $3.5 million, a 16% increase over the year-ago period. CSI is focused on product development to enhance physicians' ease of use and improve the clinical effectiveness of our technology, both above and below the knee, and with all types of plaque. We're also working to expand our capabilities into coronary applications. Compared to recent quarters, R&D expense run rate has declined this quarter as we completed development projects and coronary safety trials.

The second-quarter operating loss improved by 16% to $8.6 million, a result of strong revenue growth and gross margin improvements, partially offset by sales, infrastructure, and product development investments.

Interest expense was higher due to: outstanding debt in fiscal 2009 versus none in fiscal 2008; amortization expense of $472,000 of the value of warrants issued in conjunction with the guarantee of $5.5 million of debt; and a $179,000 increase in preferred stock warrant accretion.

Interest income increased due to the effect of recording an auction-rate security put option asset of $2.7 million relating to our acceptance of the UBS offer to repurchase our auction-rate securities at par value beginning in June 2010. This was partially offset by lower than average cash balances and interest rates.

We also incurred an impairment of $2.2 million in our auction-rate securities, which must be valued independently of the related put option with UBS. This impairment was more than offset by the gain on that put option this quarter.

The net loss improved by 11% to $8.7 million. The net loss available to common shareholders was $11.7 million in the quarter compared with $10.1 million in the year-ago period, due to an increase in the accretion of redeemable convertible preferred stock of $2.6 million in the current quarter.

The loss per basic and diluted common share for the quarter was $1.51 similar to last year's $1.56. The average common shares outstanding increased by 1.2 million shares between periods with the issuance of restricted stock and exercise of stock options.

For the six months ended December 31, comparisons are more pronounced because we only had one quarter of revenue in last year's first six-month period, due to the September 2007 commercial launch of the Diamondback 360 system.

Revenues rose to $25.6 million versus $4.6 million in the same period last year. The gross margin was nearly 69%, slightly lower than the second fiscal quarter this year due to the effect of the lower gross margin in the first quarter resulting from lower unit volumes.

Operating expenses were $39.8 million, somewhat higher than the second-quarter run rate, due to a $1.7 million write-off of capitalized IPO cost in the first quarter and reduced spending on research and development as projects and studies were completed.

The first half net loss available to common shareholders was $25.4 million, or $3.29 per basic and diluted share, versus $22.4 million, or $3.50 per share, for the first half of last year. The higher loss was due to increased investments in sales and marketing, infrastructure, and product development, and were not immediately offset by higher revenues.

The loss was reduced by $2.2 million lower accretion of redeemable convertible preferred stock. The loss per share is slightly less due to the issuance of restricted stock and exercises of stock options, as noted earlier.

Turning now to the balance sheet, we ended the year with $6.4 million in cash and cash equivalents and have not drawn on our $5 million accounts receivable line of credit. As Dave noted, we anticipate the merger will add $35 million to the $37 million in net assets to our balance sheet consisting primarily of cash, which is expected to be sufficient to bridge us to profitability and positive cash flow.

We are holding auction-rate securities with a par value of $23 million. The current fair value is $19.5 million. And the fair value of the auction-rate security put option related to those securities is $2.7 million for a total fair value of $22.2 million.

As I mentioned earlier, the put option asset relates to our acceptance of the UBS offer to repurchase our securities at par value beginning in June of 2010. In the meantime, UBS has provided us with a full par-value loan against these securities at an interest rate that matches the interest earned on them.

The remainder of our debt consists of $8.5 million in term loans from Silicon Valley Bank. Of this amount, $1.8 million was allocated to the value of warrants issued for guarantees of $5.5 million of the debt and was recorded as a component of stockholders' equity. The value of the warrants is being amortized to interest expense over the one-year term of that debt, which ends in mid-September 2009. The warrants had a non-amortized balance of $1.3 million at December 31, 2008.

Upon closing of the merger, all of CSI's stock, including both common and preferred, will be converted into common stock of the combined company. When added to Replidyne's outstanding shares, the combined company's total common shares outstanding are expected to be about 136 million to 142 million shares. This amount, however, will be reduced via a reverse split, the ratio for which will be finalized near the closing date.

I will now turn it back to Dave for an update on our product development accomplishments and plans as well as CSI's outlook for the balance of the fiscal year. Dave?

Thanks, Larry. We did several product development advancements last quarter. First, we launched the next-generation Diamondback 360 in December 2008 and have received a positive reaction from our customers. The product's new features include the following -- a 15-centimeter travel, which is twice the travel in the previous model. That allows us to treat lesions twice the length of lesions that we previously treated. It's a significant time-saver for the physician.

The device also improves fluid management. In addition, the device has an easy-use, three-in-one, one-click-connect feature to attach tubing and cables very quickly. And it's got a convenient saline infusion port for the physician.

In addition in December, we introduced two products to supplement the atherectomy device sales and enhance the productivity of our sales staff. First is the ViperSlide lubricant. It increases lubricity and reduces friction in the Diamondback 360 shaft and guidewire. And second is the ViperTrack radiopaque tape that assists the physician with alignment for any procedure, including ours, involving fluoroscopic or radiographic imaging.

And we're committed to actively pursuing additional products to supplement our growing leadership position in the treatment of PAD. Some of these products are expected to be introduced in later calendar 2009.

Now I'd like to discuss our outlook for fiscal 2009. For the last six months of our fiscal year ending June 30, 2009, we expect revenue to range between $31 million and $33 million, bringing the expected full fiscal year revenue to between $56 million and $58 million. That would be $56.6 million and $58.6 million. This is growth of more than 150% over the fiscal 2008 and represents a 21% to 29% increase in the second half of the year over the first half of fiscal year 2009.

Gross margin is expected to be in the range of 70% to 73% for the six-month period. We expect a net loss for the last six months of fiscal year 2009 to range from $17 million to $19 million. And that compares to $22.4 million in the first half of the year. The net loss improvement results from increasing revenue and gross profit with lower operating expense growth.

The improvement is more pronounced on an adjusted EBITDA basis, calculated as loss from operations less depreciation and amortization of stock-based compensation expense. The loss range on an adjusted EBITDA basis is expected to be approximately $10 million to $12 million, a substantial decline from the $18.8 million negative adjusted EBITDA in the first half of fiscal 2009.

In conclusion, fiscal 2009 is a milestone year for the Company. Our Diamondback 360 Orbital Atherectomy System has unique utility for any physician dedicated to treating PAD. And physicians' acceptance is demonstrated by our double-digit revenue growth in each consecutive quarter since our initial product line.

We have a highly professional and clinically oriented sales staff that has capacity for adding new accounts and achieving significant productivity gains. We have an experienced R&D team with a track record of developing new products - both internally and in conjunction with outside organizations. And more products are in the pipeline that are expected to expand our available markets and sales productivity.

We believe PAD is growing at a double-digit rate. And we have a uniquely safe and effective device for patients needed revascularization, calcified plaque, and lesions below the knee that were difficult to treat. But with the introduction of our product, their treatment is now safer and easier.

All of these developments in an underserved and growing PAD market are fueling our revenue growth and positioning us for future profitability as we leverage our infrastructure over increasing sales volumes.

With the merger agreement scheduled to close on or about February 25th, we are especially excited about the prospect of the combined company's stock trading under the CSII symbol on the NASDAQ Global Market and look forward to updating you on our progress each quarter.

Now we'd like to open up the call to questions.

(Operator Instructions) Your first question comes from the line of Amit Bhalla with Citi. Please proceed.

Hi, good afternoon. I wanted to start by asking you a couple of questions about utilization trends. Dave, you started to say -- or you did allude to 75% reorders in your prepared comments. The Diamondback has been on the market for about a year. So maybe you could talk a little bit about utilization trends from some of those earlier accounts. And give us your sense of what you're seeing in the market in terms of procedure volumes for PAD.

Well, let me start with the last part first. I think procedure volumes are up. The awareness of PAD is growing. The problem is large and growing, unfortunately. And there are more trained physicians than ever with specialists - interventional radiologists, vascular surgeons, and interventional cardiologists dedicated to treating. So the market is growing.

As far as utilization in our customers for last year, we did target those physicians dedicated to treating the disease. And we also worked very hard on iterating the device and making it easier and safer to use.

As we move forward, we are getting into tier II accounts, if that's what you're alluding to. Right now, we're at 400 accounts with a potential universe of accounts as high as 1,500 hospitals in the United States.

Yes, do you care to put a number on the kind of percentage growth you're seeing in procedure volumes? I have one other follow up.

In general -- and some of this revolves around discussions with you and other analysts -- but we believe that procedure volume is growing at 15% overall in the market. And we think more for us because of the unique characteristics of the device.

And in terms of the guidance, what are your assumptions in your guidance for total sales force by the end of the year? And maybe you could break it down by ASMs versus some of your direct reps as well as your accounts. And then the last question on your guidance -- it basically assumes kind of flatish to slightly up in terms of $14 million that you just reported. Are you just being conservative there? Or are there other trends that we should be aware of in the next few quarters?

Let me start that. And then Larry will finish. As far as sales model, we do believe that a lot of the building, hiring, and infrastructure build from last year will really pay off. And one example is the sales model. We're at a 100 coming into the quarter. We think the optimal model to serve this market with our product and other products is 120 to 150 sales professionals. Currently, we do have a mix that includes two types of professionals in our field sales force. There's about 80 sales professionals. And the remainder would be a junior sales professional.

Okay. In response, Amit, we target about 75 to 100 new accounts per quarter. That's our target going forward. As far as the $31 million to $33 million, is that a conservative number? Well, we feel it's reasonably conservative. But in these days, that's appropriate to be.

Thank you.

Your next question comes from the line of Ben Andrew with William Blair. Please proceed.

Good afternoon. You've got Ben and Matt here actually.

Hi, guys.

A couple quick questions for you -- David, maybe spend a minute talking about where you are in your clinical work at this point between registry and maybe something a bit more organized and when we might look to see a reasonable set of data that you can use to bolster the position in the market.

Yes, we're all queued up for two studies. We did hold, pending this transaction, on enrolling the first patient in our calcium study below the knee. But we're ready to go immediately upon close of the transaction. We think, based on our growing customer base, we can enroll that first patient very quickly.

And then we have a compliance 360 study, which would be our above-the-knee study. We will follow up on our below-the-knee with that study immediately. And then in addition, as an indicator to the coronary opportunity, we did complete our six-month mark in terms of follow up for the study that we did in India and that we worked closely with the FDA on. So that would be an optional lever that we could push going forward as well in the clinical arena.

Okay. And as you talk to clinicians, you're having a tremendous amount of success. Is there a percentage of people that give you much pushback on the clinical? Or are you targeting better? Or is there just a basic awareness of the benefits of this therapy?

Well, I think the unmet needs below the knee and particularly with calcium and our performance against those -- against that anatomy and that plaque [pathology] speaks to the physician immediately. We are committed to supporting the physician usage over time with clinical data. And I think that'll need to come. And we'll do that. But initially, physicians needed a solution for calcium, they needed a way to treat outflow and below the knee. And the product is performing nicely.

Okay. And then this is Matt. Just one more quick one -- any sense for what share you're at, at this point below the knee?

We don't have any formal data, but we're making great gains. We're certainly into double digits. One reason it's hard to put a number on is because we do two things below the knee. We do take market share immediately not only against other atherectomy devices but also against balloons. And we also grow the market (inaudible) because our device is low profile and accesses lesions that previously the physicians hadn't accessed. It's uniquely positioned against calcified lesions. 75% of below-the-knee lesions have calcification.

And maybe the most important thing is the safety profile. Now the physician can go down below the knee with the expectation that there won't be a perforation or a dissection. And that's really important for physician outcomes and acute results.

Okay. And then just real quick to follow up on that, are you hearing any learning curve as far as physicians with perforation, other complications, hemolysis early in the process of getting up to curve on using Diamondback or any anecdotal comments would be helpful.

Well, we were really open to whatever may happen, recognizing that we're bringing a new product to market. And we're taking it from bench and FDA clinical data into the commercial setting. So we worked very closely with our physicians on those issues. And we've only gained confidence.

So at this point in time, we worked last year on iterating the device eight times over the course of five quarters. We feel that we've got a device now that is in a great place to enter into clinical studies. And we're still committed to actually working on iteration schedule. So that's our go-forward plan is to continue to iterate and [enter] (inaudible).

All right, thank you.

Your next question comes from the line of Thomas Kouchoukos, Stifel Nicolaus. Please proceed.

Hey, good afternoon, guys. Thanks for taking the question.

Hi, Tom.

Hey, just wanted to follow up from some comments you made I think in your last conference call. Looking at the split between above- and below-knee treatments, I think you were at maybe roughly 40-60 ratio there with the majority being below the knee. As you've had the product out there for a pretty long time now, and as you've had new crown sizes come out to the market, can you talk about maybe the different uses you've seen? And has that ratio changed at all since your last report?

It probably has changed to 60% above the knee and 40% below the knee. Part of that is there is low-hanging market share for -- and currently, the market is biased to above-the-knee interventions. One of the opportunities for us this year is to keep a dual message -- above the knee, below the knee -- and expand the market. And that's an opportunity for our future success is to continue to take that market share as well as keep a key focus on expanding the market pie.

Okay. And then to follow up on the last question from the previous caller, it might be difficult to quantify. But could you provide some sort of measure of how much your growth is coming from expanding the market because you can treat calcium more effectively versus -- what -- maybe competitive wins in the market place?

I lost you on the beginning of that. Will you repeat the beginning of that question?

Sure, just some sense of is the bulkier growth coming from expanding the market because you can expand the treatment population due to the device's capacity in calcium? Or is it more on the competitive win front?

Well, we do both when we enter a hospital. We compete not only against other atherectomy devices, but we compete very well against balloons and stents because we make smooth tubular lumens. We've got a unique safety profile and the toughest plaque [morphology]. We're finding our physicians are picking us up first. And the Diamondback is great for starting a case and sometimes ending it. So that's the place that we're in right now. Does that begin to answer your question?

Yes, I think so. I mean, you've had -- you're sequential growth was pretty impressive and just trying to get a sense of market dynamics and share position. And you said it might be tough to quantify. But one of your early messages was that you would expand the market because you have a device that others haven't been able to really get to places in calcium and things like that. I'm just curious. Have you seen -- I guess it's tough to quantify -- but how much incremental procedure volume do you think you're getting because of that ability to reach places where others can't?

Yes, we do see that. And we're looking at quantifying that. Just some examples -- calcified below the knee, that's a trouble area. A lot of physicians won't go there with devices that were previously available. But they do go down there routinely. And we're seeing market expansion in physician practices, both the vascular surgeon and the interventional cardiologist.

We do have accounts where when we arrive, they've got the traditional three-to-one split between above-the-knee and below-the-knee interventions. And six months, they will have doubled or tripled their below-the-knee interventions. We do have some examples of that in our customer base. And we'll continue to look at that as we go forward.

Okay. That's really helpful. And then finally, one last one -- could you talk a little bit about your early efforts in the coronary space because that sounds like you might be getting more aggressive going towards the heart?

Well, we did work very closely with the FDA on a feasibility trial that we conducted last year in India. It was 50 patients. And the low profile of the device, its ability to access small vessels and the unique safety profile were indicators for us that this will be a great device in the coronaries. And in fact, that's turned out to be true. We completed the 50 cases by June of calendar year last year. And we've got the six-month follow up on nearly all of them at this point in time. We will be meeting with the FDA shortly to review those results and really look forward to giving you updates over time on that coronary opportunity.

Great. Thanks so much, guys.

You're next question comes from Christopher Warren with Caris & Company. Please proceed.

Thanks so much. I appreciate it taking the question. I wanted to ask you over the last two to four quarters have you in your opinion seen any market procedure deceleration in terms of growth?

We keep our eyes open. With the economy in the state that it is, we haven't observed any hard data. Unfortunately, a lot of the patients who need treatment are at end stage. And they're looking at immobility, pain, or amputation. So we haven't seen a trend towards less cases in PAD intervention. But we're open to looking for it.

Thanks. That's helpful. And just another question on the competitive landscape -- there are two primary competitors that you go head to head with, both of which I cover. And my question for you would be is there any change there? Do you perceive you're taking more share from one than the other?

It's hard to tell. I don't have a definitive answer. We compete well against both atherectomy and non-atherectomy solutions, compete very well against balloons of all kinds as well. And we compete well against non-treatment once the physician gets comfortable with our safety profile. We definitely have taken some market share. Physicians needed a solution for calcium. And I think we have taken market share from some of the companies out there. But it's hard to determine because we do grow the market pie as well.

Understood. And just one last question on inventories -- have you seen any change in what the hospitals are stocking or destocking, anything there?

Well, it's been pretty stringent. When we entered the market five quarters ago, the hospitals have been in pretty good control. And we also have some stringent policies here. We don't give away free product. We don't consign. We sell only enough devices on an initial stocking order for the physician to be ready for the next couple of cases. And then when physicians or hospitals reorder, we'll sell them one or two or whatever their need is for their ordering patterns. So we're not seeing any unusual practices other than continued control of inventories, both from the hospital side and from the CSI side.

Okay. Thanks so much. Great growth on the quarter.

Thank you.

Thanks.

And the next question comes from the line of Jason Mills with Canaccord Adams. Please proceed.

Hi, David. Thanks for taking the question. David, first of all, you and your team at Foxhollow did really the best initial and perhaps the best job of developing the referral channel in this market. But yet in our due diligence, it's still amazing to me the number of physician podiatrists especially out there that are either ignorant or not as aware as others about the interventional treatments such as yours. I'm wondering what your current company's doing -- CSI's doing -- to continue the referral development and how that's going. What inning do you kind of see us being in, in terms of awareness among the specific diagnosticians, whether they be podiatrists or general care practitioners out there?

Yes, we're in the first three innings still. But we're not in the first inning. We're in the third inning. We've seen in general some increased awareness and dramatic increase in the number of physicians dedicated to intervening here. In 2004 it was interventional cardiology that got into the leg space in spades and necessarily so for the size of the problem. And now we're seeing vascular surgeons doing a great job getting that endo-training.

In terms of what we do and how we spend and invest, at this point in time, we're in 400 accounts. We need to be in 1,500. We've got a chance to take market share and build the market pie without really expanding into the referral marketing activities. We're for them. But at this stage of the game, we're going to focus one physician at a time and support those physicians.

But there is a ground swell. There are hospitals now who are getting behind their physician operators and with marketing and awareness campaigns. And physician operators with the continued success of their leg interventions are calling up their referral physicians to make them aware of what they can do. And certainly a great reason for them to do that right now is the new technology that treats calcium uniquely and has a unique safety profile. So some of that work is being done for us and for patients by the hospitals and the physicians themselves.

That's helpful. To a question a little bit ago with respect to the clinical trial update, you mentioned the calcium trial. I'm wondering if you could just update me -- and perhaps I missed it -- with the details. If you've already gone over them, I apologize for making you repeat them, but details in terms of number of centers you plan to be involved in that trial and the specific endpoints you'll be targeting.

Yes, we're going to look at acute and long-term results. It's going to be a below-the-knee study. We know that calcium is prevalent in 75% of those cases. So we will look at acute and long-term results. As far as the number of patients, that's a dial that we could touch. We will likely start with ten centers and then expand if necessary. And we look forward to updating you over time.

Okay. Just a few final ones, and I'll get back in queue. Is there any way, David, you could assign any nominal benefit vis-a-vis Spectranetics federal investigation and perhaps some clinicians losing faith, be it right or wrong -- I'm not here to judge -- but in that technology or in that company vis-a-vis the federal investigation? Is there any way that you could quantify or speak to that?

No. I think it's the big issues that are important. You have 8 million to 12 million patients who need the treatment. We need more tools. And I think that's where the physicians' heads are right now is just needing new tools to treat this large patient population.

Okay. And then lastly, just with respect, you mentioned a bit ago your practices with respect to inventory and in the hospitals. When a new center starts, has there been any change or could you just remind us what your sort of normal center's upfront investment would be when they start a CSI practice?

Sure. Yes, it's about $40,000. We have five different sizes. And we think to prepare for the next couple of cases, we like them to have up to two devices per size. So I'd say the average number of devices would be six to ten, not all of them ordered, two of each size. And then for the pole and the scoreboard, we don't give that away. But we also don't get a big margin off of that. So we -- that's the way we've installed every account today.

I'll just point out that the number Dave said of $40,000 -- that would be assuming that they were buying the controller as well. But oftentimes, they choose to pay for that with a modest uplift in the device.

Okay. Thanks, guys. Congratulations on a good quarter.

Thank you.

Thanks.

Your next question comes from Raj Denhoy with Thomas Weisel Partners. Please proceed.

Hi, good evening. I just wonder if I could just ask a question. I know you've covered this a little bit. But I just wanted to reconcile -- one of your larger competitors in this market has made comments that they don't think this market is growing and that it requires additional clinical data to really get the market moving. And yet you are making comments that the market is still very healthy. And is it simply a case of your ability to treat areas they can't? Or are you seeing something in the marketplace that they're missing?

Yes, I think you're exactly right. We treat areas that other devices can't. So we're not limited to just the traditional and visible two atherectomy companies. We apply to literally anytime a physician's looking at the above the knee or below the knee. They can and often do start with the Diamondback 360. So we do have more opportunity. And we're seeing that in our usage and uptake.

Well, then could you even hazard a guess at the growth you're putting up, the revenue numbers you're putting up, how much of that is coming from new areas that couldn't be treated versus competitive wins you're taking from devices which are already on the market?

Yes, and we don't have great detail on that. Last year, we invested in infrastructure. We had new sales hires. We installed and trained new physicians in hospitals. We did take the low-hanging fruit market share. But we've got a number of examples in our customer base of situations where they've doubled or more the amount of below-the-knee cases that they've done. And they've changed their approach completely to any case where they think they're encountering calcification.

Okay. And then just lastly, you mentioned you haven't expanded yet internationally. Do you have any update on your timing or plans to start moving overseas?

Well, we've got a great margin and a great business in the United States. And we're going to focus our precious dollars on the U.S. market first. We're open to technologies from any part of the world that would help us at our user base or with our hospitals. So we do engage in that dialogue. But for right now, we're going to be a U.S.-focused company.

Great. Thank you.

Your next question comes from the line of Shawn Fitz with Stephens Incorporated. Please proceed.

Yes, great. Thank you. Congratulations on the quarter and a strong 12 months. This is a bit of a follow up to Raj's questions. But I guess as we look around at the atherectomy space and some of the technologies that have addressed this market, there seems to be kind of a track record here where you see some very dramatic growth initially and then a period where there appears to be kind of a glass ceiling and a deterioration into negative growth.

So just as an analyst trying to understand this industry, could you kind of help me understand what it is about your technology or your sales force that would make that not a reliable predictor of future growth trends for CSI?

Sure. In terms of market share, balloons, stents, surgical alternatives, we make smooth tubular lumens. And we're very safe. And we're easy to use and getting easier to use. So that in terms of just market share allows us to compete with anything that's used right now.

In addition to that, we do access anatomy that previously couldn't be accessed routinely and safely. And a great example of that is below the knee. There's a three-to-one bias for above-the-knee versus below-the-knee treatment. And that's not because the disease doesn't exist. Unfortunately, the disease is diffuse. If you've got it above the knee, you've got it below the knee. If you've got it in one leg, you've got it in the other leg. It's just the limitations of technologies that allow the physicians to get to some anatomy, especially below the knee, routinely. Our device allows physicians to do that.

And so when we think, again, about just the composition of the blockage, it sounds like you all are particularly strong with calcified lesions. Just as we think about focal versus diffuse lesions, do you feel like you've got a competitive advantage from that standpoint?

We do because one device will treat both. And that's unique. Now with the longer throw, the 15-centimeter treatment length -- now available to the doctor, that allows the physician to go in and treat multiple focal lesions or diffuse lesions. And with the safety profile, the device does differentiate between healthy and organized plaque. We're great on all plaque morphologies, particularly calcium. And the reason that when you talk to the physicians you'll hear about calcium a lot is there just hasn't been a device in the past that allows them to routinely treat it.

Okay. So below the knee, is it fair to assume that that's roughly 40% of all atherectomy procedures in the marketplace now?

Well, no, for us, it is. For us, it is. But I think other technologies have difficulty getting down there routinely. So I don't think that that mix would be as high.

Okay. And so then if we think about calcified lesions below the knee, what percentage of the atherectomy procedures below the knee do you think encounter are to address a calcified lesion?

Physicians tell us that 75% of the time they are below the knee, there is calcium.

Okay. Thanks, David. Appreciate you guys' time.

Sure. Thank you.

At this time, we have no additional questions in the queue. I would now turn the call back over to Mr. Dave Martin for any further remarks. Please proceed.

Well, thanks for attending the call. We believe [the numbers] established in the first half of fiscal 2009 will carry us into the rest of the year. And our Diamondback 360 system is making an impact on the treatment of patients with PAD. And we have the team and the plan for a superior execution for the remainder of the year and beyond. Thank you.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. And have a wonderful day.