Cardiovascular Systems Inc (CSII) 2010 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Quarter [One] 2010 Cardiovascular Systems Earnings Conference Call. My name is Modesta and I will be your operator for today. At this time, all participants are in listen-only mode. Later, we will conduct a question-and-answer session.

(Operator Instructions)

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

Thank you, Modesta. Good afternoon, and welcome to our Fiscal 2010 Third Quarter Conference Call. Before we begin, I'd like to remind you that during the course of this call we will make forward-looking statements. These forward-looking statements are covered under the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995 and includes statements regarding CSI's future financial and operating results or other statements that are not historical facts.

Please be advised that actual results could differ materially from those stated or implied by our forward-looking statements due to certain risks and uncertainties, including those described in our most recent Form 10-K and subsequent quarterly reports on Form 10-Q. We suggest that you read these and other future filings that we may make with the SEC.

CSI disclaims any duty to update or revise our forward-looking statements as a result of new information, future events, developments, or otherwise. We will also refer to non-GAAP measures because we believe they provide useful information for our investors. Today's news release contains the reconciliation table to GAAP results.

I'll now turn the call over to Dave Martin, CSI's President and CEO, for comments. Dave?

Thanks, Larry, and hello, everyone. In fiscal 2010, we have five priorities. They are, first, driving adoption in our existing accounts through customer education on the optimal protocol for the Diamondback 360 and increasing volume in patient procedures below the knee.

Second, launching ORBIT II, our pivotal clinical trial to evaluate our technology for use in calcified coronary lesions; this is a new market opportunity for CSI. Third, building a foundation of quality, evidence-based data to confirm the clinical utility of the Diamondback 360 in treating peripheral arterial disease including advancing COMPLIANCE 360, CALCIUM 360, and additional clinical trials.

Fourth, introducing new versions of the Diamondback 360 to improve ease of use for physicians and enhance device effectiveness throughout the patient's leg. And finally, balancing revenue growth and operating expenses to achieve profitability and positive cash flow. We'll elaborate on our milestones in these areas later in the call.

Turning now to CSI's fiscal third quarter financial performance. Revenue of $16.5 million was up 9% over both the year-ago period and sequentially from the second quarter of this fiscal year. This was in line with our expectations. Balancing revenue growth with expense management resulted in a reduction in our loss compared to last year's third quarter. The net loss improved 11%, excluding income for preferred stock warrants and auction rate securities, valuation changes a year ago.

During the third quarter, we made significant headway in educating our physician customer base in the optimal protocol for use of the Diamondback 360 to safely change lesion compliance by removing hardened plaque while minimizing damage to the arterial wall, and therefore preserving medial integrity. As a result, we are seeing improved patient outcomes and greater product usage at targeted accounts.

Newly targeted accounts this quarter grew 13% sequentially over the fiscal second quarter, while targeted accounts we focused on in the second quarter continued to grow as well. We are expanding this effort to additional accounts going forward by focusing on superior outcomes and increased usage in our current account base. Rather than broader account penetration, we are building a loyal customer base and sustainable revenue growth for the future.

The Diamondback 360 treats plaque throughout the leg and addresses many limitations of other treatments. In just over two and a half years since commercial launch, the Diamondback system has been used in more than 25,000 cases. At this early stage, we've captured the number one or the number two share in the above-the-knee atherectomy market in each region of the United States, and we have a leading number one share in the below-the-knee market across the country. Our unprecedented safety profile means more patients are finding relief and improved long-term outcomes with significant economic benefits.

Physicians are adopting our technology as evidenced by increases in both hospital accounts and usage. We sold 4,870 Diamondback devices, up from 4,559 in the third quarter last fiscal year, bringing the total number of devices sold nearly to 38,000 since the initial product launch.

The percentage of revenue generated from reorders increased to 93% for the fiscal 2010 third quarter. That's up 84% in the year-ago period, reflecting our emphasis on driving adoption in existing accounts.

Now, Larry will provide more details of our financial results. Larry?

Thank you, Dave. For the third quarter of fiscal 2010, compared to 2009, revenue grew to $16.5 million, which was a 9% increase over last year. Diamondback device sales continued to generate most of our revenue at 88% of the total. Other product revenue grew more than $600,000 from sales of our Viper product line and distribution partner products which have been introduced over the last year.

We added 52 new accounts, down from 87 last year, as we focus on driving adoption in existing accounts. Adding fewer new accounts reduced revenue by $1.2 million between periods. However, this was more than offset by an increase in revenue from reorders of $2.6 million to 93% of total revenue, up from 84% of total revenue last year.

Gross margin improved to 77% from 74% last year due to product cost reductions, manufacturing efficiencies, and shipment of fewer controller units. Operating expenses rose 7% to $18.8 million.

SG&A expenses increased 15%, primarily due to larger sales organization, which includes more than 100 direct sales representatives, as well as higher spending on education and training programs. R&D expenses declined 28% from the prior year due to cost reductions, as well as the completion and timing of development projects and clinical studies.

Net other expense was $349,000 for the quarter versus net other income of $2.7 million in the prior-year period. Last year's amount includes $3.5 million of income related to valuation changes in redeemable convertible preferred stock warrants, which were adjusted at the time of the merger in February 2009, and in auction rate securities. Interest expense also declined as a result of our debt refinancing in April of 2009.

The net loss was $6.5 million, or $0.44 per diluted share this year, compared to $3.8 million, or $0.32 per share last year. However, excluding the other income from valuation changes last year, the net loss improved 11% and loss per diluted share improved 27%.

The number of diluted weighted average shares outstanding rose to 14.9 million from 12 million last year. The increase was due to the effects of the reverse merger, which included conversion of all preferred stock to common stock, as well as issuance of new common shares. Last year's net income available to common shareholders was increased by $25.8 million in decretion of redeemable convertible preferred stock due to revaluation at the time of the merger.

Adjusted EBITDA, calculated as loss from operations less depreciation and amortization and stock-based compensation expense, improved by 16% from last year to a loss of $3.9 million. The improvement was greater than the adjusted net loss improvement of 11% due to the higher stock compensation expense this year.

For the nine months ended March 31, revenue rose to $46.8 million, a 15% increase over last year. The gross margin was 77%, up from 71% last year for reasons similar to the quarter. Operating expenses declined 5% to $54.6 million.

Investments in sales expansion and education training programs were more than offset by reductions in R&D, primarily due to the timing and completion of product development projects and the ORBIT I coronary trial. Also, fiscal 2009 included a $1.7 million write-off of costs related to our IPO withdrawal.

Year-to-date net other expense was $896,000 versus net other income of $2.4 million last year, which included net income of $3.8 million for valuation changes in redeemable convertible preferred stock warrants and auction rate securities, including the put option with UBS related to those securities.

The first nine months' net loss narrowed by 26% to $19.5 million. The improvement was 35%, excluding the net other income from valuation changes last year. Net loss available to common shareholders was favorably affected last year by $22.8 million of decretion in preferred stock.

The resulting net loss per diluted common share was $1.33 this year versus $0.57 last year. The average shares outstanding grew to 14.7 million from 6.1 million a year ago, primarily due to the merger transaction. Adjusted EBITDA improved 50% to a loss of $11.7 million year-to-date.

Cash and cash equivalents at the end of this quarter remain consistent with the end of the fiscal 2010 second quarter at $23.6 million, and included $4.4 million of proceeds received from the term debt refinancing at the end of the quarter.

As we previously announced at the end of March, we completed a $25 million refinancing with Silicon Valley Bank consisting of a $10 million growth capital term loan and a $15 million working capital line of credit. The term loan was funded at the end of the quarter, bringing $4.4 million of new proceeds into the Company after consolidating existing term debt balances. No draws have been made on the line of credit.

In April, we also completed a convertible debt agreement with Partners for Growth, providing the ability to draw up to $4 million in debt over the next 12 months and additional amounts over the next four years to the extent existing debt is converted to common stock. At closing, $1.5 million was drawn. This financing enhances our financial flexibility as we continue to grow the business and work towards profitability and positive cash flow.

Finally, our auction rate securities declined $3.4 million during the quarter due to redemptions by issuers. Proceeds were used to reduce the full par value loan UBS provided against those securities. The remaining $19.3 million par value of auction rate securities can be put back to UBS beginning on June 30, 2010. The remaining UBS loan will be paid off at that time.

I will now turn it back to Dave for additional comments. Dave?

Thanks, Larry. Let me first recap our recent educational efforts. When we launched the Diamondback 360, it worked exceptionally well in treating lesions behind and below the knee. We delivered a tool with a specific protocol for predictable outcomes; however, physicians began using the product above the knee, for which the optimal procedure of protocol was not in place.

Customer satisfaction above the knee did not match the below-the-knee results and usage suffered. We developed an optimal protocol for large vessels above the knee, educated our sales organization on it, and have focused on working with physicians and their staffs to install this protocol. Our efforts are paying off in key targeted accounts with higher usage rates and revenue.

We will continue to expand this effort while also placing greater emphasis going forward on increasing procedures below the knee, in order to improve outcomes of people afflicted with this life-limiting and threatening disease.

Next, I'd like to bring you up-to-date on recent developments in our clinical trials program. At CSI, we believe that clinical evidence is the path to leading market share. We are committed to obtaining quality prospective data that will confirm the clinical benefits of the Diamondback 360 in treating both peripheral and coronary disease.

Our growing body of evidence puts us in a unique leadership position to provide physicians the information that they need to optimize patient outcomes and favorably affect the cost of care, as well as standardized practice guidelines. Based on known superior clinical outcomes in treating small vessels with the Diamondback 360, we intend to leverage the device's capability to expand into the interventional coronary market. The coronary market is a large potential market opportunity for our core technology.

In April, we announced unconditional FDA approval to begin the ORBIT II, a pivotal trial to evaluate the safety and effectiveness of the Diamondback 360 in treating calcified coronary lesions. We'll initially enroll up to 100 patients at 50 US sites, with the potential to enroll up to 429 patients. We're working right now in the internal review board submissions at 15 initial hospitals across the United States and expect to begin enrolling patients in the next few months.

During fiscal 2009, we completed the ORBIT I trial, a 50-patient feasibility study which investigated the device's safety in treating calcified coronary arterial lesions. The Diamondback was successful in 98% of patients with calcified lesions and the acute procedural success rate, including stent placement, was 94%. We are confident that we can repeat these favorable outcomes in ORBIT II. Upon FDA clearance of our product for coronary use, we will have one of the few new coronary product introductions in the last decade.

Additionally, in the third quarter, CSI made significant progress related to peripheral clinical research programs. Last week, we announced the completion of patient enrollment in our CALCIUM 360 study. This trial compares the effectiveness of the Diamondback 360 to balloon inflation in treating heavily calcified lesions behind and below the knee. Calcified plaque exists in about 75% of these lesions.

In the fiscal fourth quarter, we expect to complete enrollment in the COMPLIANCE 360 study. COMPLIANCE 360 evaluates the clinical benefit of removing hardened plaque, while preserving medial integrity above the knee with the Diamondback 360. This study compares the performance of the Diamondback 360 plus low pressure balloon inflation, if desired, with that of balloon inflation alone.

Both of these clinical trials are prospective, randomized studies that will be core lab adjudicated. Each will enroll 50 patients, or have enrolled 50 patients at up to ten US medical centers and follow-up will be 12 months. In addition, we've recently began a prospective multi-center registry called Confirm to study more than 700 patients and their acute outcomes following the Diamondback procedure.

With our continued commitment to study clinical and economic outcomes in conjunction with our landmark OASIS study, coronary work, and several physician-initiated studies, we have prospective data on more than 1,100 patients. The rigorous prospective evidence will accelerate market growth and enhance our leadership position.

Now, I'd like to share our outlook for the fiscal 2010 fourth quarter ending June 30. We anticipate revenue in the range of $16.5 million to $17.5 million, or growth of 5% to 11% over the fourth quarter of fiscal 2009; gross profit as a percentage of revenue at about the same as the third quarter of fiscal 2010; and a net loss ranging from $5.6 million to $6.2 million, or $0.37 to $0.41 per share based on 15 million shares outstanding.

These amounts exclude an expected stock compensation charge in the fourth quarter of about $800,000, or $0.05 per share, related to the issuance or extension of stock option grants that had short original exercised terms. And on an adjusted EBITDA basis, we anticipate a loss between $3 million and $3.6 million. We believe that net loss and adjusted EBITDA will improve as revenue grows in the future.

To recap on our five fiscal 2010 priorities, first, driving adoption in our existing accounts through customer education on the optimal protocol for the Diamondback 360, and to increase volume in patient procedures below the knee. Second, launching ORBIT II, our pivotal clinical trial to evaluate our technology for use in calcified coronary lesions; this is a new market opportunity for CSI.

Third, building a foundation of quality, evidence-based data to confirm the clinical utility of the Diamondback 360 in treating peripheral disease, including advancing COMPLIANCE 360, CALCIUM 360, and additional clinical trials.

Fourth, introducing new versions of the Diamondback 360 to improve ease of use for physicians and enhance device effectiveness throughout the patient's leg. And finally, balancing revenue growth and operating expenses to achieve profitability and positive cash flow. These initiatives position us well for significant profitable growth over the longer-term, as we continue to target fiscal 2011 to achieve our first profitable quarter.

Now, we'd like to open the call for questions.

(Operator Instructions)

Your first question comes from the line of Matthew O'Brien with William Blair. Please, proceed.

Good afternoon, guys. Thanks for taking the question. Just wanted to ask you a little bit about the training program that you have in place. Where are we at this point? Are you 50% of the way through with your surgeon customers -- 75%? Where are you at at this point?

Yes, we are, Matt, we're about 50% through our targeted install of the optimal protocol.

Great. And then I'm looking at your unit performance in the quarter; it was up about almost 10% sequentially. Was that really driven by this change to the protocol in fiscal Q1, but now you're seeing the benefits of this?

Yes. The results are lagging activities, for sure. We really focused on this in Q2 fiscal, and we're seeing the results now.

Okay. So then when I look at your Q4 guidance, it's kind of the midpoint of the range, it looks like unit sequential growth is about 5% and that assumes flat other revenue. Are you incorporating in some kind of competitive impact or --? It just seems like the guidance is a big conservative looking into next (inaudible).

It is conservative. And no, we're not expecting -- we expect fierce competition, as we always do, but nothing in particular.

Okay. And then a question for Larry. In terms of the debt, any sense for when you expect to -- you seem like you have a reasonable cash position at this point, but any sense for when you may start (inaudible)?

I'm sorry, Matt, you broke up right at the end. Could you restate the end of it?

I apologize. Just any sense for when you might start taking down additional debt associated with the use of the revolver or the other facility that you have?

We don't have additional plans in the near future to drive down additional amounts.

And then one last quick one. You're making great progress on the clinical side of things; are we going to get any kind of interim looks at CALCIUM 360 or ORBIT II before the full data is released?

Yes, the CALCIUM 360, we would like to present acute results, so we're planning on doing that in the next six months. And then, we'll have that critical one-year follow-up about this time next year, so we'll come back at it with those results -- clinical and economic.

Okay, great. Thank you.

Your next question comes from the line of Ernest Andberg with Feltl and Company. Please, proceed.

Hello, Dave, Larry.

Hi, Ernie.

How are you?

I'm good. I guess address the ORBIT first. What are the primary endpoints that you guys are looking to meet in the ORBIT, Dave?

Yes. It's a safety endpoint 30 days -- 30-day MACE.

Okay. Are there any -- what kind of procedural success or endpoints, or are they secondary kind of endpoints?

Well, 30-day MACE would be made up of cardiac death, MI or Q-waves and TLR.

Yes.

And in the ORBIT I we had a 6% rate. For ORBIT II, the target for approval is 13.6.

Okay. How about in terms of any endpoints on opening the lumen or size of the lumen at six or 12 months, in terms of success that way as opposed to adverse cardiac events?

Yes, they are primary efficacy endpoints, but no six-month or 12-month. It's the last patient enrolled plus 30 days; it's a true safety trial. For procedural success, we're looking for achievement of 20% residual stenosis of the target lesion after stenting without an in-hospital MACE.

Okay. So, the FDA is primarily looking at safety in the coronary arteries and at 30 days?

You bet, with a really difficult patient population. So, of the 1.2 million to 1.3 million catheter-based procedures in the US and the 0.5 million cardiac surgeries, we estimate 15% will really benefit from a device that could take calcified plaque out in preparation for stent placement.

And I want to correct something, too. I just quoted you the less than 20% residual stenosis. That was the ORBIT I trial. For the ORBIT II in the US, procedural success will be defined as facilitating stent delivery with less than 50% residual stenosis and without in-hospital MACE.

Okay, fair enough. Have you got any further insight as to whether your trial sites will be able to be reimbursed for this, because there is an atherectomy code out there that is general, not specific to another device?

You bet, we do believe that it will be reimbursed throughout the trial. We worked with our sites. We've done a lot of pre-work with our sites. We've identified the first 15. We've got a list of 50 plus that we've pre-qualified, so we're excited to start reimbursements part of that package.

Okay. Last on ORBIT II. How long -- you said a few months to get the trial up and going. Any better idea what that might mean, Dave? What's a few -- three?

Yes, we think that we'll have the first patients enrolled next quarter. We've done the pre-work to make that happen, so that's the expectation.

Okay. And then if the FDA allows you to go ahead with the whole trial, can we look at that as a milestone, that the FDA thinks this thing is working?

Yes, you bet. We've worked closely with them with all of our trials. The ORBIT I, we really do believe, Ernie, that we know the answer in advance of this based on the ORBIT I.

Sure.

We think that ORBIT II will confirm that. We'll work closely with them and I think that would be a great endorsement, for them to allow us to go from 50 to 429.

All right. Dave, you made some comments about above-the-knee success in targeted accounts in the first quarter and the second quarter. I wasn't quite sure what you were referencing there. Can you go over that again, please?

Yes. The second quarter of fiscal we took a small number of accounts and we really focused on installing the proper protocol.

Okay.

And the number of touches and specific education that that took, it worked. I think we reported in the last call that those accounts that we targeted in fiscal Q2 grew well over 50% on a sequential basis, so we expanded that program. We've expanded that program into another large group of targeted accounts and got a similar great result.

Okay. But did you say something about plus 13% in targeted accounts? Did I --

Yes.

Did I miss -- what did that mean?

It means that sequentially the accounts that we targeted grew 13% from fiscal Q2 to --

I understand. Last question. Larry, how is the interest income and the interest expense line going to change as we have added -- what, $6 million of additional debt into the balance sheet and you're going to presumably have the interest you're earning on the -- pardon me, let's leave it there. How is that going to change the interest expense line?

Yes. The interest expense, just on those pieces of debt, would increase about $100,000 per quarter, though we have some interest expense that's declining on a couple of other things including long-term lease obligation, so the net impact for fourth quarter would be fairly neutral to where we are in the third quarter.

Okay. Thank you very much.

Thanks, Ernie.

(Operator Instructions)

It appears there are no further questions at this time.

The Diamondback 360 is raising the standard of care for patients with peripheral disease, which is an underserved market. We believe the minimally invasive peripheral market is growing, driven by the need for effective new treatments to remove plaque and modify compliance in lesions above and below the knee.

We see an opportunity also for this technology to apply to the small vessels in the coronary arteries; that is a new opportunity for CSI. In fiscal 2010, we're making great progress towards our goal and are optimistic about our future. We look forward to updating you on our progress next quarter. Thank you, everybody.

Ladies and gentlemen, that concludes today's conference. Thank you for participation. You may now disconnect. Have a great day.