Cardiovascular Systems Inc (CSII) 2010 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the fourth-quarter 2010 Cardiovascular Systems, Inc. conference call. My name is Keana and I will be your operator for today. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. (Operator Instructions).

I would now like to turn the conference over to your host for today, Mr. Larry Betterley, CFO. You may proceed.

Thank you, Keana. Good afternoon and welcome to our fiscal 2010 fourth-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 include 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 shareholders. Today's news release contains a reconciliation table to GAAP results.

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

Thank you, Larry, and hello, everyone. In fiscal 2010, we focused on several priorities. First, driving adoption in our existing accounts in two ways -- one, through customer education on the optimal protocol for the Diamondback 360; and two, increasing volume in patient procedures below the knee.

Second, we enrolled ORBIT 2, our pivotal clinical trial to advance our technology for use in calcified coronary lesions. This is a major new potential market opportunity for CSI.

Third, building a foundation of prospective, evidence-based data to confirm the clinical utility of the Diamondback 360 in treating peripherals arterial disease. We will advance our Compliant 360 and CALCIUM 360 studies, and prospective registries at additional layers of clinical and economic proof.

Fourth, introducing new versions of the Diamondback 360, such as the just-released Diamondback Predator 360, to improve ease-of-use for physicians and improve outcomes for more patients.

And finally, we will balance revenue growth and operating expense as we progress towards positive cash flow and profitability.

We'll elaborate on our milestones in these areas during our time with you today. While Larry will provide an in-depth review of CSI's fiscal fourth-quarter financial performance, I'll comment from a highlights perspective.

Revenue of $18 million was up 15% over a year-ago period and sequentially up 9% from the third quarter. Balancing revenue growth with expense management resulted in a reduction in our loss compared to last year's fourth quarter. Net loss improved 22% to $4.4 million or $0.29 per diluted share. Our adjusted EBITDA loss improved 58% to $1.5 million.

During the fourth quarter, we continue to make headway in educating our physician customer base on the optimal protocol for using the Diamondback 360 in large vessels. The Diamondback removes plaque, including the most difficult plaque, while preserving the integrity of the native vessel. As a result, we are seeing improved patient outcomes and we are driving adoptions in our accounts. Therefore, we entered fiscal 2010 with a strong customer base to support achieving significant revenue growth.

The Diamondback 360 treats plaque where the patient has it, typically throughout the leg, and addresses many limitations of other treatments. Since commercial launch in September 2007, the Diamondback system has been used in nearly 30,000 cases.

At this early stage, we've captured the number one or number two share in the above-the-knee atherectomy market in each region of the United States. We also have a dominant number one share in the below-the-knee market across the country and are moving in on a number one US share overall. 1,300 patients in our study offers proof that our unique safety profile means Diamondback patients are finding more relief and improved long-term clinical outcomes with significant economic benefits.

Physicians are adopting our technology, as evidenced by increases in both hospital counts and usage. We sold 5,318 Diamondback devices, up from 4,692 in the fourth quarter last fiscal year, bringing the total number of devices sold to more than 43,000 since the initial product launch. The percentage of revenue generated from re-orders increased to 93% for the fiscal 2010 fourth-quarter, up 89% in the year-ago period -- up from 89% in the year-ago period. And that reflects our emphasis on driving adoption in existing accounts.

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

Thank you, Dave. For the fourth quarter of fiscal 2010 compared to 2009, revenue grew to $18 million, which is a 15% 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 33% to $2.1 million from sales of our Viper product line and distribution partner products, many of which have been introduced over the last year.

We added 60 new accounts compared to 69 last year, as we prioritized driving adoption in existing customers. The increase in revenue from reorders was $2.9 million, bringing the reorder revenue to 93% of total revenue, up from 89% last year. Gross margin improved to 77% from 73% last year, due to product cost reductions, manufacturing efficiencies, and shipment of fewer controller units.

Operating expenses rose 7% to $18.2 million, but declined 4% sequentially from the third quarter. SG&A expenses increased 8% year-over-year, primarily as a result of a larger sales organization, which includes more than 100 direct sales representatives, as well as higher spending on education and training programs. SG&A declined to 7% sequentially from third quarter, due to expense management and program completion.

R&D expenses were consistent with the prior year and up 16% sequentially from the third quarter, with increased clinical study activity. Net other expense was similar to last year's fourth quarter at $109,000. Lower debt interest expense resulting from our debt refinancings in the last year was offset by lower investment income and gains.

The net loss was $4.4 million or $0.29 per diluted share in the just-completed quarter, improving from $5.6 million or $0.40 per share last year. The number of diluted weighted shares outstanding rose to 15 million from 14 million last year, due to the issuance of stock grants and employee stock purchases.

Adjusted EBITDA, calculated as loss from operations, less depreciation and amortization and stock-based compensation expense, improved by 58% from last year to a loss of $1.5 million. The additional improvement of adjusted EBITDA over the operating loss was due to a $794,000 increase in stock compensation expense between periods, primarily from extending stock option terms or granting fully vested shares for expiring awards, with original terms of only five years, which occurred in the fourth quarter of 2010.

For the full fiscal year ended June 30, revenue rose to $64.8 million, a 15% increase over last year. Reorder revenue was 93% of total revenue, up from 81% last year, again, reflecting our emphasis on device usage in existing accounts.

The gross margin was 77%, up from 71% a year ago for reasons similar to the quarterly gross margin gain. Operating expenses declined 2% to $72.7 million, primarily due to cost controls, and the timing and completion of R&D projects, partially offset by investments in sales and marketing. Fiscal year 2009 also included $1.7 million of expenses incurred in preparation of our withdrawn IPO.

Other expense was $1 million versus net other income of $2.3 million last year. Last year included net income of $3.8 million for valuation changes and redeemable convertible preferred stock warrants, and auction rate security assets.

The full-year net loss narrowed by 25% to $23.9 million. Net loss available to common shareholders increased $14.8 million, due to a benefit of $22.8 million from [accretion] in preferred stock recorded last year. The resulting net loss per diluted common share was $1.62 this year versus $1.13 last year. The average shares outstanding grew to 14.7 million from 8.1 million a year ago, primarily due to the reverse merger transaction completed in February 2009.

Adjusted EBITDA improved 51% to a loss of $13.2 million. Stock compensation expense was $2.3 million greater in fiscal 2010, due to stock option and restricted stock grants, and employee stock purchase plan purchases.

Turning now to the balance sheet, cash and cash equivalents at the end of the quarter remain consistent with the end of our fiscal 2010 third-quarter at $23.7 million, and included $1.5 million of proceeds received from our convertible debt financing closed during the quarter.

As we've previously announced, at the end of March, we completed a $25 million refinancing with the 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 third 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 drop up to $4 million in debt over the initial 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 and an additional $2.5 million remains available. These financings enhance our financial flexibility as we continue to grow the business and work towards profitability and positive cash flow.

Finally, our auction rate securities and related put option balance was zero at the end of the year. All auction rate securities were redeemed by issuers or repurchased by UBS. Proceeds were used to pay off an equivalent amount of debt financing UBS had provided against those securities.

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

Thanks, Larry. First, we're pleased to report our customer education efforts, launched at the beginning of fiscal 2010 regarding optimal Diamondback 360 protocols and industry-leading safety data, are paying off with higher revenue in the second half of the fiscal year. Usage has stabilized and we now have a solid customer base to support growth.

Education efforts emphasize the Diamondback's ability to change vessel compliance while preserving healthy vessel tissue. In addition, we are focused on increasing procedures below the knee to reduce the amputations and improve outcomes for people afflicted with this life-limiting and life-threatening disease.

We are launching our second-generation product, the Diamondback Predator 360 system. This new device uses the same safe mechanism of action as the clinically-proven Diamondback 360 system. We engineered improvements into the crown for enhanced clinical performance and shorter procedure times. Development of the Diamondback Predator 360 underscores our commitment to listen to physician's feedback and respond with superior tools and clinical proof to treat peripheral disease.

We completed an extensive, limited market release. In approximately 1,500 patients treated, we reduced treatment time or spend time by 33% to only two minutes while accessing and treating the most difficult lesions in both size and in makeup. Physicians who have used the Diamondback Predator 360 have found the enhanced system gives them favorable outcomes faster, and allows them to treat multiple and complex lesions with each device.

In support of this introduction, we also initiated the confirmed Diamondback Predator prospective registry, a multi-center study which will follow 500 patients. This study will collect information on Diamondback Predator 360 performance, including overall plaque reduction, and key acute safety measures and techniques for optimal outcomes.

Next, I want to bring you up to date on recent developments in our clinical trials program. At CSI, we believe that multiple sources of prospective clinical evidence and ease-of-use will lead to widespread adoption. We are committed to continuous surveillance in studies that will confirm the clinical benefits of the Diamondback 360 and raise the standard of care in peripheral and coronary disease intervention. Our growing body of evidence puts us in a unique leadership position to provide physicians and their patients the information they need to optimize outcomes.

Our prospective study shows superior clinical outcomes in treating small vessels in the leg. We intend to leverage the device's capabilities to expand into the interventional coronary markets, also small vessels. This is a new and large potential market opportunity for our core technology.

In April, we received unconditional FDA approval to begin ORBIT 2, a pivotal trial to evaluate the safety and effectiveness of the Diamondback 360 in treating calcified coronary lesions. ORBIT 2 is expected to enroll up to 429 patients at up to 50 United States sites, subject to FDA review and the results from the first 50 cases. Enrollment began in the fourth quarter of fiscal 2010.

During fiscal 2009, we completed the ORBIT 1 trial, a 50-patient feasibility study, which investigated the device's safety in treating calcified coronary arterial lesions. The Diamondback had an acute procedural success rate, including stent placement of 94% in patients with calcified lesions. We are confident we can repeat these favorable outcomes in ORBIT 2. 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 fourth quarter, CSI made significant progress on peripheral clinical research programs. In late April, we completed patient enrollment in our CALCIUM 360 study. This trial compares the effectiveness of a Diamondback 360 to balloon inflation in treating heavily calcified lesions behind and below the knee. Calcified plaque, unfortunately, exists in about 75% of those below-the-knee cases.

In late May, we completed enrollment in the COMPLIANCE 360 study. COMPLIANCE 360 evaluates the clinical benefit of removing plaque while preserving vessel wall integrity in large vessels. 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 studies that will be core lab adjudicated. The studies are enrolled now and we are in the follow-up phase tracking results at six and 12 months.

In addition, we've conducted a multi-center prospective registry called CONFIRM, studying more than 700 patients and their acute outcomes following the Diamondback procedure. In this study, Diamondback treated 1.6 lesions per device. Average treatment length per lesion was an extraordinary eight centimeters -- that equates to 13 centimeters of treatment per device. This matches the prolific nature of the disease. These and other results from this study will be presented at the TCT conference in September.

With our continued commitment to studying clinical and economic outcomes in conjunction with our landmark OASIS study, coronary work, and several physician-initiated studies, we have unprecedented prospective data on more than 1,300 patients -- more than any other plaque removal medical device. We believe evidence and product ease-of-use will accelerate market growth and enhance our leadership position.

Now I'd like to share our outlook for the fiscal 2011 first-quarter ending September 30.

We anticipate revenue in the range of $17 million to $18 million, or growth of 12% to 18% over the first quarter of fiscal 2010. Our education program is solidifying our customer base; however, procedure is often slow in the summer months.

Gross profit as a percentage of revenue is expected to be about the same as the fourth quarter of fiscal 2010, a slight rise in operating expense from fiscal 2010 fourth-quarter, as temporary increases in research and development for an electric version of the Diamondback system and for the coronary initiative.

Net loss is expected to range from $4.7 million to $5.3 million or $0.31 to $0.34 per share based on 15.4 million shares outstanding. On an adjusted EBITDA basis, we anticipate a loss between $2.2 million and $2.8 million. We believe the net loss and adjusted EBITDA will improve as revenue grows in the future.

To recap, our current priorities are to drive adoption in our existing accounts through customer education on the optimal protocol for the Diamondback 360 and its superior safety profile, and to increase volume in patient procedures below the knee.

Enroll ORBIT 2 -- our pivotal clinical trial to evaluate our technology for use in calcified coronary lesions. This is a new potential market opportunity for CSI -- and build a wealth of convincing data to confirm the clinical utility of the Diamondback 360 in treating peripheral arterial disease, including advancing COMPLIANCE 360, CALCIUM 360, and clinical trials as well as the confirmed registries.

Continually innovate to improve ease-of-use for physicians and enhanced device effectiveness throughout the patient's leg, as evidenced by the recent launch of the Diamondback Predator 360; and our electric handle device, which is currently under development.

And finally, balanced revenue growth and operating expenses to achieve profitability and positive cash flow. These initiatives position as us well for significant, profitable growth over the longer term, as we continue to target fourth-quarter fiscal 2011 to achieve our first profitable quarter.

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

(Operator Instructions). [Matthew O'Brien], William Blair.

Thanks for taking the questions. A couple -- or just one thing right off the bat -- can you give us any sense for reorder rates on customers that have been using Diamondback over 18 months?

Well, we have a large range -- I don't have that particular piece of information, but we have quite a range of usage. Some of our biggest customers fit into that category and some of those customers on average would be over 50 units per quarter. Then, of course, that will range down to just a few units for the lower volume customers; but definitely in that longer category are some of our biggest customers that have very high usage.

Okay, but the overall base hasn't changed a boat-load; even though you added 60 customers in the quarter net, it wasn't 120 gross and then 60 came off or something like that?

No. No.

Okay. And then the other thing that's just curious -- over the last three quarters, the number of devices you sold per customer has been kind of flat, and I know that's related to the protocol changes that you made. But your commentary about being number one or number two above-the-knee and the number one below-the-knee, makes me start to wonder if the market is contracting a bit and you're just taking share from the other competitors? Or is the market still relatively healthy in terms of atherectomy growth?

Yes, I think the opportunity for market growth is out there. Certainly, we've spent some time optimizing our protocol, spending time in our existing accounts with already-trained doctors, which could take away from our opportunity to work on growing the market.

So now the account base is stabilized and we've reached well over half of our customer base with the optimized large vessel protocol. We can get back to growing that below-the-knee market and really talking about distinct advantages that we have in small vessels and providing outflow for the patient -- outflow is a key to durability and economic and clinical outcomes. So we've got a stable base with which to go forward on initiatives that would grow the market.

Okay. And I know you guys are relatively small percentage of the overall peripheral market, but any sense anecdotally how that market is holding up, given some of the downturn that we've seen in procedure volumes elsewhere?

Yes, the peripheral market -- unfortunately, it's still the Wild West. You've got amputation and surgery; even the minimally-invasive choices -- balloon, stent, and atherectomy, clinical evidence as it did in coronary, in the coronary space and the ease-of-use, clinical evidence and ease-of-use will start to organize the peripheral space, and will move from chaotic, a mix of surgery and various endovascular techniques to a higher standard of care.

So we're looking at the long-term. That's the reason we're investing millions and millions of dollars into clinical research and surveillance. We know that proved source as well as research and development make the device easier to use, that will converge in a wonderful and improved standard for patients.

Okay. And then just on the quarter, I think in the past, you talked about utilization of the products nearing procedure volumes in the quarter. Was that the case in fiscal Q4? Was there any stocking that you're aware of?

Say that again, Matt?

Just any sense for any additional stocking that may have gone in the quarter, kind of year-end push versus actual utilization in the procedures?

No, we sell by needs. There's no -- we don't require any number of devices being ordered. We suggest that they've got enough on-hand to treat the next [two] cases. So we feel great about inventory and our ability to meet the hospitals' needs of ordering by the each.

Okay. And then two more quick ones. I think, David, did you just mention profitability in fiscal 2011? Was that on an adjusted EBITDA basis? Or on a EBIT basis or a free cash flow basis?

That'll be -- we're targeting our fourth quarter of fiscal 2011 on a net basis.

Okay. And then, finally, you're making good progress on the coronary side, but any sense for when that trial may be completed and when we may see the first interim data?

We'll submit the first 50 patients to the FDA. We're planning on completing that trial in calendar 2011, which would set us up for revenue in 2012, calendar.

Okay, great. Thank you.

Ernie Andberg, Feltl and Company.

Let's start on the clinical trial side briefly here. You have a six-month and 12-month follow-up on the CALCIUM 360 and the COMPLIANCE 360, and they both finished last quarter. That puts the first six months into the fourth quarter sometime, theoretically. Do you plan on discussing six month's results prior to the full 12-month follow-up?

It's a little bit subjective to the podiums and to the publications that we submit to. And we're dedicated to getting that fantastic information published. We'd like to get it on a podium going to the big meetings. And if it's not prohibitive to talk about it in advance of that, we will. And that will unfold over the coming quarters.

Okay. Dave, you jumped to the end of calendar 2011 to complete the ORBIT study, I believe, but the first 50 patients you had discussed last quarter that you might be able to get done by the end of this year, so the FDA could look at success and [MACE], and that kind of thing to bless a continuation of the trial. Is that still a target?

You bet. 50 patients this year, this calendar year. I didn't say end of 2011; I just said that we'd complete the trial in 2011. Obviously, sooner is better and we'd really like to do that. But we are on track for the 50 patients to submit to the FDA. And one positive aspect is we'll continue to enroll while they're looking at the data.

Okay. How are you -- what kind of progress are you making on the electric drive unit in the new handle, Dave?

We feel great about progress. We've had some working models in the animal lab. We've, as we always do, crossed our T's and dotted our I's, and all the quality and manufacturing processes. We've really poked and prodded at our process. So we're very confident that we're going to come out with a robust device that will really please physicians and their staffs in the hospital.

We do believe that clinical data, as we continue to build and build and build the proof sources for safety, and the flip side of that coin is cost or efficiency costs in blood flow and durability or -- the flip side of that coin is re-admission. So we continue to pile up these studies from multiple sources with -- company-sponsored and outside. Along with ease-of-use, we think that's one of the things that can accelerate the path to a standard of care in peripheral intervention that doesn't currently exist.

Any target on getting this to the FDA?

Well, we'd like to have it out in the market very early in calendar 2011. And there's no reason to believe that we can't do that.

Okay. Larry, given that you sold [and/or] placed more units than I had in my model, your gross margins were better than I thought they might be in the quarter. You've discussed decreased cost efficiencies, but do you have an idea how much placing the 60 units might have penalized margins in the quarter?

Well, the cost of the controller is right around $10,000, so when we place those units, we would take the expense charge at that time.

Okay. So $0.5 million -- $600,000 of extra expense in the quarter. Fair enough. That's what I was looking for.

The other line that surprised me, based on where we were in the third quarter and your comments, roughly the same -- you had an overall solid decrease, particularly at the SG&A line. Was there anything unusual in the decrease, Larry? Or help -- I mean -- go ahead.

I don't think so. Just earlier in the year, we had -- we invested a lot in the sales organization and (technical difficulty) some of those programs were falling or reducing or falling off in the fourth quarter, and that was the main driver.

Okay.

In addition to being conscious of our costs in general.

Fair enough. R&D line going forward, we were up about $2.9 million. Are we around a $3 million going-forward run rate, given the coronary trial is starting up and ongoing here?

Yes, in the fourth quarter, the increase over third quarter was definitely due to the increase in the clinical study activity. As we go forward into Q1, I'm sure you noticed the loss was greater than what we incurred in Q4. And that's primarily due to the increase in R&D for the electric handle project, clinical studies, and the coronary projects as well. So that's primarily where the increase will come.

Fair enough.

(Operator Instructions). With no further questions at this time, I would like to turn the conference over to Mr. Dave Martin. You may proceed.

The Diamondback 360 is raising the standard of care for patients with PADs in underserved markets. We believe that minimally invasive PAD market is growing, driven by the need for effective new treatments to remove plaque and modify compliance of lesions, both above and below the knee, while preserving healthy tissue or medial integrity. And we see an opportunity to apply this technology to coronary disease, an additional major market opportunity for CSI.

In fiscal 2010, we made great progress towards our goals and look forward to continued progress in 2011. Go Vikings. Thanks for joining us today.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect and have a great day.