Cardiovascular Systems Inc (CSII) 2011 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first quarter 2011 cardiovascular Systems Inc. earnings conference call. My name is Tom and I will be your coordinator for today. At this time, all participants are in listen only mode. We will be conducting a question and answer session towards the end of today's conference.

(Operator Instructions)

I would now like to turn the presentation over to Mr. Larry Betterley, Chief Financial Officer. Please proceed.

Thank you, Tom. Good afternoon and welcome to our fiscal 2011 first 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 investors. 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?

Thanks, Larry, and hello, everyone. Let me begin with our key priorities. First, achieve profitability. We are bound to see revenue growth and operating expenses as we progress towards positive cash flow and profitability.

Second, generate scientific data. We have a large and growing body of prospective, evidence-based data on over 2,600 lesions in 1,700 patients. The results confirm the economic and clinical utility of the Diamondback 360 in treating peripheral arterial disease, or PAD. We believe this scientific foundation is the path to years of growth and market leadership.

Third, enter new markets. Enrollment continues in ORBIT II, our pivotal clinical trial to evaluate our technology for use in calcified coronary lesions. This is a major new potential market opportunity for CSI. Fourth, proliferate the Diamondback 360 in the PAD market. We're driving adoption of our leg saving Diamondback 360 at existing and new accounts. We installed and reinforced the optimal protocol and shared clinical data to support physicians' need to increase procedures below the knee to ensure optimal clinical outcomes.

And finally, develop new products. New, easy to use versions of Diamondback 360 such as the recently launched Diamondback Predator 360 and the upcoming third generation electric power Diamondback system enhance product performance and allow physicians to treat more patients. We will elaborate on our milestones in these areas during our time with you today.

Regarding CSI's fiscal first quarter financial results, revenue of $18.2 million was up 20% over the year-ago period. revenue growth and operating efficiencies reduced our losses compared to last year's first quarter, with net loss improving to 31% and the adjusted EBITDA loss improving 51%. We continue to manage our business to balance revenue growth with achieving profitability, demonstrating steady quarterly gains since mid fiscal 2010.

CSI's revenue growth is a direct result of our physicians taking advantage of the scientific proof and clinical reproducibility of the Diamondback 360 to deliver superior outcomes for their patients. Our physician education programs emphasize the Diamondback's ability to remove plaque and preserve the integrity of the patient's native vessel.

Additionally, our data proves that small vessels, vessels of less than 4 mm, the ones that proliferate below the knee, and highly calcified lesions can be treated routinely. Routine treatment of small vessels and calcified plaque is a new breakthrough opportunity for patients and will be the key to reducing leg surgery and amputations.

We have a strong customer base to support significant revenue growth. Physician adoption of our technology is evidenced by both -- by increases in both device sales and usage. We sold 5,342 Diamondback devices, up 18% from 4,541 in the first quarter last fiscal year, bringing the total number of devices sold to more than 48,000 since the initial product launch in September of 2007.

The percentage of revenue generated from reorders increased to 95% for the fiscal 2010 fourth quarter, up from 92% in the year-ago period, again reflecting our emphasis on driving adoption in existing accounts. Now, Larry will provide more details on our financial results. Larry?

Thank you, Dave. For the first quarter of fiscal 2011 compared to 2010 revenue grew 20% to $18.2 million. Diamondback device revenue was 88% of the total. Other product revenue grew 35% to $2.1 million from sales of our Viper product line and distribution partnered products.

We added 56 new accounts compared to 55 last year. Adding new accounts has been a lower priority as we focus on driving adoption with existing customers. The increase in revenue from reorders was $3.3 million, or 22%. Gross margin was 77%, consistent with last year and in line with our expectations.

Operating expenses rose only 2% to $17.9 million on 20% higher revenue. Investments made during 2010 to expand our sales force and customer education programs were offset by operating efficiencies and cost management.

This quarter's SG&A expense also includes $500,000 in net expenses from the legal settlement with ev3 announced yesterday. Excluding the settlement, operating expenses actually declined 1% from first quarter last year and 4% sequentially from fourth quarter. R&D expenses decreased 13% year-over-year and 15% sequentially due to controlled spending and the timing of product development projects and clinical study costs.

Net other expense was $374,000 in the first quarter compared to $273,000 last year from higher net interest expense due to new debt facilities and includes $50,000 from valuation changes of conversion options related to our convertible debt.

The net loss was $4.3 million, improving 31% from $6.2 million last year, as a result of higher revenue and gross profit without significant expense growth. The loss per share was $0.28 versus $0.43 in the prior quarter. The number of average weighted shares outstanding rose to 15.4 million from 14.5 million last year due both to issuance of stock grants and purchases under the employee stock plan.

Adjusted EBITDA, calculated as loss from operations less depreciation and amortization and stock-based compensation expense, improved by 51% to a loss of $1.7 million from $3.6 million last year. Cash and cash equivalents at the end of the first quarter were $22 million compared to $23.7 million at the end of fiscal 2010. Cash used in operations was the primary driver of the change during the quarter.

As we reported yesterday, we have entered into a settlement agreement with ev3, now part of Covidien, dismissing all claims and counterclaims in the lawsuit between our companies. By resolving this issue we can focus on our business and growth opportunities without the distractions and the expense of prolonged litigation.

Per the agreement, we will pay ev3 $1 million in the form of $750,000 cash and a $250,000 promissory note due by January 1, 2014. We received $500,000 in insurance proceeds related to the settlement. The net expense of $500,000 has been recorded in SG&A for the first quarter.

The balance sheet includes $500,000 in accounts receivable for the insurance proceeds, $750,000 in accounts payable for the cash settlement, and $250,000 in other liabilities for the promissory note. The remaining increases in accounts receivable and accounts payable were due to timing of orders and vendor payments during the quarter respectively.

Total current and long term debt was consistent with the fiscal 2010 year end. We have not drawn on our $15 million working capital line of credit and an additional $2.5 million of convertible debt remains available to CSI. I will now turn it back to Dave for additional comments.

Thanks, Larry. Next I'd like to discuss recent developments in our clinical trials program. CSI has a wealth of scientific data and more studies in progress, demonstrating efficacy, safety and cost effectiveness of the Diamondback 360. Science, clinical data and economic data guides our product development strategies, guides our physician training protocols for optimal outcomes and is the basis for patient education and awareness opportunities.

At the [PCT] scientific symposium in September, the initial results were presented from three CSI PAD studies, CALCIUM 360, CONFIRM Diamondback and CLEAR 360. We now have more than 1,700 patients under evaluation in 10 trials to date. Physicians are working with CSI to provide an unprecedented amount of prospective data. More than 250 physicians and over 220 hospitals are involved in our trials.

We believe clinical evidence and an easy to use product will accelerate market growth, enhance our leadership position and allow the Diamondback system to become the key component in a rising standard of care for the PAD patient. Our clinical trials are demonstrating several key differentiating features about the Diamondback 360.

First, the Diamondback 360 has a high safety profile. And for the first time gives patients and physicians the option to address PAD throughout the entire leg. With our technology in hand, physicians can safety treat calcified lesions from hip to toes, including small vessels below the knee, the most challenging to treat and the least likely to be treated effectively by other devices.

Our Diamondback studies show extremely low rates of those things that prevent optimal outcomes, vessel perforation, vessel dissection and procedure mortality. The Diamondback 360 reduced perforation to one-half of 1%. It reduces bailout stenting to 2%. And it reduces mortality to less than one-tenth of 1%.

Second, we have irrefutable evidence of acute and long term success in treating PAD. The OASIS study results, for example, demonstrated very low hospital readmission rates. In a patient population with advanced severe disease, lesion retreatment rates were 2% at six months and 13% at two years.

Third, patients with more severe conditions can be treated with the Diamondback 360. Our studies include patients excluded from other trials due to the severity of their condition, including widespread PAD, lesions with calcified plaque, and lesions in small arteries. The body of evidence also includes many patients who were previously scheduled for amputation. Now, more PAD patients have a new treatment option and a new hope for restoring blood flow to their feet.

The Diamondback system's successful track record in treating small vessels with calcified arteries indicates that it may be well suited for coronary application, potentially sparing many patients from highly invasive surgery while improving their long term outcomes. In April we received unconditional FDA approval to begin ORBIT II, a pivotal trial to evaluate the safety and effectiveness of the Diamondback 360 in treating calcified coronary lesions.

For ORBIT II we expect to enroll up to 429 patients at up to 50 United States sites, subject to the FDA's review of results from the first 50 cases. We anticipate enrollment of the first 50 by the end of this calendar year. Our ORBIT I coronary feasibility trial provided strong safety and efficacy data and we believe we'll be able to repeat those outcomes in ORBIT II.

Regarding new product developments, in July we launched the Diamondback Predator 360 PAD system. The majority of our customer base has now adopted this second generation product. Physicians who have used the Diamondback Predator 360 have found that it gives them favorable outcomes faster and they can treat multiple and complex lesions with each device. The new device uses the same safe mechanism of action as our original Diamondback 360.

In support of this product and our clinical studies program, we initiated the CONFIRM Predator, a 1,200 patient prospective multicenter study that excludes no one and includes every patient treated with the Diamondback 360. This acute study is designed to collect information on Diamondback Predator 360 performance and evaluate procedural safety and effectiveness.

In preliminary results from the first 500 patients in the CONFIRM Predator study, we reduced average treatment time to less than two minutes, while accessing and treating the most difficult lesions in size and in makeup. Development of the Diamondback Predator 360 underscores our commitment to listen to physicians' feedback and respond with superior tools to treat PAD.

Also under development is our third generation electric powered Diamondback system. This system will greatly enhance physician ease of use, while reducing product manufacturing costs. We expect that this device will expand the market potential for our technology by encouraging labs to operate the systems independently from our support, as well as utilize the device in more lesions, especially lesions below the knee. We expect to begin limited market introduction of this product in the second half of this fiscal year.

Now I'd like to share our outlook for the fiscal 2011 second quarter ending December 31st. We anticipate revenue in the range of $18.5 million to $19.5 million, or growth of 23% to 29% over the second quarter of fiscal 2010. Gross profit as a percentage of revenues is expected to be about the same as the first quarter of 2011, fiscal 2011.

Total operating expenses should be similar to the first quarter of this fiscal year, excluding the $500,000 net expense for the settlement of the ev3 lawsuit recorded in the first quarter. Net loss is expected to range from $2.7 million to $3.3 million, or $0.17 to $0.21 per share, based on the 15.7 million shares outstanding. On an adjusted EBITDA basis we anticipate a loss between $100,000 and $700,000. We believe that the net loss and adjusted EBITDA will improve as revenue grows.

To recap, our key priorities are to achieve profitability, generate scientific data, enter new markets, proliferate the Diamondback 360 in the PAD market, and develop new products for ease of use. Executing on these initiatives positions us well for significant profitable growth over the long term, as we continue to target fourth quarter fiscal 2011 to achieve our first profitable quarter. Now we would like to open the call to questions.

(Operator Instructions)

And your first question comes from the line of Ben Andrew with William Blair. Please proceed.

Good afternoon, guys.

Hey, Ben.

Hey, Ben.

So, good data at the PCT, good traction in the marketplace. David, as you have been holding back on the expenses, what have you given up? It doesn't seem like there's a lot missing in the performance, but yet you're really delivering a lot of leverage to the bottom line on top of that top line growth.

Yes, and everyone at the company is working so hard and they're passionate about the mission to get to profitability. But you're right, we do have significant investments that will pay off over time. The science is really coming to the fore and the numbers are giving physicians and even academics and scientists the confidence that this reproducibility with the Diamondback procedure, and that's going to help accelerate the rise in the standard of care.

Certainly we could, without being so attentive to profitability, we could accelerate a number of things, including enrollment in the ORBIT II trial. We could accelerate the number of people we need on a daily basis and some of the support and educational programs.

Okay. So, I mean, maybe talk, Larry, a little bit about the reorders. You said 95% of the revenues are coming from reorders or existing customers. Is that the right number?

That's correct. Reorders as a percentage of revenue.

So as you look at sort of same-store growth, because you added 55 accounts or 56 accounts, do you track sort of what that growth rate is as compared to the overall revenue growth rate?

The 95% of revenue is from what you might call the same-store. And we break out the orders or the amounts from initial orders separately. So that 95% of revenue does really relate to existing accounts that have placed their initial orders in prior quarters.

Right. Okay. But the same-store growth would be a little bit lower than the reported overall growth because there are some new accounts in there right, but not a lot lower.

Not a lot lower, no.

Okay. And then on the new product, the Predator 360, remind us how much quicker that makes the procedure versus where you were before and what sort of kind of anecdotal feedback you've gotten from physicians about the performance.

Yes, we had a good situation that once the Diamondback 360 was deployed in the body we knew that a couple of minutes of run time, two to three, would get the job done, take off a decade's -- decades of plaque buildup in the patient. And we've reduced that by almost a minute, which is significant for the physicians.

And it's just performing fantastically in those very difficult calcified lesions, in tight lesions where there's just not a lot of room for a device to follow the wire and open up those arteries, particularly small vessels that feed the foot. So it's been a significant enhancement and we're capturing it in the scientific data that we've got in play right now.

Okay. And then the other new product you talked about, the third generation electric powered Diamondback, again, how material a difference is that in manufacturing costs? And is that also going to speed the procedure further, or what other features does that bring for the physician?

Well, I'll tackle adoption and maybe Larry can comment on cost. We think anything that you can do to make it easier for the physician in the hospital and the staff, that offers the possibility of increasing adoption. We also think that with the build of scientific data and the reproducibility of it, that ease of use plus science and clinical data and economic data, those two things meet and possibilities for creating a new standard of care for these patients exists.

It's a great opportunity in this space right now. So the ease of use is going to -- that is offered by the electric handle versus today's current air power will eliminate a little bit of setup time. It will eliminate a couple of touches by the staff. It'll put more control, this electric handle will put more control in the hands of the physician. And I think they'll respond with more usage.

And regarding costs, of course when the product first comes out it'll be lower volumes than we are experiencing today. So the cost per disposable device will be slightly higher. But of course the big gains are is that we won't have the large capital portion of our current system, which currently is about $10,000. So that'll be a big benefit going forward with the product.

Okay. And then finally, on the coronary side you talked about the first 50 patients being enrolled by the first of the year. And when would you think the FDA would have given you clearance to expand the trial and when might you be able to finish enrollment in the overall ORBIT II?

Sure. Well, two things. We'll submit the 50 patients and we'll do that before the calendar year end. We can enroll while they're looking at it and they're going to look at it for 30 days.

Okay. So --

For the overall study, we're going to complete the study in next calendar year -- we'll complete enrollment of the study in the next calendar year. We'll submit to follow and we expect -- we expect that it'll take the FDA six to 12 months to take a look at our PMA submission.

One key note, though, that's different from almost every other coronary trial is ours is a safety trial, so it's the last patient plus 30 days. And that's a significant difference, for example, if we were asked to follow these patients for a year or two. So it's last patient plus 30 days, all of whom will be enrolled next calendar year.

Okay, so, in terms of eventual label claims here, you'd be claiming effectively safety as opposed to being able to make a specific efficacy claim?

Yes, but it's with -- it's even better than that because it's with the worst patient. The study population is highly calcified coronary arteries. These are the patients that have been excluded from every other patient before this. So it's really starting with the worst patient and that will be our indication, with the calcified patient.

What sort of feedback did you get from your advisors as you were designing the trial about the power of that dataset? If you can just show safety, can you hypothetically extend the time to surgery by multiple years? I mean obviously you're not going to necessarily cure their disease, but what's the value proposition for the physician in that situation, just to get your view on it?

The value driver, starting with the patient, is patient can avoid going to surgery or being told that there's nothing that can be done and we need to manage this medically. So it really does pull in patients who normally wouldn't be in the catheter and -- the opportunity for a minimally invasive catheter based procedure, it pulls them in.

And then with those patients, the 1.2 million who get catheter based coronary procedures in the United States right now, we've got an exceptional standard of care, but one of the unsolved problems is deploying a stent, these wonderful drug eluting stents in a calcified artery. You can't deploy a stent on a rock pile. So the ability of the physician to safely and routinely make a smooth tubular lumen out of a crabby calcified artery is a real opportunity.

So I think we'll really serve an un-served patient population. I think the doctors will -- for those patients and those procedures that really make them sweat, this is going to be a great device and a great offering for them.

All right, great. Thank you.

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

Good afternoon, Dave, Larry.

Hey, Ernie.

How are you?

We're doing well.

Good. Hey, the -- how do you judge that the utilization went in the quarter relative to your guidance and expectations in the quarter? It was roughly in line with where I thought it might be, but possibly nominally lower. And then the implication is that you expect utilization to start turning up in the second, third and fourth quarters for you to get profitable by the fourth quarter.

Yes. Of course, utilization is critical going forward. We did expect it to come down a bit in the summer season. It typically is a slower season for us and we've built that into our guidance. The -- and maybe clarify what I was saying when Ben was on the phone is our new account orders tend to be slightly less than average -- the average and our same-store, if you will, utilization is a little higher than our average. But we did expect it to come in slightly down from our fourth quarter. And it was a reasonable range.

Okay. One of you gave an idea of where you expected SG&A expenses to go. And as I was taking notes, I think it was Dave mentioned the $500,000 net expense in the first quarter from the settlement with ev3. Was your estimate of the second quarter SG&A, did that exclude that or is it including an extra $500,000? I missed that.

If you take the $500,000 out of the first quarter expenses, that's where we expect the second quarter to be approximately.

Thank you. Along those lines, were you incurring any significant legal expenses in working out the settlement that may or may not disappear?

Yes. Of course that factored into our decision to settle is that the cost of ongoing litigation is significant and it was in our best interests to settle at this point. So that will go away.

Is there -- do you have a public statement on what it was costing you, Larry, on a quarterly basis up until you settled?

No, we haven't disclosed that publicly. And it would vary by quarter of course, depending on the activity that was being done at any individual quarter. So we have not commented on that.

Okay. To give me an idea how you're expecting to get to a profit in the fourth quarter or your expectation, how should I think about R&D and SG&A in the second half of the year, stable relative to the first half or trending up?

I would say operating expenses in the second half of our year will probably be in total similar to the first half. Again, excluding the ev3 settlement.

Okay.

Just kind of directionally, probably in our third quarter we'll be higher than the fourth quarter just due to the timing of meetings and product development and clinical studies.

Okay. I'll get back in line. Thank you.

Thanks, Ernie.

(Operator Instructions)

Your next question comes from the line of Jose Haresco with JMP Securities. Please proceed.

Hi, guys. Good afternoon.

Hey, Jose.

Hi, Jose.

Just want to touch on the reorder rate. If I'm not mistaken, that is up about 2% from the fourth quarter and up 3% from the same quarter last year. What happened in the quarter that made it so sticky in terms of having such a pretty decent jump in the reorder rate for given the low volume of cases?

Well, for reorder in existing accounts, we continue to talk to our operators in our labs about optimal protocol. I think the last quarter reported -- we reported that we had gotten more than halfway through our customer base in terms of communicating over and over again to our customers the optimal way to get a great result with large vessels. And that work continues to move forward. That's one reason.

A second reason is we've got a lot of science. For example, we've got 2,000 calcified lesions under study right now. I mean that is an amazing amount. And even doctors who may be early on in our scientific experience who were skeptical, when they see that many lesions under study, when they see that we've included a couple hundred hospitals and almost 300 physicians, they know that they're getting a pretty good look at real world data. And so it's not any one study that's resonating, but the ten studies together are really a force and a confidence builder for the docs. So those will be two reasons.

And also, Jose, when you look at the number of new accounts we added this quarter versus fourth quarter went down by a number of four, and if you look first quarter over first quarter to last year, typically -- the typical orders are fewer devices now than they were a year ago. So that also had some impact on the dollars of initial account orders.

And I don't know that we're real efficient at this point in time, Jose. The opportunity ahead of us is large. I think we've got a real opportunity over the course of the next eight quarters to talk about our science and put it in different formats that would make an impact on adoption.

Just one example is the upcoming ACC in the spring. We've got the big audience in the big room at the ACC. Their organization is making a big effort to recognize that it's the cardiologist that serves -- that is the primary servicer of patients with PAD. Those are the vascular experts and they're really making a push for -- to serve their ACC audience and take a look at new compelling science based procedures.

And so we'll have the big room. We'll have a presentation that, among other things, we will be announcing our COMPLIANCE 360 study initial and six-month results. We'll be reporting our CALCIUM 360 small vessel six-month results. We'll also have 1,200 patients in the CONFIRM Predator study that we will be presenting at that meeting. So it will be a big meeting and it's something that we haven't done before. But I think the science and the data and the proof sources afford us now opportunities to get into larger physician audiences.

Okay. Thank you very much.

And you have a follow-up question from the line of Ernie Andberg with Feltl and Company. Please proceed.

Dave, what do you need to get accomplished to start a limited market introduction of the new handle in the first quarter?

Well, the team's done great work here over the course of the last three or four quarters. Usually things can come apart when you don't dot Is and cross Ts early on in the process, and then something comes back to bite you. But I can tell you that we have been steady at the wheel. We have taken all the time it takes to cross every T, dot every I. I think if we complete that process with quality, we'll do just great.

We've got a great track record with the FDA and submitting there. And we also have a built-in limited market release process where we're great and getting better at post-market surveillance. So we'll apply those systems and processes that have worked for us in the past to this, and I think that'll give us the best chance of rolling that out early in the second half of this fiscal year.

So what you're basically saying is right now, given where you are on the new drive unit, you don't see any significant glitches getting to and through the FDA.

No. No, we really have maybe lost time on that introduction in order to make sure that we've done everything in a very quality way. You know, this is a good opportunity to give kudos to the team here at CSI. We did have the FDA in here recently for a three-day onsite audit, and they left with zero findings.

And the comment from the FDA lead investigator was, hey, it was great to be here. I've got some new people in tow and it was really superior to see a company who does it right. This is a great example for my new employees who are being trained. So that's the type of outfit we've got in here in the Minneapolis world headquarters and we'll apply that to the electric handle and the quality that will allow.

Okay. Second question, are you having -- I'm not sure how to couch the question. How is the process going of introducing new physicians in existing hospitals to the Diamondback 360, and are you growing that physician pool in any material way at this point?

Well, now that we've done the majority of the work installing the proper large vessel protocol for our physicians, we do have a little more time to go ahead and focus and introduce ourselves to some of the other physicians in the hospital. And that's taking place and will take place with increasing frequency as time goes on. So it's a great question and that's on the rise right now.

-- is what you're saying, Dave. Okay. Thank you very much. Nice quarter.

Thanks, Ernie.

Thanks, Ernie.

Ladies and gentlemen, this concludes the question and answer session for the day's conference. I will now turn the call back over to Dave for closing remarks.

The size and the breadth of our clinical trial program is unprecedented and reflects our belief that data driven results are the best way to guide product development, provide physicians with the data that they need for clinical decision making, and establish a new standard of care in how physicians can optimally treat PAD.

We are demonstrating the safety and efficacy of the Diamondback 360 in a real world clinical setting, giving physicians the tools to fight PAD while we advance our pivotal trial for coronary application. Fiscal 2011 is off to a strong start and we look forward to continued progress on our priority initiatives. Again, thank you for joining the call.

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