Cardiovascular Systems Inc (CSII) 2011 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Second Quarter 2011 Cardiovascular Systems, Incorporated Earnings Conference Call.

My name is Yvette and I will be your operator for today. At this time, all participants are in a listen-only mode. We will conduct a question-and-answer session towards the end of the conference. (Operator Instructions).

I would now like to turn the call over to Mr. Larry Betterley, CFO. Please proceed, sir.

Thank you, Yvette. Good afternoon and welcome to our fiscal 2011 second 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 or developments, or otherwise.

We will also refer to non-GAAP measures because we believe they provide useful information for our investors. Today's new 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 by reiterating our five key priorities.

First, achieve profitability. We are balancing revenue growth and operating expenses as we progress towards positive cash flow and profitability. We continue to anticipate that we will cross over to profitability in the fourth quarter of this fiscal year.

Second, generate scientific data. We have a large and growing body of prospective clinical and economic outcomes data on almost 2,500 patients and nearly 4,000 lesions. The results confirm the economic and clinical impact of the Diamondback 360 orbital technology in vessels large and small, and in previously untreatable disease. We believe our scientific foundation is the path to physician adoption of our technology and years of growth for CSI.

Third, enter new markets. We have nearly completed Phase I enrollment of 50 patients for ORBIT II, our pivotal clinical trial to evaluate our technology for use in calcified coronary lesions. This is a new opportunity for CSI and could allow use of our unique technology in the large, 1.7 million procedure coronary market.

Fourth, expand use of our orbital PAD systems in the peripheral market. We are driving adoption of our leg-saving orbital PAD systems in a peripheral market of over 1.5 billion, and we do that by sharing our always growing and increasingly impactful clinical data by collecting new data and attending to optimal device protocol in vessels large and small.

Fifth, and finally, develop new products. We are focused on easier-to-use versions of the Diamondback 360 such as the upcoming third-generation electric powered Stealth 360 system, our unique orbital mechanism of action in its ability to remove disease 360 degrees of the vessel while preserving healthy vessel wall, is the key to unprecedented outcomes.

We are making product improvements that enhance the ease of use, broaden market application, provide better clinical results, and are more cost effective. With these enhancements, physicians can treat patients with various conditions more easily and in greater numbers. We'll elaborate on our milestones in these areas during our call today.

Regarding CSI's fiscal second quarter financial results, revenue of $18.8 million was up 24% over the year-ago period. Revenue growth and operating efficiencies were main drivers in reducing our losses compared to last year's second quarter.

Net loss improved 71% and we achieved earnings on an adjusted EBITDA basis for the first time. We are managing the business toward profitability and have achieved steady quarterly gains since mid-fiscal 2010.

CSI's revenue growth is a direct result of physicians understanding the scientific proof and clinical reproducibility of our orbital PAD systems to provide superior outcomes for their patients. Our physician programs emphasize our product's ability to remove plaque and preserve the integrity of the patient's native vessel.

Additionally, our data proves that small vessels of less than four millimeters in size that exist below the knee, as well as highly calcified lesions, can be treated routinely. This is a breakthrough opportunity for patients and is 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 increases in CSI's device sales. We sold 5,504 Diamondback devices, up 24% from 4,429 in the second quarter last fiscal year, bringing the total number of devices sold to more than 54,000 since the initial product launch in September of 2007. Now, Larry will provide more details on our financial results. Larry?

Thank you, Dave. For the second quarter of fiscal 2011, compared to a year ago, revenue grew 24% to $18.8 million. Diamondback device revenue was 87% of the total. Other product revenue grew 34% to $2.4 million from increased sales of our Viper line and distribution partners' products.

We added 68 new accounts, compared to 48 in the year-ago period. Much of this increase was driven by increased demand from non-hospital physician accounts, which can receive reimbursement for atherectomy procedures beginning in 2011, and by increasing awareness of our compelling body of clinical data.

Reorder revenue increased 22% and represented 91% of total revenue. The reduction in percentage of reorder revenue from recent quarters is due to the higher level of new account revenue this quarter and to a slight decrease in the average usage per existing account.

Important strategic product transitions to the Diamondback Predator 360 and pending Stealth 360 to position us for future long-term growth somewhat affected second quarter revenue growth in existing accounts. We expect these transitions to be a factor in the third quarter as well.

Gross margin increased to 79%, compared to 77% in the year-ago period, as a result of increased operating efficiencies and cost management. Operating expenses decreased 7% to $16.8 million primarily due to improvements in operating efficiencies, especially in sales and marketing.

R&D expenses decreased 3% year-over-year. During the quarter, we received a $488,000 grant under the Qualifying Therapeutic Discovery Project program. The favorable effect of this funding on R&D expense was offset by additional Stealth product development expenses.

Interest and other income was $27,000 in the second quarter, compared to expense of $274,000 last year. The improvement was driven by $371,000 of income recognized from valuation changes of a conversion option related to our convertible debt and to conversion of $1.5 million of that debt, partially offset by higher interest from new debt financings.

The resulting net loss was $2 million, or $0.13 per share, improving 71% from $6.8 million, or $0.46 per share, last year. The number of average weighted shares outstanding rose to 15.8 million, from 14.7 million last year, from the issuance of stock grants, purchases under the employee stock purchase plan, and the conversion of $1.5 million of convertible debt into 276,000 shares of common stock.

Adjusted EBITDA, calculated as loss from operations less depreciation and amortization and stock-based compensation expense, improved by $4.3 million from last year to earnings of $72,000 in this quarter. For the six months ended December 31, 2010, compared to the prior year, revenue rose 22% to $36.9 million. The reorder revenue was 93% of total revenue, compared to 92% last year. Gross margin was 78%, up from 77% a year ago for reasons similar to the quarter.

Operating expenses declined 3% to $34.7 million, primarily due to operating efficiencies in sales and marketing. Interest and other expense was $347,000, versus $547,000 last year. As in the second quarter, the decrease is due to convertible debt income, partially offset by higher interest from new debt financings.

The year-to-date net loss narrowed by 52% to $6.3 million, or $0.40 per share, compared to $13 million, or $0.89 per share, last year. The average shares outstanding grew by one million shares to 15.6 million due to the same factors noted for the second quarter. Adjusted EBITDA improved 79% to a loss of some $1.7 million.

Cash and cash equivalents at the end of second quarter were $22.5 million, compared to $23.7 million at the end of fiscal 2010. The main uses of cash for the six months year-to-date are $3.5 million for operations; expenditures of $1 million for property, plant and equipment, and patents; and $600,000 of debt repayments, which began on November 1, 2010. These uses were partially offset by $365,000 received from the employee stock purchase plan and $3.5 million of proceeds drawn on our convertible debt line with a conversion price of $9.66 per share.

Total current and long-term debt levels rose by $1.1 million as a result of the additional draw and conversion of convertible debt and to term debt repayments. After quarter-end, we drew the remaining $500,000 available under our convertible debt line at a conversion price of $12.40 per share, bringing the convertible debt balance outstanding to $4 million. We have not drawn on our $15 million working capital line of credit.

We continue to manage our business to live within our available cash and debt capacity. We may consider raising additional capital in the future to fund acceleration of our current growth initiatives or additional growth opportunities if we believe it will significantly enhance CSI's value. I'll now turn it back to Dave for additional comments. Dave?

Thanks, Larry. I'd like to discuss our clinical trial milestones. CSI has collected a wealth of scientific data in ongoing studies providing further data demonstrating the safety, efficacy and cost-effectiveness of the Diamondback 360. We will have a substantial presence at the annual meeting of the American College of Cardiology in early April, and look forward to discussing our peripheral and coronary clinical data with a large number of physicians there.

Acute results from our COMPLIANCE 360 will be presented by Dr. Raymond Dattilo, the study's principal investigator, on Tuesday, April 5. In addition, CSI will be featured for both its peripheral and coronary innovations at the ACC's New Cardiovascular Innovation Forum on Monday, April 4.

We now have nearly 2,500 patients and nearly 4,000 lesions under evaluation in our 11 trials to date. More than 300 physicians and over 240 hospitals are involved in our trials, providing an unprecedented level of reproducible prospective data on treating peripheral vascular disease.

Our clinical trials are demonstrating several key differentiating features about our orbital PAD systems. First, our systems have a high safety profile and for the first time give patients and physicians the ability to address PAD throughout the entire leg. Physicians can safely treat calcified lesions from hip to toes, including small vessels below the knee.

Compiled results of our studies show extremely low rates of incidences that prevent optimal outcomes. For example, perforation rate of 0.6%, or less than 1%; bailout stenting at 2.4%, extraordinarily low; and a mortality of less than 1/20 of 1%.

Second, we have irrefutable evidence of acute and long-term success in treating PAD. The OASIS study results demonstrated very low hospital readmission rates. In a patient population with very advanced disease, lesion treatment rates were only 2.4% at six months and 13.6% at two years.

Third, patients with more severe conditions can be treated with our orbital PAD systems. Our studies enroll patients excluded from other trials due to the severity of their conditions, including widespread PAD, lesions with calcified plaque, and lesions in small arteries, as well as many patients who are scheduled for amputation.

Nearly 90% of lesions treated contain calcified plaque and 40% of vessels were smaller than four millimeters in diameter. The three small vessels below the knee are a new and untapped market. Previously the most challenging to treat, but now proven to be routine for our wire-like Diamondback 360 profile and the orbital mechanism. CSI has also developed a publication strategy to disseminate scientific information to our physicians. Current and future clinical data will be published in peer reviewed medical journals.

The first manuscript will be published in the Journal of Cardiovascular Translational Research in the coming months. Several other manuscripts have been submitted for review. We will continue to use peer reviewed medical journals as one of the methods for communicating clinical data and demonstrating the safety and efficacy of the Diamondback.

The Diamondback system's successful track record in treating small vessels with rock-like calcification while preserving healthy vessel wall indicates that it may be well suited for a coronary application, potentially sparing many patients from highly invasive surgery while improving their long-term outcomes.

In April of 2010, 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. ORBIT II was preceded by our 50-patient ORBIT I feasibility trial that provided strong safety and efficacy data.

ORBIT II, we expect to enroll up to 429 patients at up to 50 US sites, subject to the FDA's review of results from the first 50 cases. We have nearly completed the enrollment of the first 50 patients and plan to submit the data to the FDA in the next 30 days. During the FDA review, we will continue to enroll up to 50 additional patients.

Physicians participating in ORBIT II provided positive feedback regarding our product's performance to date in an extremely challenging study population. We believe that favorable outcomes achieved in ORBIT I are repeatable in ORBIT II. Next, I'd like to update you on new product developments. In the first quarter of fiscal 2011, we launched the Diamondback Predator 360 orbital PAD system, and most of our customer base has now adopted this product.

Physicians who have used this new system have found it to give them favorable outcomes faster and they can treat multiple complex lesions with each device. The new device uses the same safe mechanism of action as our original Diamondback.

In support of this product, we initiated the CONFIRM II Predator in an 1,100 patient prospective, multi-center study that includes every patient treated with the Predator 360 and excludes no one, whatever their condition. We just completed patient enrollment in this acute study, which is designed to collect information on the system's performance and evaluate procedural safety and effectiveness. In preliminary results, we reduced average treatment time to less than two minutes while accessing and treating the most difficult lesions in size and makeup.

This month, we expect to file a special 510(k) application with the FDA requesting market clearance for the Stealth 360 orbital PAD system. We also expect to begin a limited market release of the Stealth 360 in the fiscal 2011 third quarter, pending FDA market clearance.

The Stealth 360 combines our Diamondback Predator orbital mechanism of action and crown portfolio in an electric powered device to shorten system setup times and put more control in the hands of physicians during procedures. The Stealth 360 device eliminates the major capital equipment portion of our current product, which will reduce the system costs.

We believe all of these innovations will encourage more physicians to adopt our technology to treat lesions throughout the leg, including the most difficult occlusions and lesions below the knee. Once approved, the Stealth 360 will give physicians the ability to remove plaque in peripheral arteries faster and more effectively than ever before and provide successful treatment for more patients.

Now, I'd like to share our outlook for the fiscal 2011 third quarter ending March 31st. For three consecutive quarters, we've reported year-over-year quarterly revenue growth of 15% or higher. We anticipate this to continue with revenue in the range of $19 million to $20 million or growth of 15% to 21% over third quarter of fiscal 2010. We expect to achieve this even while we are transitioning to new products, collecting data, training physicians, and accelerating enrollment in our ORBIT II trial, which are key initiatives for our long-term growth.

CSI's gross profit as a percentage of revenue should be approximately the same level as the fiscal 2011 second quarter. Operating expenses are expected to rise about 5% over the second quarter of 2011 due to increasing ORBIT II enrollment costs and additional sales and marketing expenses related to ORBIT II.

Interest and other expense is expected to be about negative $400,000, excluding the effect of possible conversions or evaluation changes of convertible debt. We anticipate a net loss in the range of $2.3 million to $2.9 million, or a loss per common share ranging from $0.14 to $0.18, assuming 16.2 million average shares outstanding.

Adjusted EBITDA should be between earnings of $0.2 million and a loss of $0.4 million. We believe the net loss in adjusted EBITDA will improve as revenue grows; however, quarterly fluctuations will occur due to the timing and expense of projects.

To recap our key priorities, we are prioritizing achieving profitability, generating scientific data, entering new markets, expanding the use of our orbital PAD systems in the peripheral market, and developing new products for ease of use. Executing on these initiatives positions us well for significant profitable growth over the long-term. Now, we'd like to open up the call to questions.

(Operator Instructions)

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

Good afternoon, guys.

Hey, Ben.

Hi, Ben.

So, David, maybe talk a moment about what you're seeing in the marketplace just generally, both with overall procedure volumes and kind of share trends. Do you feel like you're taking share right now relative to competitors, or what's your perspective at this point?

Yes. Diagnosis is up and reimbursement is up. Below the knee we're building a new market and doing very well there. And then despite the fierce competition above the knee in large vessels, we're doing all right there. And all the while, we're investing time and activity in key long-term growth initiatives like collecting data, like getting IRBs set up and patients enrolled in the ORBIT II.

Okay. And so you talked about some of the issues in the quarter relative to some product transitions and that they'll probably continue to affect you in Q3 a bit. Any way to quantify that and maybe elaborate a touch?

Yes, you bet. We've got 25 accounts queued up for electric handle and, of course, some of those are top accounts where we do anywhere from 50 to 150 devices per quarter in those accounts. We want to manage inventory. Our previous product is fantastic and the results are proven, so there's really no reason to not use that product.

But anticipating the Stealth and product that comes along with, we're really making short-term decisions with an eye on long-term growth and avoiding taking product back. So that's the specific reason for the transition. Could we have had $0.25 million or $500,000 more in revenue? Absolutely. But we thought it was the right thing to do to manage the transition to the Stealth in a really controlled, progressive way.

Okay. And so the FDA review there sounds like nothing is a formality, but it sounds pretty straightforward. Is there like a pre-launch process you can do with those certain level of accounts before you get the formal approval, and is that what you're counting on or do you think you'll just have that 510k review very quickly?

Is that a two-part question? One is what are we doing in those identified 25 Stealth accounts? And are you also asking about the FDA process?

Yes.

Yes. On the first count, we are preparing those 25 accounts. We're excited because we've been guiding our investments and activities for the last couple of years towards marrying scientific data with ease of use. And it's been frustrating with 2.7 million diagnosed peripheral vascular patients per year, and none of the companies effectively tapping into that market.

We've got early indicators we're growing basically alone with below-the-knee small vessel market. But going forward, ease of use is an opportunity. The electric handle allows the physician to have the on/off and speed controls in their hands and eliminates two hands of setup for the Stealth.

So in advance of that, we are going into those 25 identified Stealth accounts and we're training those physicians who we think will come into the queue that previously didn't. Those physicians -- three, four, and five in the hospital -- that wanted to see the clinical data, that needed an easy-to-use device in order to jump in and use atherectomy in general, but specifically orbital atherectomy.

So we are prepping them with results to date on the clinical data front and we are introducing the concept of ease of use and how that might benefit them and the patients that they treat right now.

On the FDA standpoint, we're crossing our Ts and dotting our Is, as we always do, with an eye on quality and we expect a robust product that will deliver on those things like ease of use. We're going to file that shortly, maybe in a day or two, and we expect that to be a 510k.

Okay, great. Then that's a relatively quick process, it sounds like?

Yes.

To review that.

We've got a nice track record. If history is any indicator, it's 30 days according to the FDA guidelines, but we've routinely been able to get cleared in advance of -- even in advance of that 30-day window.

Okay. And then last question for me, David. If you think about the opportunity with your sales force, I know you've revamped it, you've made some changes there, and things are trending real nicely. How much leverage do you have over the next couple of years with that organization, without adding a lot of bodies, to drive procedure volume? And can you get away from case-by-case support as well? And what are the levers you can pull there from a leverage standpoint? Thanks.

Yes. Thanks for asking. There's a number of levers. First of all, this is a group of people that grew revenue 25% over the last year while reducing sales and marketing expense specifically 12%, and a big part of operational expense has dropped 7%. So that's a nice model at this early stage, and we could definitely grow on that.

We're taking advantage of the proved sources that the scientific data is delivering. We can train people now specifically to a protocol. We've really stepped beyond discovery stage and the unknown, and that's a real ripe situation for hiring younger professionals and it's a great platform for productivity going forward.

This is the group of people who will get wiser over time and we're going to fold in our coronary opportunities. So the future is bright and we've made a number of short-term choices and decisions that will lead to fantastic long-term productivity and revenue growth.

Thank you.

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

Yes, good afternoon.

Hi, Jose.

Hi, Jose.

First off, on the cost reductions, which really came in much stronger in the quarter than we'd expected. You reiterated your guidance of you wanting to cross over that profitability threshold in the fourth quarter of fiscal '11. Should we see that, assuming you don't add headcount or anything at the middle level of sales -- is it fair to assume that we should look at that as a transition to being consistently profitable or do you look into 2012 and 2013 or is there going to be ups and downs around that break-even line?

Are you talking about next quarter or --?

Yes. I guess one's starting at the fourth quarter of '11, should we look at '12 as being an entirely profitable year?

Well, maybe Larry will talk about next quarter and I'll talk about long-term.

We continue to target the fourth quarter, and it will all depend on our level of revenue, though. We've been pretty effective in managing the expenses and still funding the required programs. As far as the quarterly goes, for 2010, 2012, we might see quarterly fluctuations. It really depends on what projects are in the hopper and the timing of those projects and spending. But overall, as revenue grows, you should see improvements in the net earnings and adjusted EBITDA line; however, there could be quarterly fluctuations. To look at 2012, we'd expect to be profitable for the full year.

Okay.

Long-term, Jose, a lot of the things that we're doing now will lead to long-term, consistent growth. And maybe one example, or a window into that, right now we know there's a patient population in the coronary segment, highly calcified, and eventually I think as we do follow-along studies, we're going to see that this device has application for a much broader piece of the coronary market.

But right now to get that done, we've got our own internal quality systems and operational activities to get that product ready. That earns us the right to engage with the Federal Drug Administration in the process and back and forth that that entails. And then that earns us the right to go to each hospital and their internal review board and engage with them in a lengthy process of hospital approval.

And any and all changes have to go right back through that cycle as we -- for example, opened up the protocol a little bit for the ORBIT II trial, we went through the process, we were cleared with the FDA to open it up a little bit, for example, with patients with diabetes is a category that we can no evaluate. And then, you go back to those internal review boards. Those activities in large part are done by our field team. They maybe steal time away from today's selling, but they really give us a nice platform for new markets and long-term revenue growth.

Thank you. Can one of you go a little bit more into the gross margin improvement in the quarter? That was really strong. Was that volume driven? And should we look at those as being consistent levels in accordance with kind of the revenue that we saw this quarter? I guess I'm trying to figure out whether this was a volume or something really permanent.

It is ongoing efficiencies and product cost reductions, so it is consistent in that. I'd say the level is a reasonable level. Of course, with the Stealth, we have the opportunity for improvement by eliminating the controller part of the system, which is, as you're well aware, we typically don't charge for and we eat the cost when we ship the product. So there's definitely up-side there.

We have started production in our Texas facility, so we can begin. We're starting with some components that we had previously outsourced, so there are potential margin improvements there as well. And as volumes grow, we should gain efficiency and reduce the overhead costs per unit.

Now, of course, there's always the unknown of what pricing will do. So we're always a little cautious about predicting higher gross margins, but I think we're set very well at the levels we are today.

Okay.

Larry's exactly right on the cost side. I think one of the many benefits of committing over the last several years to scientific proof should just show up in a number of places, including average selling price. Companies now are under intense scrutiny and pressure to lower their prices, and our average selling price has been steady, even increased a little bit over time. And I think a major component of that is proof of the utility in studies like the COMPLIANCE 360 coming out that proved not only the utility in patients who can benefit, but economic advantages as a proved source and a part of that prospective study.

Okay. Kind of along the same vein, as we think about the Stealth and the limited rollout once we get that out on the market, remind me of the timeframe that we should think about when we go from a limited rollout to broadly across the 900 plus accounts you have out there right now.

We've learned that you properly train and educate one hospital, one physician, one staff at a time. And bringing all stakeholders along is a great way to get dramatic devices per account numbers on a quarterly basis, which is an important number to us.

We'll be in controlled rollout mode for at least three quarters, and that will allow us to get to the majority of opportunistic current users and new users. Because the ease of use plus scientific data, it really does allow us to knock on the door of previously skeptical physicians about treating below the knee or using atherectomy in general.

Okay. All right. Thank you very much.

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

Hello, Dave, Larry.

Hi, Ernie.

The Stealth rollout; there are two parts to that. One, will all new systems that are placed once you've beta tested it, presumably this quarter, be Stealth or will you still be shipping the old controller?

Yes. We'll still ship the old controller. We really want to get a window on what the Stealth can deliver. Front and center is marrying the ease of use with the data. And in physicians -- two, three, four, and five -- right now, as you know, we've got one or two physicians, by and large, throughout the entire customer case, we've got some wonderful exceptions.

But right now, we've got a real opportunity with those physicians -- three, four, five and six -- who do some peripheral. But with the marriage of ease of use and the clinical proof, would start expanding their practices by treating the entire leg and incorporating our orbital technology because of its safety and cost effectiveness. So we'll watch that closely in the 25 Stealth accounts, all the while shipping the old product opportunistically to some other accounts.

What happened --? Excuse me. Dave or Larry, what happens to your cost of sales when you, let's say, swap out a unit? Because a cost of putting a new unit in there, but it doesn't in the short-run generate anymore volume. Is that an incremental cost?

Are you talking about the controller, Ernie?

The controller, yes.

Yes. The new product really doesn't have the large controller system of the old product, so the customers have title to the prior products. There isn't a new large piece of capital to go in. So the customer owns the prior system and it's theirs. And the new product, like I said, does not have a large capital component, so there isn't a swap per se to do for that.

And we did ourselves some favors, too, early on when we set pricing. We priced it at cost knowing that we would iterate, and so we won't have a blowback on customers who want a return or some remuneration. The product, because of the clinical validation, got better over time. We sold that capital piece at cost and we think that we're really set up for a smoother transition on the result.

Fair enough. You are close to completing the enrollment of the first 50 people, and you suggested -- in the ORBIT II, and you suggested that you will be able to submit that data very rapidly. Does that mean you have a good handle on safety that's relative to the requirements for the FDA? And can you talk about that, Dave?

We're not supposed to know the data, really, and we can't talk about that. But we've got no reason to believe that it wouldn't behave exactly like it behaved in ORBIT I, or better. In ORBIT I we did calcified patients overseas in a patient population that really doesn't exist here in the US. It was much tougher overseas for that ORBIT I. So while there are a ton of patients who could benefit over here, the severity per patient of the disease is a little bit lighter. So we have no reason to believe other than that we will meet and beat the milestones for ORBIT II.

Fair enough. Would you elaborate briefly on the, you called it, non-hospital physicians who are able to get reimbursement for a procedure, and where that might carry you in terms of new accounts?

Yes. First of all, there was no reimbursement for atherectomy; now there's a lot. So that's a big deal. And it's a great thing too because there's 2.7 million diagnosed patients with peripheral vascular disease each and every year.

It's an undertreated patient population. Surgery and amputation is way too high, so I would love to see this non-hospital setting really succeed for patients. And we set ourselves up to have proof for patients and those physicians about venturing out to treat patients outside the hospital setting to do very well.

So we did avail ourselves of some of that activity. We targeted 50 new accounts last quarter and we landed at 68. It did maybe diffuse a little bit our devices per account and the overall account population, but it was for the right reasons. We think some good work can be done and --.

First, some of the physicians may have been interested in getting a cheap price because they're running their own businesses, but it doesn't take but a few minutes to introduce the concept of quality. Quality is the least expensive way to go. If you've got a great outcome, a durable outcome, and you eliminate complications -- complications equal cost.

And having the scientific proof to introduce to these entrepreneurs, these physicians, really helped us get a number of extra accounts at the end of last quarter that we really hadn't planned on because we didn't really see this reimbursement was coming.

But it is fantastic and it's even better than that. It went from zero reimbursement in the non-hospital setting to a lot, and physicians are reimbursed per vessel now. There's three vessels below the knee just like there are three vessels in the heart.

We're the only device that can routinely treat those vessels and reimbursement in place for that, it's really set up nicely for great outcomes for patients, for these intrepid entrepreneurs to do some good work, and for CSI to succeed wildly over time.

Last question on your objective of being profitable in the fourth quarter, Larry. It suggests that you expect one of three things to happen, but in the cost side it probably isn't that it can get driven much lower. But you either have to have more accounts out there or a nice jump in utilization by the fourth quarter. How are you modeling or thinking about those three parameters in terms of cost, accounts, and/or utilization that gets you profitable?

We're not anticipating opening large volumes of new accounts. I think we'll settle back into the -- probably the 30 to 50 range going forward. So it will come from utilization.

And what makes you comfortable about that improvement right now, Dave?

The improvement in --?

Utilization.

The marriage of ease of use and clinical data. We're so excited about what's going to happen at the ACC and we've got some major opportunities with some of our fantastic physician operators and investigators on Monday, April 4 and Tuesday, April 5. We're hoping that you come and number of other people come. There will be a -- the ACC is making a concentrated effort to recognize the role of new devices. The American College of Cardiologists, we think, is a great partner and a path for us to participate in raising the standard of care.

Right now, one of the few places that has not moved from surgery to minimally invasive techniques is the leg market. It's been frustrating over time. We believe science and ease of use is the key. We're working with American College members and faculty members on the way that we organize our science. We speak to them and get advice from them on the quality of our data. They've been a great guide and we think together with a society like that and those special physicians that we can raise the standard of care for the peripheral patients.

ACC is coming up, which will have a small and building effect on devices per account. The Stealth, we'll start in 25 accounts and maybe the impact will be hard to see in the overall base. Probably, Larry and I should consider the way we look at that devices per account because we've never really -- since the test of time, we dragged every customer we've ever knocked on the door of for that statistic.

You just mentioned it -- it's at six point something, but really in our top ten accounts it's over 50, and it's as high as 150 per quarter, the devices in an account. And that's where we can go, because those accounts represent those institutions where we have three, four, five, six operators, and they're doing a great job by reaching out in the community to treat those patients who can be treated. So I think [if you just went a little bit over time] it's an important number to us. I don't think you'll see anything dramatic quarter-to-quarter, but I do think that over time you'll see marked improvement in that number.

Thank you.

That's all.

(Operator Instructions).

You have a follow-up question from the line of Jose Haresco with JMP Securities. Please proceed, sir.

Guys, could you touch on the reimbursement again in non-hospital settings? What's the reimbursement level there for the physician (inaudible) that's new this year? And I guess, why wouldn't you expect the number of new accounts to increase just a little bit because of -- you have the new channel to sell into?

Yes, and that's a fair question, Jose. We're going to have to watch it closely. We want to work with quality operators and physicians dedicated to the disease. And to the extent that that grows in a non-hospital setting, we'll follow it.

So it is something to watch. Right now, today as we sit, we've identified 25 great opportunities to introduce our Stealth product. We'll watch the environment as it changes. We'll also, with those non-hospital setting physicians that we've sold product to now, we're going to help them with tracking their results and proving that that's a great avenue for patients. So it's a bit of a [watched pot].

Okay. And what was the physician reimbursement again?

Yes, reimbursement. The atherectomy story has been great. We inherited reimbursement when we got here at CSI for the initial commercial launch. Reimbursement had been in place in the in-hospital setting for quite some time. I think in 2008 they bolused up the outpatient -- the hospital outpatient reimbursement.

Right.

And now, this year, just a couple of weeks ago, the reimbursement went from zero for atherectomy in a non-hospital setting to thousands and thousands of dollars. It is very competitive with hospital reimbursement for the facility and the physician.

There is no economic barrier to doing the right thing for patients in the non-hospital setting, and that wasn't the case last year, that physicians -- because balloon is the gold standard and it's perceived as being cheap. That's what was being used in the non-hospital setting.

Two things happened. One is we proved with our CALCIUM 360 trial that even acutely the cost of the Diamondback is equal to the cost of a balloon. And we believe that over the long-term as we track that study, that the durability of our procedure, the ability to keep the patient out of the hospital for retreatment, our economic prospects are absolutely [dynamite] against all comers including balloon. And then the second thing, which is what you're asking about, is reimbursement is not a barrier anymore. We went from zero to thousands of dollars for the atherectomy treatment.

Do you have a sense for how many below-the-knee and below-the-knee are done in hospital settings by insurance?

Repeat that again?

Do you have a sense for what percentage of the total procedures are done in that setting?

I'm sorry, Jose. It's a little blurry. One more time?

Sure. Do you have a sense for how many procedures annually or what percentage of the annual procedures are done in a non-hospital setting?

I don't think it's measurable right now. I think there's a couple of large exceptions that probably everyone knows about. It's new. It's unclear. I think the ability for those physicians in the non-hospital setting to keep reimbursement, I think they're going to have to track results. I think they would have every interest in working with CSI and collecting data and proof sources for quality, quick clinical outcomes and great economic outcomes. We'll work with a couple of the top docs, which we already are right now, and we'll identify it over time. I'm not sure how measurable it is at this point in time. It doesn't seem to be, but maybe you might know next month or so.

Okay. Great. Thank you.

Thanks, Jose.

With no further questions in the queue, I would now like to turn the call back over to Mr. Dave Martin for closing remarks. You may proceed.

The size and 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 data they need for clinical decision-making, and, mostly importantly, establish a new standard of care in how physicians can ultimately treat peripheral vascular disease.

Our sound, science-driven approach is leading to new product introductions, specifically the Diamondback Predator 360 orbital system and the upcoming Stealth 360 electric handle with innovative features that enhance physicians' ease of use, enabling them to treat patients with a wide range of peripheral conditions in less time. We look forward to continued progress on our new products and clinical trial initiatives and a strong overall performance in fiscal 2011. Thank you for joining us today.

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