Cardiovascular Systems Inc (CSII) 2011 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Third Quarter 2011 Cardiovascular Systems, Inc. Earnings Conference Call. My name is Thelma and I will be your coordinator for today's event. At this time, all participants are in a listen-only mode. We will facilitate a question and answer session towards the end of today's presentation.

(Operator Instructions)

As a reminder, today's presentation is being recorded for replay purposes. I would now like to turn the presentation over to Mr. Larry Betterley, Chief Financial Officer. Please go ahead.

Thank you, Thelma. Good afternoon and welcome to our fiscal 2011 third quarter conference call.

Before we begin I'd like to remind you that during the course of this call we will make forward-looking statements. These forward-looking statements are covered under the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995 and 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. 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. We had a productive quarter at CSI. Four highlights. We had the limited release of our new Stealth 360 product and its major ease of use enhancements. Secondly, we presented scientific data (inaudible) 50 patients in our Orbit II coronary trial, and we continued revenue growth and progression towards profitability. We'll touch on all these accomplishments during the call today, but first let me begin by reiterating our key priorities.

First, to achieve profitability. We are balancing revenue growth and operating expenses as we progress towards positive cash flow and profit. We expect continued sales growth, especially with the broader commercial launch of the Stealth 360 beginning in the second quarter of fiscal 2012, and profitability will follow as the productivity of our operations increase.

Generating scientific data. At the American College of Cardiology meeting we announced acute data from our Compliance 360 study of above the knee lesions. We have a large and growing body of prospective clinical and economic outcomes data on 3,000 patients in 4,000 lesions in 12 different studies. 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 that it will provide years of growth for CSI. More than 400 physician specialists in over 300 United States hospitals are involved in our trials.

Entering new markets. We completed phase 1 enrollment for Orbit II, our pivotal clinical trial to evaluate our technology for use in calcified coronary lesions. And we submitted 50 patient data to the FDA for approval to complete the 429-patient enrollment. A coronary application is a new opportunity for CSI and could allow the use of our technology in a very large coronary market where 1.7 million procedures are performed annually in the United States.

Expanding the use of our Orbital PAD system in the PAD market. We are driving our leg saving Orbital PAD systems in a 1.5 billion leg market. Scientific proof and an easy to use device are the keys to attracting new physicians to treat vessels large and small.

And finally, we're committed to introducing new products. We received 510k marketing clearance for our third generation electric powered Stealth 360 system and began a limited market release. Our unique orbital mechanism of action and its ability to remove disease 360 degrees in the vessel while preserving the healthy vessel wall is the key to unprecedented outcomes. As we enhance the ease of use, 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 third quarter financial results, revenue of $20.2 million was up 22% over the year-ago period. revenue growth, gross margin improvement and operating efficiencies were the main drivers in reducing our losses compared to last year's third quarter. Net loss improved 63%, while adjusted EBITDA improved 87%.

We are managing the business towards profitability and have consistently achieved year-over-year quarterly gains. CSI's revenue growth is a direct result of physicians understanding the scientific proof and clinical reproducibility of our Orbital PAD systems.

Our system provides superior clinical and economic outcomes for their patients. Our physician programs emphasize our product's ability to remove plaque and preserve the integrity of the patient's [meta vessel]. Additionally, our data proves that small vessels of less than 4 mm, virtually 100% of the vessel anatomy 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 5,816 Diamondback devices, up 19% from 4,870 in the third quarter of last fiscal year. That brings the total number of devices sold to nearly 60,000 since the initial product launch.

We are focused on driving adoption in key target accounts that offer the highest growth potential. More specifically, our field sales organization's giving priority attention to about 200 accounts, including the accounts participating in the Stealth 360 limited market release.

In the third quarter, device usage in these 200 target accounts grew by 3.6 devices, or 27%, over the second quarter of this fiscal year. Further, the number of accounts using more than 30 devices in a quarter rose 44% over the second quarter.

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

Thank you, Dave. For the third quarter of fiscal 2011 compared to a year ago, revenue grew 22% to $20.2 million. Diamondback device revenue was 88% of the total. Other product revenue grew 24% to $2.5 million from increased sales of our Viper line and distribution partners' products driven by the larger customer base and higher Diamondback device sales.

We added 57 new accounts compared to 52 in the year-ago period. many of these new account additions resulted from increased demand from our nonhospital physician accounts, which can receive reimbursement for atherectomy procedures beginning in 2011 and by increased awareness and growth of our compelling body of clinical data.

Reorder revenue rose 24% and was 94% of total revenue. Gross margin increased to 80% compared to 77% last year as a result of increased operating efficiencies and product cost reductions. Operating expenses decreased 3% to $18.2 million, primarily due to reduced research and development expenses. The reduction was due to lower product development expenses as a result of the Stealth 360 launch, reduced stock compensation from the forfeiture of stock awards, and estimated refundable state R&D tax credits.

SG&A expenses were flat with last year on 22% revenue growth, as operating and cost structure efficiencies improved productivity. The increase in interest and other expense was primarily from a change in the fair value of the conversion option related to the convertible debt. The resulting net loss was $2.4 million, or $0.15 per share, improving 63% from $6.5 million, or $0.44 per share last year.

The number of average weighted shares outstanding rose to $16.1 million from $14.9 million last year, with the issuance of restricted 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 $3.4 million from last year to a loss of $495,000 in this quarter. Results were similar for the nine months ended March 31, 2011 compared to the prior year and for similar reasons, with two additional explanations.

Operating expenses also benefited from receipt of a $488,000 grant from the qualifying therapeutic discovery project program of the Internal Revenue Service during the second quarter of this year. And interest and other expense also improved due to income from the conversion of convertible debt.

Cash and cash equivalents at the end of third quarter were $18.6 million compared to $23.7 million at the end of fiscal 2010. The main uses of cash year-to-date were $7.2 million for operations, expenditures of $1.3 million for [PP&E] and patents, and $1.5 million of debt payments which began on November 1st, 2010. These uses were partially offset by $800,000 received from stock plan purchases and $4 million proceeds drawn on our convertible debt line.

Total current and long term debt levels rose by $2 million as a result of additional draws of convertible debt net of conversions of that debt and term debt repayments. During the third quarter 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 growth initiatives or additional growth opportunities if we believe it will significantly enhance CSI's value.

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

Thanks, Larry.

Next I want to elaborate on our clinical trial milestones. CSI's collected a wealth of scientific data and ongoing studies are providing further data demonstrating the safety, efficacy and (technical difficulty) of the Diamondback 360. The American College of Cardiology (technical difficulty) acute results from our Compliance 360 study of knee lesions. (technical difficulty) balloon angioplasty in treating above the knee PAD.

Data from 50 patients at nine United States (technical difficulty) showed that Diamondback 360 can achieve far superior acute results (technical difficulty) angioplasty and stenting. Study results with a p value of less than (technical difficulty) showed the success rate in the Diamondback 360

(technical difficulty) greater than in the balloon arm and required 91% less bailout stenting. Patient follow-up is continuing and longer term results will be reported as they become available.

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 disease throughout the entire leg. Physicians can safely treat calcified lesions from hip to toes, including small vessels below the knee.

Complied results of our studies showed extremely low rates of incidence that prevent optimal outcomes. A perforation rate that is one-half of 1%. And bailout stenting at 2.4%. And a negligible microscopic in fact mortality rate.

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 advanced disease. Lesion retreatment rates were only 2.4% at six months and 13.6% at two years, far better than results in other studies using alternative treatment methods.

Third, patients with more severe conditions can be treated with our Orbital PAD systems. Our studies enroll patients that are excluded from other trials due to the severity of their conditions, including widespread PAD, lesions with calcified plaque, lesions in small arteries, as well as many patients who were scheduled for amputation. Nearly 90% of lesions treated contain calcified plaque and 40% of vessels were smaller than 4 mm 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 orbital mechanism. The Diamondback's system successful track record in treating small vessels with rocklike calcification while preserving healthy vessel wall indicates that it might be well suited for a coronary application, potentially sparing many patients from highly invasive surgery, while improving their long term outcomes.

Orbit II, our pivotal clinical trial to evaluate the safety and effectiveness of the Diamondback 360 in treating calcified coronary lesions is proceeding well. The trial protocol calls for FDA review in the first 50 cases, and we have submitted data from these patients. Enrollment of up to 100 patients continues during their review. Pending FDA approval to proceed, we expect to enroll up to 429 patients at as many as 50 US sites.

Orbit II was preceded by our 50-patient Orbit I feasibility trial, which generated strong safety and efficacy data. We believe favorable outcomes achieved in Orbit I are repeatable in Orbit II.

Next I want to update you on new product developments. In March we received 510k marketing clearance from the FDA for the Stealth 360 Orbital PAD system and began a limited market release. Through the limited release we are collecting valuable physician feedback to establish best practices for the device operation and a smooth transition to the new platform.

The Stealth 360 combines our proven Diamondback Predator Orbital mechanism of action and [Crown portfolio], an electric powered device to shorten system setup times. The simplified Stealth 360 design eliminates a separate console, moving controls to the handle and into the hands of physicians during procedures. Physicians gain complete control of device operation, positioning our device as a frontline therapy for complex and routine cases.

Further, eliminating the capital equipment portion of the current product reduces our product 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 lesions below the knee.

Stealth 360 gives physicians the ability to remove plaque in peripheral arteries faster and more effectively than ever before and provide successful treatment for more patients. Initial feedback from physicians has been impressive. We expect this product to drive substantial revenue growth in early 2012 after completion of the limited market release.

Now I would like to share our outlook for the fiscal 2011 fourth quarter ending June 30th. We anticipate revenue to be in the range of $21 million to $22 million, or growth of 17% to 22% over fiscal 2010 fourth quarter. We expect to achieve this even while we are transitioning to new products, educating physicians about new technologies and clinical data, and accelerating enrollment in our Orbit II trial, all key initiatives for our long term growth.

CSI's gross profit as a percentage of revenue and operating expenses should be at approximately the same level as the fiscal 2011 third quarter. We anticipate interest and other expense to be about negative $350,000, excluding the effect of possible conversions or valuation changes of convertible debt.

Given the product transition to the Stealth 360 now in limited market release, the revenue level in the fiscal 2011 fourth quarter is not expected at this time to be high enough to generate profitability on a net income basis. We currently anticipate a fourth quarter net loss in the range of $800,000 to $1.4 million, or loss per common share ranging from $0.05 to $0.09, assuming 16.2 million average shares outstanding. Also, adjusted EBITDA is expected to be positive, with earnings between $1 million and $400,000.

To recap, our key priorities are to achieve profitability, generate scientific data, enter new markets, expand the use of our Orbital PAD systems in the PAD market, and introduce new products for ease of use. Executing on these initiatives position us well for significant profitable growth over the long term.

Now we would like to open the call to questions.

(Operator Instructions). Our first question comes from the line of Jose Haresco with JMP Securities. Please go ahead.

Hi, guys. Good afternoon.

Hi, Jose.

Hi, Jose.

Just to recap some of the housekeeping details, what was the other revenue number in the quarter? Was it $2.5 million or $2.4 million?

It was $2.5 million.

$2.5 million, okay. And [ASV] is still roughly around 2,950 or thereabouts for the quarter?

Yes, they were slightly over 3,000.

On the gross margin side, these were better than expected in the quarter. Can you kind of walk us through what the -- what caused that and whether we should assume [inaudible - background noise] from there on out?

For the gross margins?

Yes.

We've had continual -- I'm sorry, you broke up a little bit there. The gross margins we've had continued manufacturing efficiencies and product cost reductions on the products as we've gone forward. and then again the slightly higher ASP, which came in, if you do the math, about 3,000 (technical difficulty) as well.

As we go forward with Stealth of course, you know, Jose, that our (inaudible) device, as we start to convert to Stealth and new customers get Stealth, that controller device, which costs us about $10,000, will now go away and help us, give us some benefit in the gross margin there as well. So that, with increasing volumes, a slight increase in ASP, we look pretty good.

(technical difficulty) facility also helping us bring some third party manufactured parts in-house, although (technical difficulty).

Okay. Thank you very much.

Our next question comes from the line of Ben Andrew with William Blair. Please go ahead.

Good afternoon. Can you guys hear me?

Yes, we can, Ben.

Yes, we can.

Great. Thanks. Good quarter, guys. And wanted to just ask a couple of questions relative to the rollout of the Stealth. What sort of feedback are you getting from customers in terms of their intention to switch and is there any need for them to continue with legacy product in terms of sizes, things like that? And so as we think about kind of the number of quarters required to convert the market, just maybe talk a bit about that, David, if you would, please.

Sure. The initial feedback is better than expected. Setup time is faster than that of a balloon and treatment time is, too. So we're getting a lot of great feedback about that. The tactile feel, the crown movement, the ability for accounts to be independent of the extra hands that it used to take to set up the device.

We're also finding that introducing this new product (technical difficulty) introduce our science and we're getting some open minds on that account, at least conversions of physicians who previously didn't use the Diamondback. And we're also seeing some physicians who use the Diamondback but really just in large vessel taking advantage of the ease of use and going below the knee with our simple algorithm. It also in terms of our requirements for setup and training, it makes account training a lot easier. And so we think that it will be a total conversion over time.

As far as the rollout, we want to turn unknowns to knowns. So that's why we wanted to go out on a limited basis. And we'll continue that going forward. so it'll take four to six quarters, I think, to gets to the majority of our account base and convert them to the Stealth.

Anything you've seen so far that suggests that you need to rework anything or that there would be maybe potential for a material delay that would change those plans?

Yes, it's a great question. There's an alarm beep that beeps at 25 seconds and let's the physician know that they're at the 25-second spin mark. It's probably fine for most people, but we made it a little bit louder. And so we're in the land of detail, which says it's just a great launch. We can modify that.

In fact, we already have. And what we're seeing is reduced run times. The run times for the initial group of Stealth physicians is about a minute total. We're seeing a lot of individual 15-second run times adding up to that minute total. So it's really the next step clinically and ease of use-wise.

Okay, good. And then as you think about sort of, again, the continued rollout of product (inaudible), when are you going to have additional crown sizes and how should we think in terms of what that next might look like over the very long term? You talk about getting to a majority of the accounts in six quarters, but is there any reason that you wouldn't convert the bulk of the market, which gives you kind of that gross margin advantage within a couple of years?

Yes, we will have a great gross margin advantage. But from the first part of your question, we're seeing the device and the ease of use and the reintroduction of science really impacting on a per account basis old users, but also new users. We've got several examples that even in advance of [ordering up a] Stealth, just preparing those accounts, reintroducing the science, we've got situations where six physicians who are treating peripheral disease, one of whom was using the Diamondback previously, but just going in and reintroducing our science, we now have the other five.

And we think that's the way to roll forward is to spend a little extra time preparing those accounts, reintroducing the science, going deep to all the physicians that are committed to treating peripheral and then moving forward in that way.

I'll also point out, Ben, that in the near future new accounts will be put on with the Stealth product so we'll get the benefit of the -- eliminating the capital piece sooner rather than later.

Right. Of course. And then, Larry, maybe talk a little bit more about the incremental costs in Q4 that led to kind of your thoughts on the $0.05 to $0.09 loss. What are those onetime things or what are those incremental [inaudible - microphone inaccessible] part of the launch. Thanks.

Well, Q4, actually our expenses aren't expected to grow from Q3. They'll be fairly flat. In Q3 we incurred significant expenses related to theproduct launch, I'm talking in SG&A at thispoint, the Stealth product launch expenses, some additional headcount (technical difficulty) new tax year, so payroll tax expense coming in. So we had a number of items that increased our expenses in Q3 over Q2.

But Q4 we expect to be fairly close to Q3 levels with SG&A coming down (technical difficulty) and more going into R&D. In Q3 we had some credits in R&D as we had some forfeitures in our stock awards that we had a benefit from and also we had a refundable Minnesota tax credit estimate that we recorded. So those will go away for Q4. R&D will rise a bit. But SG&A should come down a bit to keep operating expenses fairly flat next quarter.

Okay. And without looking too far ahead, are there any other kind of material plans for expense increases that you are thinking about for fiscal 2012 or should we sort of trend gradually from that kind of Q4 run rate? Thank you.

Yes, we'd expect, we're not giving guidance for next year of course, but we are expecting that we will have some increases in operating expenses related to especially the Orbit II study, which we'll start ramping up as soon as we get clearance to move forward from the FDA. And some modest increases in SG&A, but at rates far below what we expect revenue ramp to be.

Thank you very much.

Our next question comes from the line of Ernie Andberg with Feltl and Co. Please go ahead.

Good afternoon, David and Larry.

Hi, Ernie.

Hey, Ernie.

Dave, you talked at length about how the Stealth unit and your studies are helping raise the awareness of your ability to go below the knee and get good results. Is that changing yet the dynamics of where you're getting the business above or below in terms of percentage of revenues?

We're uniquely 50/50 right now because of the ability of the device to get below the knee, which is different from the overall market, which is three to one, three for the large vessel, one for the small vessel. But we're growing in both large vessel and small vessel. [Dr. Datillo] had that fantastic ACC presentation and science regarding large vessel, the strong p value and a really easy to use algorithm for physicians to follow.

And then our device continues to perform so uniquely well in small vessels with calcification that they're growing side by side. And I would say that the growth from last quarter to this quarter is equal in both categories, above and below the knee.

Thank you. You also gave some anecdotal evidence in percentage changes of physicians in your key accounts in the top 200, Dave, as to what's happening there. How do I -- how do I judge sort of the tidbits you threw out to us on increases which were larger in those accounts than overall in terms of (inaudible) forward on your ability to sell the product?

Yes, it's anecdotal evidence of our targeted approach. We're going to start with the 200 most opportune hospitals in the United States. We are seeing examples in the early going here of market pie growth, of physicians who just didn't treat below the knee now opening up their eyes and [saw alongside] an easy to use device and a reintroduction of our science, they're willing to go down there and they're having a great experience.

And we certainly saw that in that Virginia hospital that I just talked about with six physicians, five of whom were [users last quarter]. We've got another example from the south of five physicians, one of which had used the Diamondback, another four we went and called on, reintroduced ourselves and the science, and they became users.

We're also seeing some evidence of market share take. We did -- even though we just went to a few sites early on for the Stealth, and literally Stealth device usage was a fraction of last quarter's total, I mean just a couple hundred or more, we did go to two institutions that were -- could be considered competitive accounts. And we were able to triple the run rate of their usage of our device and it is at expense of mostly another device, as well as a little bit more usage below the knee.

All right, thank you. On competitive accounts, obviously the [Fox Hollow] is buried in Covidien now and [Pathways] is private but they talked about they had a 21% increase in their revenues in their most recent quarter, though much smaller than you, it looks like. Dave, are you seeing them competitively, beside what you just talked about?

Not a whole lot. Pathways is working off a low base. But as you know, it's a very large market and there's a lot of disease and treating physicians out there. So we don't see them a whole lot.

In terms of Covidien, they still have the same old technology that they've had for many years. It's indiscriminate cutting. It doesn't do well in small vessels. It doesn't perform consistently or well at all with calcification. So we're not seeing situations where they're growing into that really significantly large market.

Are you seeing any other competitive technologies out in the field, either in test or being used?

Not on a routine basis.

Larry, you made some comments, and the conference call broke up now and then, on the other income line. There's your interest expense in there and you said that there were some other items. I didn't catch that.

Yes, in the current quarter, as you may recall, Ernie, we have an asset that we recorded on our books related to our ability to call the convertible debt. And as our stock price changes, there are some fluctuations to the value of that, which gets run through our other interest and other income line.

So we had about $60,000 expense related to that in the current quarter. And when I was comparing year-over-year, in our second quarter we had some income related to conversion of the debt that was done in the second quarter. Those were the items I was referring to.

All right. Thank you very much. I'll get off.

We have no further questions at this time. I would now like to turn the call back over to management for closing remarks.

Reflecting on the third quarter and looking ahead, we want to underscore the progress that our hardworking CSI team has made in helping physicians treat peripheral arterial disease. We have an exciting new product, the Stealth 360. We're rolling that out to key accounts.

Our penetration at our target accounts is growing, and we continue to generate an unprecedented level of data through our wide ranging clinical trial programs. As a result, our revenues are growing and we are approaching profitability.

Again, thank you for joining us today.

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