Cardiovascular Systems Inc (CSII) 2012 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Third Quarter Cardiovascular Systems Incorporated Earnings Conference Call. My name is Sonya, and I will be your operator for today. At this time all participants are in a listen-only mode. We will be facilitating a question-and-answer session towards the end of today's conference. (Operator instructions.) I will now turn the presentation over to your host for today, Larry Betterley, CFO. Please proceed.

Thank you, Sonya. Good afternoon and welcome to our fiscal 2012 third quarter conference call. Before we begin I would like to remind you that during the course of this call we'll 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'll 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?

Thank you, Larry, and hello everyone. The prevalence of arterial calcium is high in patients over 65 years of age who are diabetic or have renal insufficiency. This is a large and growing population that needs treatment options. Data shows that calcified lesions are difficult to treat and result in higher rates of adverse events and restenosis as well as higher treatment costs. Our growing body of clinical evidence demonstrates that the CSI PAD products are unique and when used as the primary therapy, they safely and routinely treat calcium.

Scientific proof and an easy-to-use technology are keys to a new and higher standard of care for the PAD patient. The Diamondback Stealth 360 is easy to use. Scientifically proven efficacy of the primary treatment option is driving market expansion including new and under-served markets like calcium. The Stealth 360 combines our proven, safe, effective, and economical orbital mechanism of action in an electric-powered device with an improved shaft design.

The system set up and treatment times each only take about a minute. The simplified Stealth 360 design eliminates a separate console and moves the controls to the handle, into the hands of the physicians during procedures. As a result, physicians now have complete control of device operation.

CSI's committed to initiatives that will expand adoption and application of our technology and will drive future revenue growth and profitability. Our priorities are to expand the use of our Stealth system as the primary treatment option in the PAD market; to build on our base of scientific data supporting the safety, effectiveness, and economic benefit of our products in new and existing peripheral markets; and obtaining approval for a coronary application to address a large unmet need in treating calcified coronary arteries.

We saw progress on multiple fronts in the fiscal third quarter. Highlights include total revenue growth of 8% over the second quarter of this fiscal year and 5% over the prior year, sales growth of 24% over the second quarter of this year for our Stealth 360 device, revenue growth in the emerging office-based lab market of 14% sequentially, patient enrollment that is more than 65% completed in our ORBIT II clinical trial for coronary application, and presentation at medical conferences of additional data supporting the safety and efficacy of our technology as the primary therapy.

I'll cover each of these during our time with you today. Let me start with Stealth 360 device growth and usage. Demand was high for conversion of the Diamondback Stealth 360 system, which we introduced about a year ago. In the just-completed quarter, the Stealth 360 customer base grew 34% from the second quarter to more than 500 accounts. Stealth now comprises 78% of our total revenues.

Device usage per Stealth account grew over the second quarter of this year and is 65% greater than our overall average usage per account. In addition, Stealth commands a 15% higher average selling price than non-Stealth devices.

The simplified and improved Stealth 360 has only five crown configurations versus 13 configurations for the predecessor Diamondback 360. Stealth reduces the amount of inventory the customer needs, which initially reduces purchases as we transition between product lines. Stealth users, however, perform more procedures, and we are seeing higher usage volumes offset inventory and drive higher revenue growth.

In recent conference calls we have talked about some high-volume physicians moving the practices from the hospital to the office-based lab or OBL setting. We see this as a positive trend that broadens access to treatment for the three million people diagnosed annually with PAD.

Office-based lab accounts posted a 14% rise in revenues over the second quarter. At the same time we saw revenues grow 9% from the hospitals that are associated with our office-based lab physicians. We believe that the strength of our technology supported by compelling clinical data for our role as the primary treatment option will lead us to long-term success in both the hospital and office-based lab settings.

Now, Larry will provide more details on our financial results, and then I will come back for additional comments before we take your questions.

Thank you, Dave. For the third quarter of fiscal 2012 compared to a year ago, revenues grew 5% and 8% sequentially over the second quarter of 2012 to $21.2 million. Combined Diamondback and Stealth device revenues represented 89% of the total. Over 5,800 devices were sold in the quarter bringing the life-to-date total sold to nearly 83,000.

Other product revenues declined slightly to $2.4 million from $2.5 million primarily due to the expiration of a balloon distribution agreement in the fourth quarter of last year. Reorder revenues increased to 96% of total revenue from 94%. We added 41 new accounts compared to 57 last year as we continue to focus on Stealth conversions and driving adoption in our key existing customers. 39 of the accounts added this quarter were Stealth accounts.

Gross profit margin was 76% versus 80% as stronger average selling prices and shipment of fewer controller units were offset by a higher mix of Stealth 360 sales. Stealth devices currently carry a higher unit cost due to limited initial component purchase volumes. Also the addition of CSI's second manufacturing facility in Texas for future production capacity has temporarily increased production costs, which should enhance efficiencies over time.

Operating expenses rose 9% to $19.8 million primarily due to advancing the ORBIT II clinical trial. The resulting net loss was $4.2 million or $0.23 per share compared to loss of $2.4 million or $0.15 per share last year. The number of average weighted shares outstanding rose to 18 million from 16.1 million last year with the issuance of stock from our employee stock plans, exercises of stock options and warrants, and the conversion of $4 million of convertible debt into 4,000 -- 402,000 shares of common stock since last March.

Adjusted EBITDA calculated as loss from operations less depreciation and amortization and stock-based compensation expense was a loss of $2.3 million compared to a loss of $495,000 last year and was affected by the same factors that impacted net loss.

For the nine months ended March 30, 2012, compared to the prior year, revenues rose 4% to $59.6 million. Reorder revenues were 95% of total revenue, up from 93% last year. Gross margin was 76% versus 79% for reasons similar to the quarter. Operating expenses increased 6% to $56 million, again for reasons similar to the quarter. Interest and other expense was $1.7 million versus $739,000 last year. The expense increase was mainly due to conversion and valuation changes of our convertible debt compared to income in the prior year.

The resulting year-to-date net loss totaled $12.2 million or $0.69 per share compared to a net loss of $8.6 million or $0.55 per share last year. The average shares outstanding grew by 1.9 million shares to 17.7 million due to the same factors noted for the third quarter. Adjusted EBITDA loss was $5.9 million versus $2.2 million last year.

We finished the quarter with over $22 million of cash and continue to manage the business to live within our available cash and debt capacity. However, as we've said before, CSI may raise 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. We have a universal shelf registration statement in place for this purpose if needed.

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

Thanks, Larry. Let me now update you on CSI's clinical trial program. In March CSI presented twelve-month data from the COMPLIANCE 360 study of severely calcified above-the-knee lesions at the American College of Cardiology Conference. Dr. Datillo, principal investigator of the study, presented the data demonstrating the strong acute results translated to positive clinical outcomes at twelve months.

COMPLIANCE 360 enrolled 50 patients with 65 lesions at nine US sites. Patients had calcified above-the-knee lesions greater than or equal to 70%. They were equally randomized to angioplasty alone versus Diamondback Orbital Atherectomy System and low-pressure angioplasty.

The data showed superior outcomes with the Diamondback system. Primary treatment with Diamondback enabled low-pressure adjunctive balloon inflation. This is compared to high pressures required in the balloon alone arm. High pressures often lead to vessel damage.

Favorable acute results led to patency of 75% at twelve months in the Diamondback arm comparable to the PTA arm but with 90% less use of stents, which preserves treatment options for the future. The long-term durability of stents in peripheral arteries is limited. Only 8% of Diamondback patients versus 84% of patients in the PTA arm required stenting. Avoiding stents may reduce the risk and complications of retreatment over time.

In March CSI also announced results from a study of patients treated for peripheral arterial disease with the Diamondback system in a non-hospital or OBL setting. Dr. Warren Swee discusses analysis of data demonstrating short treatment times and device safety and efficacy treating calcified lesions in the OBL setting at the Society for Interventional Radiology Annual Scientific Meeting.

In this prospective, single-center study, 100 consecutive procedures were performed on 84 patients over a nine-month period by Dr. William Julien, Chief Executive Officer of South Florida Vascular Associates. Of these patients, 65% had claudication and 35% had critical limb ischemia.

The data highlighted the following outcomes. The mean atherectomy run time was only 55 seconds. Low-pressure adjunctive angioplasty was able to be performed in all cases. The average pre-procedure vessel stenosis was 78%. After treatment, mean vessel stenosis was 11%. The dissection rate was only 2.8%, none of which were flow limiting, and no perforations were reported. All patients were discharged to their homes with no hospital transfers, no cases of hospital admission, or major adverse events within 24 hours.

You can find details from both of these presentations on our website. Our comprehensive outcomes data is drawn from twelve clinical studies of 3,800 patients and 55,000 -- 5,500 lesions. These studies provide powerful, irrefutable evidence of safety, efficacy, and cost effectiveness of our orbital technology.

Turning now to coronary. Our coronary PMA study increased its enrollment pace by almost 50% this quarter and is now over 65% enrolled. More than 40 US medical centers are enrolling patients. We expect to complete patient enrollment shortly after the end of fiscal 2012. It's important to note that because ORBIT II's primary endpoints are based on patient's 30-day followup post procedure, we should be able to file a PMA application soon after we finish the trial enrollment.

Patients with small calcified coronary arteries excluded from other clinical studies because of limited effective treatment options. A coronary application of our technology would give patients a new, minimally-invasive option. It would also provide CSI with a large growth opportunity. Our technology's ability to treat calcified lesions in small arteries and our success in the ORBIT I feasibility trial give us confidence about meeting our ORBIT II endpoints and obtaining a coronary indication in the United States.

Now I'd like to share our outlook for the fourth quarter fiscal 2012. We are progressing both on Stealth 360 and the office-based lab opportunities. We expect that momentum to result in sequential quarter revenue growth for the fourth quarter over the third quarter. At the same time, with the introduction of the Stealth 360 and FDA approval to continue our ORBIT II coronary trial, CSI is at an inflection point.

We need to invest further in clinical trials as well as commercial support to capitalize on our growth opportunities. Therefore, fourth quarter operating expenses will increase over the third quarter. Specifically, for the quarter ending June 30, 2012, we anticipate revenue to be in the range of $21.5 million to $22.5 million. CSI's gross profit as a percentage of revenue should be similar to the third quarter of fiscal 2012. The higher initial Stealth 360 unit cost and ramp up of our second manufacturing facility in Texas will continue to offset other efficiencies.

We expect operating expenses to grow 7% to 8% over the third quarter fiscal 2012 as we expand the ORBIT II trial and invest in medical education and infrastructure for our next phase of growth. We anticipate interest and other expense to be about $400,000 excluding the effect of conversions or valuation changes of convertible debt. The resulting net loss is expected to be in the range of $4.5 million to $5.1 million, or loss per common share ranging from $0.25 to $0.28 assuming 18.2 million average shares outstanding. Again, this excludes the potential effect of conversions or valuation changes of convertible debt.

CSI's technology with its innovative orbital mechanism action and new easy-to-use platform in the Stealth 360 is uniquely suited for treated calcified lesions that other therapies cannot address. Data shows the prevalence of calcified arteries is large and growing. Our expanded base of clinical data shows primary treatment with the Diamondback delivers effective acute results and favorable longer-term outcomes.

CSI is well positioned for success in the peripheral and coronary vascular markets and in hospital and office-based lab settings. Execution on our key initiatives will lead to significant profitable growth and shareholder value over the long term.

Thank you for participating in today's call. And now, operator, we would like to take questions from the participants.

(Operator instructions.) Your first question comes from the line of Deepak Chaulagai with Dougherty and Company. Please proceed.

Good morning gentleman. Thank you for -- good afternoon I should say. Thank you for taking my questions.

Hello, Deepak.

Hi, Deepak.

Hello there. Very good quarter. Thank you for all the update. Let me just start with the core business and I'll move on to the coronary trial.

Looks like you were on target with your R&D, but gross margin we had sort of expected you would start seeing some of that efficiency from Stealth pricing in the back half of this year. Perhaps we should expect that next fiscal year? Is that the expectation from the Company, or should we -- is there another way to think about that?

Yes. No, I think this quarter we'll still burning through that higher-priced inventory and we still have a lot of capacity in that Texas facility that we need to start being able to use to bring down -- or to improve the gross margin, so that would happen in the next fiscal year versus Q4.

Okay. And office-based revenue looks like you are continuing to do well there. How has that dynamic shifted, if at all, for physicians moving out of the hospital setting? Has that subsided or are you seeing an increase of that trend? If so, do you expect that line to increase significantly in going forward?

Yes, it's a significant part of our business now, over 10%. Thankfully for patients, that trend will continue. And we think we've supported that with the Dr. Julien and Dr. Swee presentation at the Society for Interventional Radiology. Their 100 patients in their study proved that patients can get safe and effective treatment using the Diamondback as primary therapy in the office-based setting, so we're excited to support that.

We see that as a continuing trend. And over time it may help stamp out the gross inefficiencies of the way the United States PAD patient is currently treated, which is either wait-and-see, surgery, amputation, or a myriad of endovascular procedures. We think that our science and technology focus will help move and evolve the market to a new and higher standard.

Do you think that study will help you -- help your sales force market Stealth to physicians in an office-based setting, because initially I know you had some trouble because of that movement of physicians from hospitals to office-based labs? But do you think this additional clinical data will help? Do you see that making an impact? Or is there work to be done in that -- in that setting?

Yes, that's a great question, and we really do. We think for changing the paradigm and moving to a higher standard that science is a critical piece. Especially now, we've had a wonderful group of early adopters and innovators. We're now moving into the mainstream, and clinical data is really important.

Some of the specific feedback that we've gotten from that study is physicians, they didn't want to experiment. They wanted to know that it was safe to treat in their office-based setting, particularly in the new markets that we're opening, the calcified market, the small vessel market, and they are excited that they can do that safely in the office setting and they are thankful that Dr. Swee and Dr. Julien presented that data at a podium at a major conference.

That's great. And last one and I'll hop and get back in the queue. In your ORBIT II -- I'm sorry, your CAD clinical trial, did you say you had a 50% increase in enrollment? Did I hear that right -- correctly?

You did. You did hear that right.

Okay. And you are still targeting end of June or shortly thereafter to complete enrollment?

We are. We think we'll be able to complete enrollment in the summer quarter and because it's -- the trial hinges on 30-day followup after the last patient, we think we'll be able to submit our application shortly thereafter the last patient is enrolled.

And obviously it's different setting from your phase one trial in India and multiple sites here, more than 40 I think you said, so there could be variance in data, but data from your phase one trial was pretty strong. Should we expect similar I guess results here, and how confident are you that the results will be similar, which would be obviously above the FDA's defined target?

Well, we're very optimistic. At the TCT last fall there was a presentation of two-year data on our ORBIT I that showed a 15% or an 85% freedom from adverse events at two years, which really was amazing to a number of people looking at the study. It highlights the differences of our technology. Our technology has never been offered before. It's an orbiting technology. It's easy to use. It sands back and forth. The particulate is small. The treatment times are low. And that's really important for these very, very sick patients with calcified coronary arteries.

So ORBIT I we're drawing off of. Also we've got an unbelievable experience in the peripheral small vessel, vessels one to four millimeters below the knee. We're the dominant market leader in the United States in below-the-knee intervention. We've got well over 60% market share. Most of those below-the-knee arteries are calcified, and we've got an experience captured in our twelve clinical studies so that's another reason to be optimistic that this study go -- will go well.

And anecdotally, now that we've got 40 institutions and in some cases multiple operators in the United States enrolling ORBIT II patients, anecdotally we're getting some really positive feedback from the physicians about treating patients who previously couldn't be treated without great difficulty and risk of complication.

That's great. If I may ask one additional question? If we look -- think about the timeline and if data is good and you, like you said, there is a 30-day follow-up time from the last patient enrolled, how should we think about the timeline in terms of your submission and potential approval by the FDA?

Well there's a window. There's things that we can control and then of course there's what the FDA needs to do, but we'll control all our controllables. We think the window may open as soon as midyear next year, and the window could be as long as twelve months.

But we're optimistic because of our intimate relationship with the FDA, the fact that they had a hand in designing ORBIT I, they took a look at ORBIT II at patient 50 and have formally approved us to continue, and we worked with them closely as well on the over 75,000 patients that we've done in the commercial setting in the peripheral. So we're optimistic that we could achieve early part of that window.

Thank you. Great quarter.

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

Hi guys. Good afternoon.

Hey, Jose.

Hi, Jose.

Okay, so again, congratulations on (technical difficulty) revenue lining utilization, it seems like things have kind of stabilized after a few quarters of unpredictability. Can you give us a sense for what you think has led to that? Is it sales force restructuring? Is it the way they're selling? Is it just things are going deeper versus broader? I'm trying to figure out how sticky this is for the next few quarters.

And the second question then is now that you have 40 sites enrolled for the coronary trial, how many of those are not existing customers? And are you seeing any sort of impact from the trial in terms of a spill over in terms of being able to pull in some of your other products?

Will you restate that second -- second question?

Yes, sure. Let's tackle the first one first. I mean, what's working? How stick is this? How stable is the utilization headed into the fiscal fourth quarter?

A couple of different parts to that. One is, boy, the R&D team in here did a great job on the technology. The Stealth is really a great product, and that shows in the clinical results and the feedback that we're getting about the ease of use, and it's showing up in the usage data and the growth of the Stealth. And the growth of the Stealth is out-stripping the demise of the old technology, the air-powered device. And so that's one piece of it is the technology is right.

I do think that some of the hires that we made nine months ago have taken effect these past few quarters as we grew 6% and then consecutively here 8%. We're bringing in people who are appropriate for mainstream adoption as we enter in and try to make this procedure mainstream. We've got Kevin Kenny who has managed over 1,500 people. In January we brought on Jim Breidenstein as VP of Sales who had five years at Kyphon and success with growth and making that procedure mainstream.

We've talked previously about getting a medical director who had ten years' experience with Johnson & Johnson, and they're bringing some of our earlier investments, like our science investment, to the fore. And just a couple of examples, we brought our sales team together for the first time under the -- Kevin and Jim's leadership in January for education and motivation as an entire group. And we also had our first faculty meeting under the direction of our medical director, Angelo Giovanis. And we brought the faculty together to congeal all the milestone achievement and learnings in science and the procedure, and those things are taking effect.

So we're starting to bring some of our investments to the fore, and that's what's showing up in the last couple of quarters and will continue to stabilize growth going forward.

Okay. Kind of on the second question, of the 40 sites, how many of those are not -- were not existing -- were not customers of the Company?

That's a great question. There is not complete overlap. Some of those sites are heavily dedicated to coronary. Some of those sites, because their reputation and high volume in coronary, we did chose. Additionally they're not using our device in the peripheral space.

So we think that foretells the future opportunity that there will be great synergy between the two technologies and that the glow of the coronary, its safety profile, its treating previously untreatable patients in the coronary setting, we do think that will help us validate as we move into the mainstream operators and get into some of the institutions and in some of the physicians that we have previously not been able to influence.

Are you seeing -- I know it's still early, but are you seeing some pull-through from -- an interest from people at those institutions who are doing the coronary work and looking at devices now with the peripherals.

We have. We've seen people who maybe miscategorized us as the -- another atherectomy device or the same as the Rotablator, which are completely in accurate once you know the detail. We've seen some of those people take another look because they're hearing about anecdotally from physician operators in their own hospital involved in the ORBIT trial. They're hearing about what the device can do, so they're taking a whole new look. And we've gotten audiences that we previously didn't have to review our data and the merit of the device in the peripheral setting, so there's good early indicators there that we'll get the synergies that we were always hoping for.

Okay. Great. Thank you.

Your next question comes from the line of Ben Andrew with William Blair.

Good afternoon, guys. Can you hear me?

Hey, Ben. How are you?

Very well, thank you. So, David, I mean most of the key topics have been well covered, but one thing I'm interested in is you kind of restructured the feel and organization, brought in new leadership six to nine months ago now, and kind of feels like you redid a lot of your processes and whatnot. Talk about the changes that that's brought for you and how it may have fundamentally changed the nature of your relationship with customers?

Maybe you took a step back there for a bit, but how do you find your situation today? And then I've got some followups to that.

I think we're more stable today and we're poised for growth into the -- into the mainstream. Some of our -- the customers who brought us here so to speak still continue to be involved in our science. We're going to continue to build that data and, boy, we need them as faculty members. We did bring together for the first time a large number of our faculty members together to congeal and celebrate what's happened.

But the systems and process are important. The things that you do as a young company in discovery phase, those are different people. Those are different processes and feedback loops. And now that we've got so many knowns, we're in much better position to spend a dollar and to scale.

And just a couple of highlights. We invested -- we always had a long-term approach here. We invested in four things that I think are opportune for scaling and new investment. Now we have, as you said, brought in new people, new systems, new process. We've also been headcount sensitive while we're doing that, so we're not a lot larger but I think we brought in people with literally decades more experience at the stage that we're just about to enter right now.

But the four investments that we've always had over the years is regulatory. We've really invested in regulatory. We cross our T's, dot our I's, and you've seen that in the approvals, in the line extensions, in what we've been able to do, and perhaps surprise people with our ORBIT I and ORBIT II studies, especially considering it's financially constrained times.

Manufacturing. Boy, what a great team we have here. And you see that in two different ways. One is when the FDA comes into this building for three-day audits, either here or in Texas, they're leaving with no findings. And in addition to that, the incident rate out there in the field as we use large numbers of devices per quarter with patients, our incidents rate is a fraction of the rest of the industry, and that's a real hats off to our manufacturing team.

R&D. Our engineers get out in the field. I think what shines through with the current Stealth technology is that they are interactive with our customer and they've worked hand-in-hand with these early adopters and innovators. And then the science. We knew it was a tough expensive road to hoe, but boy it's really coming to the fore. We've got peoples' attention, including academics. We're getting those podium spots that perhaps we couldn't get a year and a half ago, and we've submitted some of our studies for publications to major journals, so it's going to be a great time going forward.

So this is the time to start to amplify all those good things with maybe a few more dollars spent with -- on commercial support. Does that answer your question or --?

Yes. That gets to it. That definitely gets to it. And I guess another way to look at this is as you look at the sales force productivity, where it was, where it is, and where it goes back to, where are we on that path? Are we kind of in the third or fourth inning of where you can take it with this product set, or are you kind of seeing some steady progress that you don't need to scale headcount but you're staying as linearly with revenues here in the next several quarters?

Yes, I think you nailed it. We're early on. We're -- we can't wait to pop that $1 million per representative annual revenue mark. We would like to get on our way to $250,000. We think that what we're doing right now in terms of people and process will generate productivity gains per representative, and you've seen that in the last two quarters. And boy, bringing that pipeline to the fore in the form of a coronary indication, that has got grand efficiencies.

We will be able to fit that device and a very high ASP with fantastic margins into an existing infrastructure company wide, including the same sales force and the same customer base. So one reason why we're so urgent and excited about medical education is it's something that we have to get good at now because we'll have more medical education to do in conjunction with the coronary, and we do think that there'll be growth from the coronary opportunity on the peripheral -- on the peripheral business because we'll be doing extraordinary things in -- with high-risk patients, and so I think people will correctly assume that maybe I can do a little bit more work for the benefit of the peripheral patient.

Okay. And then just finally, maybe a quick question for Larry. Gross margin trajectory obviously is down a little bit here with the manufacturing facilities. But where do you see that trending over the next few quarters and do we get back above 80 relatively quickly, or is that going to take some time? Thank you.

Yes. Thanks, Ben. We're going to continue to make some improvement next year, but the one thing that I do want to point out is there is a medical device tax that's looming out there. If that stays in place, that could offset some of the gains we make next year, so we may not be able to hit 80% given that tax is upcoming as well.

So that will hit gross margin for you guys?

Yes. It will be part of our cost to sales most likely.

Okay. Thank you.

Your next question comes from the line of Ernie Andberg with Feltl & Company.

Good afternoon, Larry and Dave.

Hi, Ernie.

Hey, Ernie.

You made a point in your press release, Dave, and your comments about the improving utilization with the Stealth 360, and if I do some rough calculations, it looks like you're obviously getting good utilization there. It's lower than it was the first quarter you had, but you're bringing people in who aren't doing as many procedures. But how -- I can't see in looking at the data that you've given us, let's call it same-doc sales growth. What's really happening as opposed to anecdotally that you've spoken earlier to the docs who are using the Stealth versus the kind of business -- kind of utilization they were doing before on the Diamondback 360? Do you have something to help us there?

Yes, sure. Three things are happening primarily. One is it's easy to use, so there's really no barrier for doctors who are short of staff or who are late in the day with procedures, and so that ease of use factor is great. There's less wear and tear on the teams and the physicians and that's great, and that was -- that's important for a technology that will become platform technology and a primary driver of a right standard of care. That's one thing.

The second thing is we -- we are getting, with that same data, two additional physicians. We're still primarily a one-doc-per-hospital moving to two, and that'll be the exciting part of the business going forward is we will be able to go deeper.

We've got a group of accounts that we call flagships accounts. There's just over 200 of them. We still have 25% more of them to go. It does distract a little bit from going deeper, and the first 25 were urgent to get the Stealth into. Every one of what we identify as flagship accounts are where the business in the United States is parked. So once we complete rolling out the Stealth, particularly in those flagship accounts, we'll have more attention and time to drive deeper.

But a third thing is happening, and that is inventory. There were 13 line items when you show up at the door of a hospital who does not have Stealth, who still has the old air-powered device. There's 13 line items. Typically they would carry multiple of the most popular items, and as a part of our patient-centric and customer-centric approach, there's only five line items in the simplified Stealth, and therefore you've got a par level of inventory difference.

We have asked our hospitals to work through their inventory of the air-powered device. It's got all the same mechanism inside the body. It's wonderful for patients although it's not nearly as easy to use. But we have asked them to work down that inventory. So the numbers are convoluted there. Conservatively we're -- there's 10% more usage than there are reported revenue numbers these last several quarters where we've introduced the Stealth.

So I guess the short answer to end with that is that it is a little convoluted, it's hard to see, but we are -- we are moving in the right direction in terms of devices used per doctor and hospitals per -- I mean doctors per hospital using the device.

Okay. Question for Larry. Should we expect a comparable increase sequentially in both R&D and SG&A expenses, Larry, or is it going to be weighted more towards one of the line items rather than the other?

I think dollar lines it's probably fairly evenly split between the two.

So --

So a higher percentage of R&D. I'm sorry, go ahead.

Okay. That's what I thought you just told me. Okay. Fair enough. Thank you very much.

Your next question comes from the line from James Terwilliger with Benchmark Company.

Yes, hey guys. Can you hear me?

Sure can, James. Hi.

Great. Most of my questions have been answered, but I just have a couple of quick questions on the ORBIT II. In the -- when you say in this press release that you're approximately 65% complete in enrollment, is that as of the end of the quarter, or is that as of the date of the press release?

As of today.

As of today. And if I look back in my notes I want to say when I looked at the December quarter, your comments then were you were over 50% complete. Is that a good number from my notes?

I don't think 50% complete.

For enrollment, excuse me.

At the time of the call, James, I think that was correct.

And when I look at you could -- you could get 50 different US medical centers enrolling, and as of today you have 40, do you want to get to 50 or does it not make -- does it not make business sense to get to 50 at this time?

No, we do. There were two governors. One, we paced ourselves with sensitivity to expense and spend. And once we expanded into the allowed 50, which we have now 40, each hospital has its own bureaucracy, and some are faster than others. And so what you're seeing is a lag from our decision to go forward into more accounts and the difference between the weeks and sometimes months that it takes an individual institution to get approval through their internal review board to start the trial.

No, I agree. That can be a difficult process. But at this time you envision getting more US medical centers enrolling patients in the ORBIT II?

Yes, we'll get to -- we'll get as close to 50 as we can.

Okay. And then my last question, is there any type of seasonality or sensitivity in terms of patient enrollment trends that we should be thinking about as we move into the summer months? Does the enrollment momentum decline due to some of the issues associated with the summer months?

You know, it could happen, and the reason why is we are dependent primarily on one or two investigators per site, and to the extent that they vacation, we would be susceptible to that, which is why we've been really excited about the continued increase in quarterly enrollment and the fact that we're getting closer and closer to the end.

And we're hoping also that having 45 or 50 institutions enrolling in that summer timeframe will blunt -- will blunt the fact that same people may -- may be out of pocket.

No, excellent. I agree. And lastly, just real quick. Is it still -- still a fair, say, timeline to be looking at possible US regulatory approval by the end of fiscal 2013 with a launch in the United States in fiscal 2014? Is that still a reasonable back of the envelope assumption?

That's a little more pessimistic. I think you're talking about -- maybe you should restate just so I make sure I understand. Are you saying that -- that we'd have a clearance from the FDA at what date?

I was really just kind of targeting the second half of fiscal 2013 for the approval --

Oh, fiscal.

Yes.

Yes.

And then with a launch, that takes some time as well. And then a launch in fiscal 2014. But as we sit today, that's probably a fair assessment?

Yes, that's certainly in the window, and that's fair.

Okay, guys. Thanks a lot and thanks for taking my questions. Thank you.

(Operator instructions.) At this time I show no questions in the queue.

Thank you. Thank you for participating in today's call. CSI has a proven product in the Stealth 360. Ease of use and performance in treating calcified PAD lesions are a validating -- are validating it's use as a primary treatment option. The office-based lab setting opens new opportunities for patients, physicians, and CSI. We continue to make progress in expanding our technology to a coronary application. With this -- these initiatives, we are excited about our future potential. Thanks again for joining us today.

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