Cardiovascular Systems Inc (CSII) 2012 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the fourth quarter 2012 Cardiovascular Systems Incorporated Earnings Conference Call. My name is Caris and I will be your coordinator for today. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session. (Operator instructions). As a reminder, this call is being recorded for replay purposes.

I would now like to hand the call over to your host for today, Mr. Larry Betterley, CFO. Please proceed, Sir.

Thank you, Caris. Good afternoon and welcome to our fiscal 2012 fourth quarter conference call. Before I begin I would 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 will now turn the call over to Dave Martin, CSI's President and CEO for comments. Dave?

Thanks, Larry and hello everyone. The prevalence of arterial calcium is vastly underestimated. Patients with advanced age, diabetes and renal insufficiency are most likely to have calcified plaque even if it is not visible on angiography. Calcium, which is present in about 65% of peripheral arterial disease lesions leads to poor outcomes with balloons and stent therapies.

The undesirable outcomes include dissection, vessel wall trauma, stent fracture and the need for retreatment. And calcified lesions result in increased treatment costs. Successful treatment of calcified lesions requires a different approach than balloon alone or stent therapies. CSI's orbital mechanism of action is different. Clinical data from 14 studies with over 5,400 patients by more than 500 doctors at more than 350 institutions prove our technology's safety and effectiveness.

Our new Stealth 360 electric handle PAD system is easy for physicians to use as a primary therapy and protects healthy vessel tissue for our patients. At the same time, it removes even the most difficult to treat calcified plaque anywhere in the leg. Stealth 360 is easy and safe for doctors to use in hospitals or office settings.

To drive future revenue growth and profitability our priorities are to expand the use of our Stealth system as the primary treatment option for treating calcified arteries in the PAD market, building on our base of scientific data that supports the safety and effectiveness and economic benefit of our system and obtaining approval for a coronary application which would allow us to address a large, unmet need in treating calcified coronary arteries.

In the fiscal fourth quarter we made progress on multiple fronts. Revenues of $22.9 million increased 8% sequentially over the fiscal 2012 third quarter and 6% over the fiscal 2011 fourth quarter. Stealth 360 revenues grew 21% from the fiscal 2012 third quarter. Revenues from office-based labs grew at a double-digit rate over the fiscal 2012 third quarter.

The FDA approved the inclusion of our electric Orbital atherectomy system in the ORBIT II trial. This trial is now in its final phase with enrollment in excess of 350 patients. We also continue to expand on our wealth of clinical data with presentations at medical conferences supporting the proven safety and efficacy of our technology.

Let me provide a little color on Stealth in particular. Most customers have converted to the new system which was launched just over one year ago. In the just completed quarter our Stealth 360 customer base grew 27% from the third quarter to nearly 700 accounts. Stealth now comprises 86% of our total device revenues. Device usage per Stealth account increased over the third quarter of this year and is nearly 50% greater than our overall average usage per account.

The simplified and improved Stealth 360 needs only six crown configurations for our physicians to conquer calcium in vessels from the hips to toes versus 13 configurations for its predecessor, the Diamondback 360. Stealth reduces the amount of inventory the customer needs to have on hand which initially lowers the number of devices purchased during the transition between product lines. As physicians adopt Stealth and perform more procedures we expect higher usage volumes will offset this and drive increased revenue growth.

In recent conference calls we have talked about a market shift driven by physicians. Some are moving their practices from hospitals to office-based labs. This shift is continuing and it will broaden access to treatment for the three million people diagnosed annually with PAD. CSI's office-based lab revenue grew substantially over the third quarter. The strength of our technology supported by compelling clinical data is a success in both 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 fourth quarter of fiscal 2012 compared to a year ago revenues grew 6% over the prior year and 8% sequentially to $22.9 million. Combined Diamondback and Stealth device revenues represented 88% of the total. Nearly 6,300 devices were sold in the quarter bringing the life-to-date total sold to over 89,000.

Other product revenues increased to $2.7 million from $2.5 million primarily due to increased Asahi wire sales. Reorder revenues remained high at 96% of total revenue consistent with the prior year. We added 49 new accounts compared to 41 last year as we continue to focus on Stealth conversions and driving adoption in key customers. All but one of the account adds this quarter were Stealth accounts.

Gross profit margin was 77% versus 81% a year ago as stronger average selling prices and shipment of fewer controller units were offset by a higher mix of Stealth 360 sales. Stealth devices currently have higher unit costs due to limited initial component production purchase volumes. Also, the ramp-up of CSI's second manufacturing facility in Texas for additional future capacity has temporarily increased production costs.

Operating expenses rose 18% to $21.7 million primarily due to advancing the ORBIT II clinical trial, comparative enhancements to the sales and marketing organization and expansion of medical education programs to drive adoption. As planned, the resulting net loss was $4.6 million or $0.24 per share compared to a loss of $2.5 million or $0.15 per share last year.

The number of weighted average shares outstanding rose to 18.9 million from 16.3 million last year. The increase resulted from our recent equity offering, the issuance of stock from our employee stock purchase plans and warrants and the conversion of $500,000 of debt into common stock earlier in the year.

Adjusted EBITDA, calculated as loss from operations less depreciation and amortization and stock based compensation expense was a loss of $2.5 million compared to income of $539,000 last year with the increase being driven by higher operating loss.

For the year-ended June 30, 2012 compared to the prior year, revenues rose 5% to $82.5 million. Reorder revenues were 95% of total revenue, up slightly from 94% last year. The gross margin was 77% versus 79% in fiscal 2011 for reasons similar to the quarter change. Operating expenses increased 9% to $77.7 million, again for reasons similar to the quarter.

The resulting year-to-date net loss totaled $16.8 million or $0.93 per share compared to a loss of $11.1 million or $0.70 per share last year. The average shares outstanding grew by 2.1 million shares to 17.7 million due to the same factors noted for the fourth quarter.

Adjusted EBITDA loss was $8.4 million versus $1.6 million last year. The larger increase from that of the net loss was due to lower stock based compensation expenses. We finished the quarter with over $35 million in cash. Cash flow benefited from $15 million of net proceeds raised from our equity offering this quarter of 1.8 million shares at $9 per share.

We will use the funds to accelerate growth in the Company's PAD business and prepare for a potential coronary application.

I will now turn the call back over to Dave for further comments. Dave?

Thanks, Larry. During the quarter there were several important presentations of clinical data at the New Cardiovascular Horizons and C3 annual conferences. Our trial results continue to demonstrate the proven safety and effectiveness of CSI's Orbital technology in treating calcified lesions.

Specifically, 12-month data from the Compliance 360 study of calcified above-the-knee lesions showed that avoiding stents and reducing re-stenosis lowers costs. The cost effectiveness of CSI's Orbital atherectomy group versus the balloon group at six months was $5,264. The balloon arm required bailout stenting in 94% of procedures compared with only 8% with Orbital atherectomy.

Twelve-month data from the Calcium 360 study of calcified below-the-knee lesions demonstrated significantly favorable outcomes of the Orbital atherectomy group versus PT alone. The differences include freedom from death of 100% versus 68% and freedom from major serious adverse events of 93% versus 58%.

The CONFIRM registry series, three studies of over 3,100 real-world patients with no exclusion criteria showed predictable and reproducible results of Orbital atherectomy in calcified PAD. Results demonstrate an excellent, acute safety and efficacy.

For example, freedom from dissection was 98%. Freedom from stenting was 94% and freedom from perforation was 99%. A study of Orbital atherectomy in an office-based lab versus hospital setting demonstrated similar excellent results when used in the physician offices compared to the hospital. 108 lesions were treated in 75 patients with zero perforations, slow flow or embolization. High procedure success and low complication rates were comparable to our CONFIRM series.

For detailed study results please visit the clinical data section of our website.

Also during the fourth quarter we received unconditional approval from the FDA to include our new six-branch guide catheter compatible electric Orbital atherectomy system in our ORBIT II trial. This trial is now in its final phase with over 350 patients enrolled. Demonstrating safety and effectiveness of our Orbital technology in treating calcified coronary arteries is the study objective.

Our new electric coronary system is a simpler design that gives the physician complete control of device operation. Including this new system in ORBIT II and avoiding a second trial will save us millions of dollars and significant time getting our new technology to physicians and their patients.

The FDA requires 100 enrollments with the new device and will allow up to 50 additional patients in the trial, as needed, to achieve that enrollment level bringing the maximum trial enrollment to 479. As a result of this good news, it may extend enrollment completion into our second quarter of this fiscal year. However, again it will save CSI millions of dollars and allow us to go to market with our newest and best technology.

Based on demonstrated results in treating calcified lesions of small arteries and severely calcified coronary arteries in our ORBIT I trial, our Orbital technology is ideal for removing calcified and fibrotic plaque in coronary lesions. A coronary application would open up a large, under-served market opportunity for CSI, estimated to exceed $1.5 billion annually.

Now I would like to share our outlook for the first quarter of fiscal 2013. We are investing in science, our commercial organization and medical education to accelerate and drive our next stage of growth in the PAD market. We are investing in the final phase of the ORBIT II trial and preparing for a coronary market application. These investments will increase operating expenses in the near-term but result in attractive revenue growth and profitability long-term.

Specifically for the quarter ending September 30, 2012, we anticipate revenue to be in a range of $21 million to $22 million representing year-over-year growth of 13% to 18%. Seasonally low procedure volume during the summer months is factored into the revenue range. CSI's gross profit as a percentage of revenue should be similar to the fourth quarter of fiscal 2012. Improvements in the Stealth 360 component costs and utilization of our second manufacturing facility in Texas will be offset by the effect of lower summer production volumes and costs to prepare for a coronary launch.

We expect operating expenses to grow 7% to 8% over the fourth quarter of fiscal 2012 as we continue the ORBIT II trial and invest in physician and sales education as well as infrastructure for our next phase of growth. Operating expenses include about $4 million for the ORBIT II trial and coronary market preparation.

We anticipate interest and other expense to be about $300,000 excluding the effect of conversions or valuation changes of convertible debt. The resulting net loss is expected to be in a range of $6.7 million to $7.3 million or a loss per common share ranging from $0.33 to $0.36. This assumes 20.2 million average shares outstanding. Again, this excludes the potential effect of conversions or valuation changes of convertible debt.

In closing, CSI's technology uses an innovative Orbital mechanism of action and a new and easy-to-use platform in the Stealth 360. This makes CSI systems uniquely suited to treat calcified lesions that other therapies cannot address. Data shows the prevalence of calcified arteries is large and growing. Our expanded base of clinical data demonstrates that primary treatment with CSI technology delivers effective acute results and favorable, longer-term outcomes. Because of these factors, CSI is well-positioned for success in the peripheral market in both the hospital and the office and we have high confidence in obtaining approval for a coronary application of our technology.

Thanks for participating in today's call. Now, operator we would like to take questions from our participants.

(Operator instructions). Your first question comes from the line of Jose Haresco with JMP Securities. Please proceed.

Hi folks, good afternoon. Just some housekeeping items. Could you talk a little bit about what the reorder rate was in the quarter?

Are you talking about reorder as a percentage of revenue, Jose?

Just in terms of number of accounts that put in the orders. You guys used to talk about that and it used to be in the 94% to 96% in the quarter. Do you know what that was this quarter?

I would say it would be close to 90%. We typically talk about a quarterly reorder rate that would be in the high 80's to 90%.

Okay. Thank you. Other revenue in the business for the quarter was it around $2 million? Is that about right?

Other revenue was $2.7 million.

Thank you. There was obviously a lot of expense coming in the next quarter because of the coronary trials. When specifically do you expect those to taper off or do you expect that level of expense to carry throughout in every quarter of the year?

I would say it will change in content early on in the year. It is more heavily weighted to completing the trial and PMA submission but as we progress through the year it will switch and be more heavily weighted towards market preparation. So I think it is a fairly reasonable number going forward each quarter for the rest of the year.

Okay. On the gross margin side, could you talk a little bit more about the second manufacturing plant, when you expect to have that up and running and I guess in terms of volume what kind of volume do we need to look at to see the gross margins improve and not have that drag on it?

I think we will make some cost improvements as we go on throughout the year. What will offset that later in the year is of course the medical device tax that we have talked about before of 2.3%. So that will probably offset the gains.

Then we also have to make some investments in our processes and systems to prepare for the coronary application as well. So we will continue to make gains both in the Stealth costs and the overhead related to the Texas facility in productivity but they will probably be offset by those other two items later in the year.

Alright. Got it. Thank you very much.

(Operator Instructions). Your next question comes from the line of James Terwilliger with Benchmark Company. Please proceed.

Hey guys, can you hear me?

Sure can.

I think the quarter looks fine. I like how you are continuing to develop the market at the same time, I think it is great you are going to expand the trial and get some more patients in there for this new device. Real quick, two quick questions. One, on the trial can you tell me how many US sites are currently enrolling patients at this time?

We are allowed 50 and we are at about 50 right now.

Alright, perfect. So you have maxed that out. So in terms of the sites you are pretty much done.

You bet. We couldn't be more excited about the inclusion of the new technology. It will save millions of dollars as you can imagine with the expense of a PMA trial, the expense of a second trial in time to get that great technology into the hands of our physicians for the benefit of the patients has everybody excited around here.

I think it is great. In terms of a time perspective let alone doing a complete separate trial, let alone I think it is going to help with the launch to go with the latest and greatest and plus you are getting it into the hands of your doctors, i.e. today.

When you look at people have asked questions about the manufacturing capacity, when you look at what you are capable of doing from a manufacturing perspective what utilization rate would you give for the organization as a whole? You can give me one for the organization as a whole or maybe the two different manufacturing capacity utilization for each facility.

Well, we have got plenty of capacity. What number are you looking for?

I guess I am looking at kind of a percentage. If you are capable of making 10,000 units and you are currently making 5,000 units you are kind of at a 50% capacity. So I am trying to determine...I would think going forward there is not a significant investment in your manufacturing. I mean, you are prepared for hopefully the approval of the cardiology application and the subsequent launch so I'm just trying to determine would you think as an organization you are running at 50% utilization? 75% utilization?

I would say it is closer to 50%. You are correct, we don't need a lot of additional capacity. As a matter of fact what we are doing now is we will continue to do some investments in the Texas facility to get them on the same setting as the Minnesota facility in preparation for coronary approval, so we can get that site certified, but as far as from a capacity standpoint we have plenty of capacity.

The last question, and this is a crazy one, if you would take this cardiology application say to go after a CE mark approval do you even have a back-of-the-envelope guess of what that type of trial would look like? Probably not what you are doing here with the FDA here with 400 plus patients.

I don't think much at all. We could have CE mark right now or with a little more to do based on ORBIT I. The only reason that we did not go to Europe with the coronary technology is we did not want it to jeopardize the control and details of getting this through in the large US markets. We wanted to complete the ORBIT II here in the US and that is the trigger for international expansion and we couldn't be more excited about that. We would go internationally with both our peripheral and coronary technologies together. Our analysis shows that a direct sales force would be very shareholder and value friendly and we have already identified a tier one and tier two list of countries that we would go to first and second, and some of those activities to prep that have already been started.

Excellent. Thanks for taking my questions. Nice quarter and nice guidance. I am excited for your outlook. Take care, guys.

Thanks, James.

(Operator Instructions). At this time there are no further questions in queue.

A special thanks to the CSI employees. We had extraordinary revenue growth. The talent new and old here is excited and just a few of the clinical breakthroughs as well as the productivity rates, the exceptional performance of the Stealth and performance office-based labs is really great. This group is energized like no other.

On a closing note, we continue to drive top-line progress for fiscal 2012 further building momentum as we move into 2013. In particular we are encouraged by physician acceptance of our new Stealth 360 electric handle PAD system. Sales to physicians in office-based labs continue to grow at double-digit rates as more doctors are now establishing practices outside the traditional hospital setting. We continue to make progress on expanding our technologies to the coronary application.

With these initiatives we are excited about our future potential. Go CSI. Go Vikings and thanks again for joining us today.

Ladies and gentlemen that concludes today's conference. Thank you for your participation. You may now disconnect. Have a wonderful day.