Cardiovascular Systems Inc (CSII) 2013 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the fourth quarter 2013 Cardiovascular Systems, Inc. earnings conference call. My name is Carla, and I'll be your operator for today.

(Operator Instructions)

As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the conference over to your host for today, Mr. Larry Betterley, Chief Financial Officer. Please proceed.

Thank you, Carla. Good afternoon, and welcome to our fiscal 2013 fourth quarter conference call.

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. 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 David Martin, CSI's President and CEO, for overview comments.

Dave?

Thank you, Larry, and hello, everyone.

CSI had a strong finish to the fiscal year, building significant momentum as we enter fiscal 2014. Our easy-to-use and effective technology, combined with our focused sales strategy, educational initiatives and expanding wealth of scientific data are driving strong year-over-year top-line growth in the large and expanding $2 billion peripheral vascular market.

We're also encouraged by the fact that there continues to be a high level of physician and marketplace interest in the pivotal 30-day data from our ORBIT II coronary study released earlier in the year at the American College of Cardiology conference. During the fourth quarter we presented this data at late-breaking trial sessions at the EuroPCR and C3 conferences. Results exceeded the trial's primary safety and efficacy endpoints by a significant margin. Results show that patients treated with our technology had low rates of angiographic complications and residual stenosis.

On the peripheral front, we began enrolling patients in our postmarket Liberty 360 study. This trial is evaluating the acute and long-term clinical and economic outcomes of our Orbital Atherectomy System. And we continue to share compelling new data from our CONFIRM study series that evaluated the use of our technology as a PAD treatment in above- and below-the-knee lesions. CONFIRM studied a real-world population of over 3,000 patients, treating nearly 5,000 lesions, with no exclusions.

All of our efforts are focused on our role as the primary therapy for arterial calcium. We continue to make significant clinical and adoption progress in the large and underpenetrated peripheral market. In addition, our compelling ORBIT II study results and PMA application progress may position us to be the primary therapy in the $1.5 billion calcified coronary market opportunity.

Our goals for fiscal 2014 are consistent with last year's initiatives -- expanding the use of our Orbital Atherectomy System as the primary therapy for treating calcified arteries in the PAD market; building on our base of scientific data that supports the safety, effectiveness and economic benefit of our products; obtaining approval for a coronary application, which would allow us to launch our technology into a new market and address a large unmet need in treating calcified coronary arteries.

During the fourth quarter, revenues rose 26% year over year and 9% sequentially. And on July 19, we responded to questions received from the FDA on our completed PMA application to treat coronary artery disease.

Now Larry will provide more details on our financial results, and then I will come back to recap additional clinical and research activity before we take our questions.

Thank you, Dave.

As Dave said, CSI reported a strong quarter. For the fourth quarter of fiscal 2013 compared to a year ago, revenues grew 26%, to $28.8 million, which was above our guidance. Device revenues were 88% of the total. We sold more than 8,100 devices, bringing the life-to-date total sold to nearly 120,000 units. Reorder revenues remained high, at 96% of total revenue, consistent with last year. We added 59 new accounts, compared to 49 in the year-ago period.

Our Stealth customer base grew 10% from the third quarter this year, to nearly 1,100 accounts. Stealth now comprises 99% of our total device revenues. Product revenues rose at a similar rate as total revenue, to $3.4 million from $2.7 million.

Gross profit margin was 76%, down slightly from 77% last year. The positive effect of higher production volumes was partially offset by Stealth's higher direct unit cost and by slightly lower average selling prices. We expect engineering enhancements to Stealth and increasing production volumes to reduce unit costs in the future. However, investments to prepare for our coronary launch are expected to offset these gains in the near term.

Operating expenses rose 32% over last year, primarily from planned investments. Approximately $4 million was for the ORBIT II trial in preparation for a coronary launch. We also made investments for competitive enhancements to sales and marketing, and expansion of medical education programs to drive PAD adoption. All of these investments are geared towards generating higher future revenues. Operating expenses were also affected by higher incentive compensation as a result of performance above plan.

As you know, the medical device tax became effective on January 1. An expense of $521,000 was included in SG&A for the quarter.

Net other expense decreased $459,000, to $160,000, mainly due to valuation changes of our debt conversion option asset. The resulting net loss of $6.8 million, or $0.28 per share, was within our guidance, and compares to a loss of $4.6 million, or $0.24 per share, last year. The number of weighted average shares outstanding rose to 24.2 million, from 18.9 million last year. This was due to the issuance of 4.1 million shares in two equity offerings since the first quarter of fiscal '12 as well as the issuance of stock from debt conversions, employee stock plans and warrant exercises.

Adjusted EBITDA, calculated as loss from operations less depreciation and amortization, and stock-based compensation expense, was a loss of $4.3 million, compared to $2.5 million last year. The increase was driven by a larger operating loss, partially offset by higher stock compensation expense content in expenses. Excluding investments for the coronary application of $4 million, adjusted EBITDA for the PAD business was nearly positive for the quarter.

For the year ended June 30, 2013, compared to the prior year, revenues rose 26% to $104 million. Reorder revenues were 97% of total revenue, compared to 95% last year. The gross margin was comparable to the prior year at 77%, for reasons similar to the quarter. Operating expenses increased 31%, to $102 million, again for reasons similar to the quarter, and included $16.6 million for the ORBIT II trial and coronary launch preparation. Interest and other expense decreased to $1.6 million from $2.3 million, mainly due to valuation changes of our debt conversion option asset.

The year-to-date net loss totaled $24 million, or $1.11 per share, compared to a loss of $16.8 million, or $0.93 per share, last year. The average shares outstanding grew by 3.7 million shares, to 21.7 million, again due to the same factors noted for the quarter. Adjusted EBITDA loss was $14 million, versus $8.4 million last year, and was $2.6 million positive for the PAD business, excluding the coronary investments. At year end, our cash balance stood at $68 million, nearly double the level from a year earlier. These funds will support continued growth in PAD and our anticipated coronary launch.

I'll now turn it back to Dave for further comments.

Thanks, Larry.

We'd like to detail the ongoing clinical progress we're making centered around three things -- our recent PMA submission; follow-on data from our ORBIT II study; and our Liberty 360 study.

First, our PMA application. CSI completed submission of its PMA application to the FDA for our Orbital Atherectomy System to treat calcified coronary arteries on March 15, 2013. On June 14, the FDA submitted its questions to our application. We were able to quickly turn that around and provided them with our responses on July 19, just one month after questions were received. Special thanks to the team here at CSI for an exceptional turnaround and a quality submission.

CSI and the medical community are very excited about the ORBIT II results and our PMA application. We're working closely with the FDA to secure approval for an application to treat this most challenging, underserved patient population. We anticipate that approval could occur in late calendar 2013 or early 2014, primarily depending on whether or not a full advisory panel is required by the FDA.

In the meantime, we're hard at work readying the organization for this important launch. We are educating physicians on the dangers of arterial calcium, and we presented our ORBIT II data in the late-breaking presentations at the 2013 EuroPCR conference in Paris and at the 2013 Complex Cardiovascular Catheter Therapeutics conference in Orlando, Florida. Dr. Jeff Chambers, of Metropolitan Heart and Vascular Institute in Minneapolis, highlighted new data showing that 92.8% of patients were free from severe angiographic complications. Additionally, core lab assessed final procedure residual stenosis was only 4.7%.

This new data adds to the excellent primary safety and efficacy endpoint results previously reported. We exceeded the trial target endpoints, and by a significant margin, including freedom from 30-day MACE of 89.6% and procedural success of 88.9%. Excluding MACE, procedural success was 98%.

As Dr. Chambers highlighted, patients who suffer from severely calcified coronary lesions are one of the toughest-to-treat populations. They're more likely to experience major adverse coronary events or even death. The 30-day ORBIT II results demonstrate that our Orbital Atherectomy technology may be a superior treatment option.

Looking at the peripheral side of our business, we began enrolling patients in our postmarket study, Liberty 360, during the quarter. This study is evaluating the acute and long-term clinical and economic outcomes of our Orbital Atherectomy System in treating PAD. Additionally, Liberty 360 is the first study of its kind to compare Orbital Atherectomy to all other PAD treatment options.

Dr. Cezar Staniloae, of New York University Medical Center, is the study's principal investigator and performed the first procedure. The medical community is excited about Liberty 360 because it's assessing success based on long-term outcomes and durability rather than acute angiographic results of the various treatments. Moreover, the study's patient population includes complex cases, even those with advanced and severe PAD. This is a subset of patients that has been excluded from other studies, with CSI being the standout exception.

This is a prospective, observational, multicenter, postmarket study. It will enroll up to 1,200 patients at 100 sites across the United States, including 500 patients with claudication, which is a painful circulatory problem, another 500 patients who suffer from critical limb ischemia, a severe form of PAD, and another 200 patients scheduled for amputation. Liberty 360 will evaluate numerous parameters, including procedural and lesion success, the rate of major adverse events, duplex ultrasound findings, quality of life, six-minute walk test, wound status, economic outcomes and development of plaque burden assessment.

Now I'd like to detail our outlook for the fiscal 2014 first quarter, ending September 30, 2013. We anticipate revenue to be in the range of $27.5 million to $28.5 million, representing year-over-year growth of 18% to 22%. This includes the expected effect of lower procedure volume during the summer months.

CSI's gross profit as a percentage of revenue should be slightly higher than the fourth quarter of fiscal 2013. We expect to see improvements in Stealth 360 component costs and increased utilization of our manufacturing facilities. Those will be partially offset by costs to prepare for a coronary launch.

We anticipate operating expenses approximately 9% higher than the fourth quarter of fiscal 2013. We are investing about $6 million in the ORBIT II trial in preparation for a coronary launch and also in physician and sales team education. Interest and other expense should be about $300,000, excluding the effect of debt conversions or valuation changes of the related conversion option asset.

The resulting net loss is expected to be in the range of $9.6 million to $10.2 million, or a loss per common share ranging from $0.39 to $0.42. This assumes 24.5 million average shares outstanding. Again, this excludes the potential effect of conversions or valuation changes related to our convertible debt.

Before closing, I'd like to make a few comments about the recent CMS reimbursement proposals. CMS has proposed reimbursement rates for 2014 that include increases for atherectomy in the hospital setting, both outpatient and inpatient, and decreases in the physician office setting. The decreases in the office-based setting seem to run contrary to past CMS process and direction, and it will be debated over the 30-day comment period.

We feel confident about our growth potential going forward for the following reasons. The PAD market is large and underserved, especially in the treatment of calcified plaque in small vessels, where critical limb ischemia is prevalent. We have clear advantage in the treatment of those conditions and have really just begun to penetrate that multibillion dollar market opportunity.

Patients will get treated in either the hospital or the office-based settings. While we feel the physician office is an attractive treatment setting with great growth potential, it's a small portion of our business today. We are very strong in the hospital setting, which received increases in the CMS proposal and has higher ASPs for CSI. Even at the proposed office rates, atherectomy is the highest single lower extremity reimbursement. Our technology's fast procedure time, its ability to treat multiple vessels with one device, its ability to routinely treat a broad range of disease, including calcified and small vessels, positions us well in that market.

To conclude, CSI is committed to helping physicians treat the most difficult disease states, including arterial calcium. We'll do this through clinical rigor, constant innovation and a drive to improve patient outcomes.

Thank you for participating in today's call.

Operator, we would now like to take questions from the participants.

(Operator Instructions)

Our first question comes from the line of Danielle Antalffy, with Leerink Swann. Please proceed.

Hi. Good afternoon, guys, can you hear me okay?

Sure can, Danielle.

Okay, great. Thanks so much. Congrats on a great quarter. I just wanted to talk a little bit about the growth guidance for fiscal first quarter of 2014 and your confidence in that double-digit growth number, very strong growth still. Dave, could you talk about what gives you confidence in that number, where is it coming from, is it adding new accounts, is it driving higher use at existing accounts, given the fact that you're coming up on a tough comp year over year?

Yes, you bet. We're confident in double-digit growth. The technology continues to deliver clinical and economic benefits. We had another great quarter of scientific proof source for that. We've got a huge prevalence of the disease, unfortunately, out there with which to treat. We continue to build new market. And there's more sites than ever with which to treat. And the things that are enabling us to drive deeper adoption in our top accounts are medical education -- we've made a real commitment in the last year and a half, two years to employ education -- and the device delivers a smooth tubular lumen every time it's tried. So we've got a lot of things going for us even in the summer quarter.

Okay, great. That's helpful. And then, this is probably, Larry, more for you. The significant investment in ORBIT II in the coronary indication, when should we see that start to ramp back down? Is that more second half of fiscal '14? Is that more fiscal '15? When -- how do we think about that?

Well, the investment will actually ramp up, Danielle, as we get closer to the market launch. As you know, we're going to add about 20 direct salespeople to focus on that launch. And so it'll probably continue to grow moving forward, leveling off towards the end of the year.

Okay, great. And one last question, any sense based on the questions that you got from FDA, any better sense of how they're thinking about a potential panel? I mean, are you guys still sticking to the likelihood that there will not be a panel?

Well, we don't really know, but we're doing everything in our control to put us to the best window. And even if they did go to panel, we're confident that, while we might not get this calendar year approval, that in the first half of next year we would be approved.

Okay, perfect. Thanks so much. Congrats again, guys.

Our next question comes from the line of Brooks O'Neil, with Dougherty & Company. Please proceed.

Good afternoon. I just wanted to follow on with Danielle's question. I'm just curious if you guys have planned in flexibility in terms of your spending ramp for coronary related to the timing or likely path to approvals for that product?

Yes, we can be flexible with that. We're monitoring it, and we'll start adding people when we think we're getting close. It's a bit of an art, but there is some flexibility that we have. Some of those 20 that I talked about will come out of our PAD sales force, so we have some control over the timing of that, as well.

Sure. And I'm curious, obviously you commented in your prepared remarks and in the release that you were able to respond to questions quickly. Should we read into that that the issues FDA was curious about with regard to your PMA submission were relatively straightforward and not things that threw you for a loop?

Yes, absolutely. They were straightforward, and we were able to turn those around in less than 30 days.

Great. And should we read into that a greater likelihood of relatively smooth sailing to approval, or would that be too big a stretch?

Well, we're rooting for that, but we don't really know. What we do know is that the results are extraordinary, and the patients out there, large, underserved market, can really use this device. So we think the FDA will be motivated.

Right. That's great. I'm just curious, and you know I'm pretty new to this story, but could you just talk a little bit about the higher unit cost of the Stealth 360 and the pricing, the lower average selling prices? What do you -- what drives those two things?

Yes, when you compare year over year, we had a lower percentage of Stealth last year than we did in the fourth quarter of this year. And the Stealth, with its new design, the direct cost is a little bit higher than the old Diamondback device, which we had the opportunity to drive cost out of over time. So we'll get the cost down as we do future versions. But it is a little higher from a direct unit cost initially. Overall, the ASPs, they do fluctuate. It was down slightly from last year this time, but still very strong at over $3,100.

Great. Thank you very much.

Our next question comes from the line of James Terwilliger, with Wunderlich Securities. Please proceed.

Hey, guys. Can you hear me?

Sure can, James.

First of all, congratulations on a nice quarter and nice guidance going forward. I've got a couple of different questions, though. The first question I have is when I look at this type of revenue growth versus what I would think is market growth or procedural growth, clearly you guys are taking share. Can you comment on not who in terms of a competitive perspective you're taking share but what type of technology? I mean, I would think you're taking share in terms of plaque removal technology. I think you'll be taking share in terms of balloons and stents. And I think you'd be taking share versus surgical bypass and amputation. Can you talk a little bit about what you're seeing with the clinicians and where you're winning this business at?

Sure. With the increased awareness of calcium and its detrimental role in patient outcomes, we are taking share from balloon and all the other players, both stent and atherectomy. But the most exciting part of the story is we're expanding the market. We go where the disease goes. We can make a smooth tubular lumen in small arteries, calcified arteries. And we can even treat those patients who are end stage, critical limb ischemia, some of them scheduled for amputation. And that's really great, sticky revenue, and more and more of our physicians are going through medical education programs to learn how to treat these patients routinely.

Well, that would lead me to a different question. When you look at this Liberty trial, this postmarket study, 1,200 patients, 100 sites, I mean, the thing that jumps out here is the level of clinical excitement, that you're actually going after patients that are scheduled for amputation.

Yes, it's an extraordinary story and one that the United States needs. We still have 150,000 or more amputations a year in the United States because of peripheral vascular disease. We could treat the worst of the worst. And, quite frankly, we could treat people with less severe disease. We could treat multiple lesions. We could treat soft plaque and calcified plaque. This device and its ability to go where the disease goes is a real winner for patient outcomes, both clinical and economic.

It's very exciting. I wanted to switch a little bit in terms of the coronary PMA. Well, you had these questions and you've already responded. That's a tremendous turnaround time. Is it safe to assume that all the questions were on Module 3 and Module 1 and 2 are pretty much done?

You're asking about where the questions were from? The latest submission was the majority of them.

Yes.

And they were really straightforward. Some of them were in the submission and we just had to point out where the answers were.

There were a few follow-up to our responses to Modules 1 and 2, but very few.

Okay. And then, lastly, in the release when you talk about the $4 million for the coronary launch, is all of that in sales and marketing, or is some of that in R&D?

Actually, it's mostly in R&D, James.

Okay, so it's all in R&D on the coronary, because R&D kind of trended down here a little bit. And then the last question I've got, in the release you talk about the arterial calcium, 65% of all PAD arteries have this, but more importantly 80% of all the small arteries below the knee. Does that one data point provide you tremendous confidence for what your technology can do in the coronary application? That to me seems very powerful and significant.

Yes, it does. The vessels below the knee are 1 mm to 4 mm in size. So are the vessels in the coronary arteries. We've got a long history of success with calcified arteries in patients who are really sick. And then the results from ORBIT I and now ORBIT II are really extraordinary. So there's a need for this device. The prevalence of calcified coronary arteries is enormous, and we're really excited to get approved and start helping patients out.

Okay. Thanks for taking my questions, and, again, congratulations on a great quarter. Thanks, guys.

Thanks, James.

(Operator Instructions)

Our next question comes from the line of David Runkle, with Newel Capital. Please proceed.

Yes, Dave, my question is about your educational offering. Are you finding good physician attendance for that offering?

Yes, extraordinary physician attendance. We've got two really great advantages for the physicians who face this disease every day, every week. One is we've got an extremely low physical profile, so we can really go where the disease goes. And, secondly, we have the advantage of, because of our low profile, of accessing the vascular tree from different points, including the foot and the calf, and that allows physicians to treat in a way that they haven't treated before and treat disease that they haven't treated before more successfully. Our training programs are featuring these new access points and new ways to treat difficult disease. Attendance has been very strong.

Okay. And some of the physicians that are attending these educational seminars, is that resulting in some of your new account number for the quarter?

Well, we've got some new accounts every quarter, but we also have more physicians per our current accounts attending. So if, for example, one or two physicians were using our device a couple of quarters ago, as a result of our physician training now four or five are in that same institution.

So that's kind of a ripple effect, then.

Yes.

From the education. Okay. All right. That's all I had. Thanks.

I would now like to turn the call over to Mr. David Martin for closing remarks.

Thank you. Fiscal 2013 was a year of accomplishments that the whole CSI team can be proud of. We delivered very strong revenue growth, completed a key submission to the FDA, expanded education initiatives and continued to generate scientific data through clinical trials. This all sets the stage for more growth in the years ahead.

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