Cardiovascular Systems Inc (CSII) 2014 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q1 2014 Cardiovascular Systems Incorporated Earnings Conference Call. My name is Ashley, and I will be your coordinator 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, Larry Betterley, CFO. Please proceed.

Thank you, Ashley. Good afternoon, and welcome to our fiscal 2014 first-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'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. Dave?

Thank you, Larry, and hello, everyone.

We're pleased to report an excellent quarter. Our performance in the expanding $2 billion PAD market drove first-quarter revenues to record levels.

Revenues rose 28 percent year-over-year and 3 percent sequentially over the fourth quarter, which was also very strong. Physicians continue to embrace our easy-to-use technology.

The Diamondback 360 is a primary treatment option, including for arterial calcium. Calcium is present in approximately 65 percent of all peripheral arteries treated, as well as in nearly 80 percent of the small arteries treated below the knee. Building on our peripheral franchise, nine days ago, CSI received FDA approval to market our Diamondback 360 coronary orbital atherectomy system to treat severely calcified coronary arteries. This is an exciting and landmark moment for patients suffering from calcified coronary artery disease and their families, for physicians treating this complicated condition, and for everyone at CSI.

After nearly seven years of investment, we're able to bring to market the first and only FDA-approved device to treat severely calcified coronary lesions. This is the first new coronary atherectomy system introduced in over 20 years. Our mechanism of action is unique and has never been offered before.

On the peripheral front, we continue to enroll patients in our post-market Liberty 360 study. This trial evaluates the acute and long-term clinical and economic outcomes of our system in treating PAD. We continue to spread the word about the challenges and complications posed by arterial calcium.

All of our efforts are focused on CSI's role as the primary therapy for this difficult condition. Our goals for fiscal 2014 are to expand the use of our orbital atherectomy system as the primary therapy for treating calcified arteries in the PAD market, build on our base of scientific data that supports safety, effectiveness, and economic benefit of our products, and conduct a successful targeted coronary launch.

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

Thank you, Dave. CSI reported a strong first quarter. For the first quarter of fiscal 2014 compared to a year ago, revenues grew 28 percent to $29.8 million, which was above our guidance. Device revenues were 88 percent of the total. We sold more than 8,500 devices, bringing the life-to-date total sold to more than 125,000.

Reorder revenues remained high at 96 percent of total revenue, consistent with last year. We added 50 new accounts compared to 34 in the year-ago period. Stealth now comprises 99 percent of our total device revenues from a customer base of nearly 1,200 accounts.

Other product revenues rose 26 percent from the prior year quarter to $3.6 million. Gross profit margin remained consistent with last year at 77 percent. Cost reductions from higher production volumes were offset by a higher mix of Stealth 360 sales, which has a higher direct cost per unit than its predecessor device and by a small decline in ASPs. We expect engineering enhancements to Stealth and increasing production volumes to continue to reduce unit costs in the future.

Operating expenses rose 28 percent over last year primarily from planned investments. Investments included approximately $6 million of coronary expenses related to the ORBIT II trial, FDA approval, and market launch preparations. We also made investments for competitive enhancements to sales and marketing, expanded clinical and product development initiatives, and expanded medical education programs to drive PAD adoption. All of these investments are geared towards generating higher future revenues.

SG&A also includes $520,000 of expense for the medical device tax, which became effective on January 1, 2013. Operating expenses were lower than expected for the quarter due to the timing of clinical study enrollment and product development projects. Both are expected to ramp up in the coming quarters.

Net other expense totaled $445,000 versus $4,000 in the prior year, mainly due to valuation changes of our debt conversion option asset. The resulting net loss of $7.3 million, or $0.29 per share, was favorable to our guidance and compares to a loss of $5.2 million, or $0.26 per share last year. The number of weighted average shares outstanding rose to 24.8 million from 20.4 million last year. This is due to the issuance of 2.3 million shares in an equity offering during the third quarter of fiscal 2013, 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 $4.2 million compared to $3.2 million last year. The increase was driven by a larger operating loss partially offset by higher stock compensation expense. Excluding the $6 million of coronary investments, adjusted EBITDA for the PAD business was positive for the quarter.

We finished the quarter with $63 million of cash. After quarter-end, we refreshed our universal shelf registration to the original $75 million level. While we currently have a significant amount of cash on hand, we may take additional financing in the future if we feel we could increase shareholder value by accelerating or adding to our growth initiatives.

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

Thanks, Larry. As we look at the coronary market, it's estimated that moderate-to-severe arterial calcium is present in nearly 40 percent of patients that undergo percutaneous coronary intervention. Moderate-to-severe calcium contributes to higher treatment costs and poor outcomes. These include a significantly higher occurrence of death and major adverse cardiac events, or MACE.

The FDA's approval of our Diamondback 360 coronary orbital atherectomy system opens up a large underserved market for CSI, which is estimated to exceed $1.5 billion annually in the United States. Severe coronary arterial calcium is a vastly underestimated problem in medicine with limited options for treatment. Our ORBIT II trial proved CSI's Diamondback technology is safe and effective in treating this complex disease.

Securing coronary approval is another key milestone in our mission to provide primary tools for vascular intervention. I'm proud of our principal physician investigators and our scientific teams. Together with the CSI team, we're excited to move forward to help a larger physician population treat these previously underserved patients.

We have begun a controlled launch of the Diamondback 360 coronary orbital atherectomy system. Our first four sites have completed nearly a dozen cases with great outcomes. Dr. Sharma, Director of the Mt. Sinai Medical Center in New York, performed the first procedure post-approval. Since then, he's done two more cases. One of the cases was posted on YouTube by Mt. Sinai, and amongst the comments were that it took less than three minutes from insertion to the removal of our device.

Our initial coronary rollout is very targeted. With a dedicated team of coronary sales specialists, we are focusing on a limited number of the top medical institutions in the United States. This strategy will continue for several quarters. During this time, we're focusing on providing physicians with the quality experience to drive adoption in those accounts and will conduct post-market studies to enhance our product offering and further build our body of clinical data.

Looking ahead, we anticipate announcing ORBIT II one-year data at the ACC conference in March of 2014. This will be critical to highlighting the longer term efficacy of our technology.

On the peripheral side of our business, we continue enrollment in Liberty 360. This study evaluates the acute and long-term clinical and economic outcomes of our Diamondback 360 system in treating PAD. It is the first study of its kind to compare orbital atherectomy to all other alternative treatment in these difficult-to-treat patient populations.

As a prospective, observational, multi-center study, Liberty 360 will enroll up to 1,200 patients at 100 sites across the United States. We are including 500 patients with claudication, or painful circulatory problems, another 500 who suffer from critical limb ischemia, which is a severe form of PAD, and 200 have permanent tissue loss and are candidates for amputation.

The medical community is excited about Liberty 360 because it's the first study that will assess long-term data on real-world patients treated with various endovascular devices. It will allow a never-been-done-before analysis of critical health economics data. Dr. Cezar Staniloae of NYU Medical Center is the study's principal investigator, and he performed the first procedure. About 30 patients have been enrolled to date, and we expect enrollment to accelerate as more sites complete their internal reviews.

Now, I'll detail our outlook for the fiscal 2014 second quarter ending December 31, 2013. We anticipate revenue to be in the range of $30 million to $31 million, representing year-over-year growth of 19 percent to 22 percent. This includes a very limited amount of revenue from coronary cases due to our controlled launch.

CSI's gross profit as a percentage of revenue should be consistent with the first quarter of 2014. We anticipate operating expenses approximately 10 percent higher than the first quarter of 2014 primarily for additional coronary investments. 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 $9.1 million to $9.7 million, or a loss per common share ranging from $0.36 to $0.38. This assumes 25.6 million average shares outstanding. This excludes the potential effect of conversions or valuation changes related to our convertible debt.

To conclude, this fiscal year-to-date has been filled with many accomplishments. We delivered a very strong first quarter of revenue growth and secured a landmark FDA approval. We began a controlled coronary market launch, and we advanced scientific data through clinical trials. All this sets the stage for continued revenue growth in the future.

Now, Operator, we'll take some questions.

(Operator instructions.) Brooks O'Neil, Dougherty & Company.

Oh, good afternoon. Congratulations on all your accomplishments. I have a couple of questions. David, you detailed a little bit about your launch plans, but could you just give us a little bit more color in terms of maybe when you're thinking you'll start to ramp up your expansion to a broader number of centers?

Sure. We've got a long-term view. This is a wonderful time for patients and physicians. We've got a franchise that will be rolling out for years and years to come. So, in the opening quarters here, two to four, we're really going to extend ourselves on understanding the clinical data, polishing up all the great learnings from ORBIT II, looking to refine the procedure and the process of installation with some of our select partners up front so that when we roll out into the broader market, we will have a lot of solutions and a faster track for adoption over the long-term.

Great. Second question, do you anticipate any impact on the PAD efforts as a result of your ramping up in the CAD area?

Yes, we really do. We think there will be a [glow]. The vessels in the heart are one to four millimeter. Vessels below the knee are one to four millimeter. Calcification is a complication in both areas. And we think those physicians -- let's just say physicians four and five in some of the accounts that we call on now who are looking for a little more validation that this product is safe and can be routinely used for the most complex and difficult cases, we think that this will be another data point for them to consider and get involved as we go forward.

Great, and then just one more. It would be very helpful if you could detail anything about the competitive environment. Obviously you said this is the first and only product approved in the coronary area for severe calcification, but what do you see out there? What do you expect over the next year or so?

Well, we don't expect another device like ours. Our mechanism is unique. It's never been offered before, and we've got a great runway, going forward, to help a lot of people over time.

I think more in terms of opportunities is just awareness of calcium. There's no device to treat it before. It was swept under the rug a little bit. Some of these patients ended up in medical management, some in coronary artery bypass surgery. And then, as some of the physicians here at the TCT explained from the podium last night and throughout the day, for those patients with calcium, they're the toughest cases. Calcium means that complication is coming. And so, the ability to treat in just a few seconds with our device and start that case off differently is a real opportunity.

Great. Thanks a lot.

Thanks, Brooks.

Danielle Antalffy, Leerink Swann.

[Good evening], guys. Can you hear me okay?

Sure can, Danielle.

All right, great. Thanks so much, and congrats on another awesome quarter. I was wondering if you could comment on, as we think about the remainder of fiscal 2014 and the variables at play here specifically for your peripheral business, I know you've had a few really strong quarters. It seems like the momentum's continuing, but there are some new variables. Number one, you have the coronary, so wondering if you have a comment on how you can ensure that it won't be a distraction there as it relates to the peripheral business.

And then, number two, obviously the office-based lab proposed reimbursement cuts, which of course are not final, but let's assume, if they do go into place, how we think about maybe the remainder of fiscal '14.

Yes. Thanks, Danielle. The first question about distraction -- possible distraction of the great news of coronary, we've got 20 specialists and management to go forward with the very controlled, limited launch, so we'll be able to really get answers in a hurry and also keep the high growth momentum that we've got right now on the peripheral franchise.

And the second question?

The second question was, as we think about the remainder of 2014, also assuming this proposed office-based lab reimbursement cut goes into place, can you give us some color on how you think about that and potential impact to volumes? And maybe give us some color on what percentage today of your users are in office-based lab, or what percentage of procedures are in office-based labs.

Sure. No, we like the office-based lab environment, but it is less than 20 percent of our business. There's a lot of discussion on where the reimbursement will end up.

Regardless, we think we're pretty well positioned in the office-based lab, with the quick turnaround in our device, the quick procedure time, being able to treat multiple vessels with one device in a very safe way really are competitive advantages for our product. Since we have such a small penetration in the overall PAD market today, there's ample room for growth wherever the procedures are done. As you know, we're very strong in the hospital where the ASPs are actually higher. So, while it's unfortunate that OBLs are under pressure, we feel we're pretty well positioned to be successful either way.

Do you guys think that there could be -- and Dave, I know we talked about this just one-on-one, but I was just hoping you could comment on whether you think this could drive a shift back into the hospital, like these physicians could do more procedures but do them more in the hospital, or do you think it continues in the office-based lab setting and that growth can continue regardless of the reimbursement cuts?

Yes. The patients could go back to the hospital, but I think those physicians who are entrenched in the office base will continue to work there. It's a great place to work. It's very patient-centric, and they can continue to make money.

Particularly with the Diamondback, we've got one device that treats multiple vessels. We're the only device that routinely allows them to get to a big part of their practice, which is below the knee. And the economics on lower extremity reimbursement for the office-based lab are still very strong.

But, it's a good point, because reimbursement did go up in the hospital, both inpatient and outpatient, and that will continue to be the lion's share of our business, going forward. If anything right now, and we'll have to watch it very closely, I think maybe if the reimbursement cuts go through, maybe it would slow the number of physicians who come out of the hospital or set up an office-based practice.

Right, okay. And one last question if I could. I just walked out of the (inaudible) Lutonix's drug-coated balloon presentation. Obviously, there's increasing excitement around drug-coated balloons and the potential for drug-coated balloons plus atherectomy. Can you comment on your guy's perspective there, and what you might be doing or what you'd be willing to do in combination with a drug-coated balloon longer-term? Thanks so much.

Yes, you bet. There's great excitement about drug therapies, and certainly the patients would need it. And all those technologies and the companies that drive them are interested in getting into the very large calcium market. The absence of calcium, a smooth tubular lumen that only one mechanism of action makes that leaves the native artery intact, that preserves the media, that is the opportunity for those drugs to get to the majority of lesions and get the most uniform uptake in the vessel wall and into the media.

So, we feel, again, that we're the primary device. And then, afterwards, some of these advances could really help patients. So, we're very excited about that.

Perfect. Thank you, guys. Have a good day.

Thank you.

Jose Haresco, JMP Securities.

Hi, good afternoon.

Hey, Jose.

So, let me add my voice to the chorus of congratulations on both the quarter and obviously the FDA approval of the coronary system.

Couple of questions. So, you talked about doing a slow rollout. Could you give us a sense of which centers you'll be targeting and what sort of activities you'll be focused on as part of this rollout? And how long do you think this slow rollout period is?

Somewhat related to that, it's obvious from being down here at TCT, like everybody else, that there's a lot of excitement around the product, that people want to see longer-term data. So, should we be expecting you guys to run a [Rotaxis]-like study, and then looking at the issue of [lade] loss, which at this point has been the Achilles heel of rotational atherectomy?

Sure. Let me start with the clinical data. We'll be tracking on the initial cases. We'll also be aging that ORBIT II data to one year and presenting that at March ACC, and that'll be important. I think people will be looking to that.

In addition, we've got a MACE trial, which studies further this unstudied population. It studies what people do in the absence of the Diamondback 360 with the severely calcified coronary artery.

And the initial indicators are really enlightening. For example, it looks like acutely, just the day of the case, that by using the Diamondback 360, you could save $4,300 in costs on the date of the case versus fighting through this difficult patient population, the time, and all the additional tools that you need to bail out of a complex, severely calcified coronary artery case. So, we'll continue to bring that data, and the market does want that data for the broader launch. We'll focus on that.

Another example of the things that we'll be doing right now, we've got blue chip, tier-one medical education, and it's been driving our peripheral business to extraordinary growth. And we would like to have extraordinary medical education programs for our coronary introduction into the broader market. So, that's one of the things we'll be looking at, is the curriculum and what's the best way to communicate information and disease state awareness to physicians who will be using the Diamondback 360 in the coronary space.

Regarding rollouts, Jose, I think for this fiscal year we're focusing really on outcomes, driving adoption in key accounts, generate the key opinion leaders. Probably going into next fiscal year, we'll start a broader rollout. That's our current estimate at this time.

Okay. So, is it fair to assume then that, for at least the next six months, you'll focus on that roughly 30 percent of your account base that is interventional cardiology before you start adding on?

Well, we'll also focus on new accounts who have high procedure volumes in coronary who may not be peripheral users today. Those will be key focus for us, as well.

Okay. And maybe it's a little bit too early, but since its approval, have you gotten any interest from potential partners on the international side? Have you thought about that, or how should we think about that, going forward, given that you guys don't have direct distribution overseas? Like, clearly there's going to be a lot of interest in this product from other parties.

Yes. We're excited to go overseas. We've gotten a lot of interest, as you could imagine. But, we'll keep it in our control right now. We just completed a trip to Japan, and we're starting things with the Ministry of Health in Japan, and we're looking forward to a Japanese introduction a few years from now when we get through the Ministry.

We have had CE Mark in the past on some of our previous products. We're looking forward to getting that, and we'll go into some selective European countries. We'll have a clinical bias like we do here in the U.S., so we'll conduct studies and controlled launches in a limited number of countries, but not till the end of the year.

Okay, great. Thank you very much.

James Terwilliger, Wunderlich Securities.

Hey, guys, can you hear me?

Yes, we can, James.

Real quick, like everybody else, congratulations on a great quarter and with your coronary regulatory approval. I'd like to build on the previous question, though. I'm not as concerned in terms of distribution for Europe and Japan, but you've got great clinical technology, and I know you've always put the patient first. You have a desire to help patients. So, what would be the R&D plan now that you've got your coronary approval for both Europe and Japan?

Yes, that's -- well, we don't have it for Europe and Japan yet, but now that we've got US approval, we're going to move forward on that.

But, I'm glad you asked about R&D. We did hire Mike Yang as VP of Science, Research and Development. He's had a prolific career at Johnson & Johnson, and before that at St. Jude. There are a number of products, both in the peripheral space and the coronary space, that we've got in the queue. And the science opportunity is rich, as well. We can enlighten the market on the physiology that goes with our device and our outcomes, as well as the opportunity for our device first and drug therapies second. So, there'll be a science queue as well that we think will inform the market and drive further adoption.

In addition to that, James, also on the coronary side, we have been working on a different crown type than the one that was approved, it will have better sanding and crossing capabilities, and that'll be part of studies, going forward.

Excellent, thank you. And then, my second question was really on the coronary launch in the United States. Can you remind me how many coronary sales reps you have right now, feet on the street, and then what is the number you would like that to get to?

Early on here, we've got about 10 who did a great job getting cases in the first 48 hours, and we've got great outcomes, and really satisfied, happy customers at Mt. Sinai and Memorial Hermann Medical Center in Texas, Metropolitan Cardiology Consultants, Dr. Chambers in Minnesota, and then St. Francis Hospital, Dr. Schlofmitz and his team in New York, and we're moving to 20. So, we think 20 is the right number at the outset here, but we'll have to look at what the optimum model is and judge that, going forward.

Thank you. And then, my last question is really just how's the TCT going for you? I mean, to get your coronary approval with the clinical data that you have and the buzz that you have, I would imagine it's a very robust and exciting TCT conference for you. Any feedback on the TCT conference?

Yes. It is exciting, and the buzz is about calcium. There's been some great data presented, seems like literally every third presentation at the TCT is about the complications that come with calcium, including last night. The CRF database continues to bring forward information about the increased cost that come with the complications related to calcium.

And so, now that we've got a device that can treat that routinely, I think there is excitement. I think there's a lot more to learn there. And what our job is, to bring specific numbers home to our user base and a great first-class medical education program so that we could start out center after center as we [proliferate] the use of the Diamondback in the coronaries.

Excellent. Thank you for taking my questions, and congratulations again on a great quarter and your regulatory success. Thanks, guys.

Thanks, James.

(Operator instructions.) Jan Wald, Benchmark Company.

Good afternoon, and again, to be totally redundant, congratulations on the quarter and on the approval.

I guess you intrigue me with a couple of things that you said during the call. One is on the medical science end of things. I think that's an intriguing opportunity for you. And I guess I'm going back to the Guidant days where defibrillators were secondary prevention devices, then they moved to primary prevention devices. What do you see the goals of the medical science activity at CSII being at this point? So, what do you want to demonstrate? What do you want to see?

Well, the physiology and the biology of it all. I think uptake, drug uptake, there's a great opportunity to be first with some of the key learnings that would guide treatment options, going forward, for all the exciting drug therapies coming forward.

And then, the calcified patient is a real opportunity, just hasn't been studied. This group of people has been excluded from every trial ever in the space, so there are a lot of key learnings, and we're in a great position to lead scientifically in that area.

Okay. And the other intriguing thing that you said was that there could be a trigger that would speed up funding of various initiatives that are going on in the Company. What are the kind of triggers that you're looking for there? What should we, I guess, look for and see to see whether or not you are going to increase your funding for some of these initiatives?

Yes. As always, if there are ways to accelerate the business, for example if we did the medical education that I mentioned before, it's been a great way to show physicians that with our device and our unique mechanism, we can access the disease from the pedal artery, from the foot, from the tibial artery, from the calf, which has never been done before, and they like that peer-to-peer faculty engagement environment to learn that new approach.

Our small, wispy, very low French-size device would be well suited for the radial artery and some tibial-based approaches that excite people, going forward. So, if we were to optimize our medical education program, as one example, that would be a trigger to move forward and expand a lot more aggressively.

Another potential area is, of course, the coronary launch. As we go through that and see how it progresses, there could be an opportunity to expand that or accelerate that, as well.

Okay. And I guess my last question is, just in terms of the Liberty 360, what's the latest, I guess, estimates on timeline and when we can expect some data?

That would be another great area for acceleration. We started that. We've got our eye on 1,200 patients to start. We've had a great opening experience with some of the top centers and treating some very, very difficult cases, including heading off some amputations in the early enrollment here. But, we would like to publish in tier-one journals, and as soon as we get to case 100, there's no reason that we couldn't mine that data, and in fact some physicians, including Manesh Patel from Duke University, are looking forward to do exactly that and to get that information out. So, early and frequently would be the answer to your question.

Okay. Thanks very much, and again, congratulations on the quarter.

Thanks, Jim.

There are no further questions at this time. I will now turn the conference back over to David Martin, CEO, for closing remarks.

Thank you. CSI's committed to helping physicians conquer the most difficult disease states, including arterial calcium. We do this through clinical science, innovation, and a drive to improve clinical and economic outcomes. We've had an exciting start to the year, and we look forward to updating you on our future success.

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