Cardiovascular Systems Inc (CSII) 2015 Q1 法說會逐字稿

Good day, ladies and gentlemen. Thank you for standing by, and welcome to the Cardiovascular Systems, Inc. Q1 2015 Earnings Conference Call. (Operator Instructions) As a reminder, this conference call is being recorded. I would now like to turn the conference to our host, Mr. Larry Betterley, Chief Financial Officer. Sir, you may begin.

Thank you, Eric. Good afternoon, and welcome to our fiscal 2015 first quarter conference call. During 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. 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 CSI's President and CEO, Dave Martin.

Thanks, Larry, and hello, everyone. We are pleased to report that the momentum we built in fiscal 2014 strengthened as we began a new fiscal year. First quarter revenues grew 39% to $41.4 million. Our momentum is due to our market expanding products that allow physicians to treat calcified lesions throughout the body. In support of this, we have begun cross-training our peripheral representatives to also sell our coronary products, an initiative we call Project Evolve. Since the end of June we have cross-trained another 29 of these hybrid sales professionals. Going into this second quarter we have a sales force of 60 hybrid, 24 coronary, and 107 peripheral representatives. We plan to cross-train about 25 hybrids each quarter.

While still very early, we are encouraged by our hybrid productivity, which is a key factor for the success of our coronary ramp and future profitability. The product revenue numbers look -- they look great. We had hoped that would be the case, and the early returns on the metrics look super.

The coronary launch has focused on quality training, great patient outcomes and account penetration. We sold nearly 1,400 coronary units by the end of fiscal 2014, and we needed about eight months after FDA approval to get that done. In the three months ending last quarter we sold 1,300 units with the expanded hybrid sales force as a driver generating nearly $5 million in coronary revenue.

We added 27 new PAD reps during the quarter. We will continue to assess what the optimal number is for our sales force. Our vascular market opportunity is enormous. Because of our ability to treat coronary and tibial arteries, we have more vessel opportunity and patient contribution opportunity than our competitors.

On the technology side, we remain excited about our 1.25 millimeter crown including the March launch of our tibiopedal access device. It is a low profile, 4 French sheath compatible system. It allows physicians to treat the small and tortuous vessels located below the knee through alternative access sites in the ankle or the foot, and in the future, in the radial artery, or the arm. It is estimated that 20% of lesions below the knee cannot be crossed using the traditional femoral access approach. The retrograde access that we offer means physicians can help a broader range of patients who may otherwise face amputation. In addition, use of smaller sheaths has shown to reduce procedure and access site closure times. It lowers radiation exposure and enables faster pace of recovery while also reducing complications from bleeding.

First quarter sales of all of our 1.25 millimeter solid and Micro Crowns represented 45% of peripheral device revenue versus 36% just a year ago. That is 53% growth between the periods. Going forward, these low profile devices will be a key driver of device growth and market expansion, allowing a growing number of physicians to safely and effectively treat calcified lesions even in the small vessels below the knee. And those doctors who use the 1.25 as their primary device, these are happy customers that are delivering great outcomes.

Calcified and small vessel disease is a determining factor for critical limb ischemia, or CLI, which, if left untreated, often results in debilitating amputations. It is estimated that nearly 3 million people in the United States alone suffer from CLI, and that number is expected to double by 2030. CLI is vastly undertreated with only 150,000 of these patients receiving endovascular interventions annually and, unfortunately, over 160,000 more patients receive amputations.

Dr. Mustapha at Metro Health Hospital in Michigan estimates that beginning in 2009, he himself has used our device on nearly 250 patients suffering from PAD who would have otherwise been candidates for limb amputation at an estimated savings in excess of $8 million in amputation-related procedure costs over that period, $8 million. Our orbital technology is uniquely proven to safely and effectively treat complex CLI disease addressing a multi-billion-dollar market opportunity. Larry will now provide details on our quarterly financial results and I will return to comment on our clinical and our research activity before we take your questions.

Thank you, Dave. CSI's performance was very strong this quarter. Compared to a year ago, total revenues grew 39% to $41.4 million, which exceeded the upper end of our guidance range. Device revenues were 88% of that total. We sold over 11,500 devices, bringing the life-to-date total sold to nearly 170,000. Devices sold included nearly 1,300 coronary units that generated $5 million in coronary revenue. Reorder revenues remained high at 97% of total revenue above the already strong 96% in the prior year. We added 57 new peripheral accounts and 82 coronary accounts. All but one of our coronary accounts are also peripheral users, adding confidence in our ability to gain sales synergy with both applications.

Gross profit increased to 78.5% from 76.9% in the prior year quarter. The gain was due to higher device average selling prices. The peripheral device ASP was about $100 above first quarter last year. In addition, our coronary device, which was not commercially available last year, commands a higher selling price. The increased ASPs drove our first quarter gross margin above the top end of our guidance range. Going forward, we anticipate that engineering enhancements and rising production volumes will continue to reduce unit costs. In addition, the higher ASPs of our new products, including coronary and tibiopedal access devices are expected to keep gross margins in the upper 70% range.

Operating expenses rose 37% over last year primarily due to $12.4 million in coronary costs for the commercial launch, clinical studies and new product development. We continue to make investments in sales and marketing, expanded clinical and product development initiatives, and medical education programs to fuel the adoption of our technology. These investments allow us to take advantage of our extensive market opportunities and drive high revenue growth.

Operating expenses came in below our first quarter guidance, rising about 2% sequentially compared to the fourth quarter of 2014. The lower level of expense than expected was a result of timing of new hires and study enrollment.

Net loss was $8.2 million, or $0.26 per share versus a loss of $7.3 million, or $0.29 per share last year. Weighted average shares outstanding rose to 31.3 million from 24.8 million last year. The increase was due to the issuance of 3 million shares of stock in our November 2013 stock offerings and warrant exercises, debt conversions and employee stock plans. Adjusted EBITDA was a loss of $4.2 million, which was consistent with last year. Excluding net expenses related to our coronary launch, adjusted EBITDA was positive for the quarter.

At quarter end we had a cash balance of $116 million. We are primarily using our cash to fund our growth investments including coronary launch initiatives for sales force optimization, clinical studies, product portfolio expansion, education programs, and future international expansion. In addition, we are building a new facility in Minnesota to accommodate our growth. Progress payments for that facility totaled approximately $2.6 million in the quarter. That completes my prepared remarks. I will turn it back now for Dave for commentary.

Thanks, Larry. Now I will update you on you clinical programs. CSI continues to build a large body of clinical data that validates the use of our Diamondback 360 as the primary treatment therapy. The unfortunate reality is that the number of people suffering from vascular disease continues to mount in the aging population, many of whom suffer from diabetes, obesity and other morbidities translates into calcium as a growing and underserved problem. The complications related to the presence of calcium result in poor patient outcomes and higher treatment costs. Fortunately, our Diamondback 360 provides cost-effective and long-term durable outcomes for these patients.

In the first quarter we continued to advance our clinical initiatives. Enrollment in our LIBERTY 360 trial now exceeds 450 patients, an increase of over 180 since the end of the fourth quarter. This study is evaluating the acute and long-term clinical, up to five years, in fact, and economic outcomes of our orbital atherectomy systems. It is the first study of its kind to compare orbital atherectomy to any other PAD treatment option in a very difficult to treat patient population.

This month, as a part of the LIBERTY 360 trial, Dr. Mustapha removed a calcified lesion with our Diamondback system prior to using the newly approved Lutonix drug-coated balloon. Dr. Mustapha believes that when significant calcium is present, plaque modification is beneficial for adequate and uniform drug transfer from a drug-coated balloon to the vessel wall. In his experience, CSI's orbital technology is unique in its ability to treat these calcified lesions prior to drug-coated balloon treatment.

Furthermore, Dr. Tepe of RoMed Hospital in Rosenheim, Germany, and other key opinion leaders have concluded that vessel preparation to remove calcium prior to using drug-eluting technologies leads to better outcomes. We believe that preparing the vessel wall while preserving the health of the native artery with our device will ultimately become the standard of care, and we will continue building the science to make this happen.

Another important study we have underway is COAST, or Coronary Orbital Atherectomy System Trial, taking place in the United States and Japan. The study is designed to assess the safety and efficacy as well as economic outcomes of our new Micro Crown Orbital Atherectomy System. It is also designed to facilitate approval of our system in Japan. This week we began enrolling our first patients in Japan with Dr. Saito of Kamakura General Hospital performing the first seven procedures just two days ago. And like Orbit I, Orbit II and the US commercial experience, those cases went great. There is a lot of excitement and the team here did a great job. Thank you. And they are still in Japan, so safe travels back.

For COAST, we plan to enroll up to 100 patients in 15 US sites and 5 sites in Japan. While commercial operations in Japan are probably a few years away, entering this coronary market with its strong acceptance of minimally invasive coronary procedures and attractive reimbursement potential provides CSI with another exciting future growth opportunity. In the near term, we look forward to passing an important coronary milestone early in 2015 by sharing two-year data from our ORBIT II study.

This study evaluated the Diamondback 360's effectiveness in treating severely calcified coronary lesions. The one-year data revealed a high freedom from major adverse cardiac events and an impressive 95% freedom from reintervention. We are confident that two-year results will demonstrate that our device delivers quality long-term patient outcomes.

Data shows that when significant calcium is present, much higher rates of adverse events and death occur. It is estimated that significant calcium is present in 40% of coronary cases performed in the US annually. These 400,000 underserved patients represent a $1.5 billion market opportunity. Our coronary system is the only device approved in the United States for treating severe coronary calcium. Now I will detail our financial outlook for the fiscal 2015 second quarter ending December 31, 2014.

Revenue is expected to be in the range of $43.1 million to $44.8 million, representing year-over-year growth of 33% to 39%, including approximately $6 million to $6.5 million of coronary revenue. Gross profit as a percentage of revenue is anticipated to be similar to first quarter results.

Operating expenses should increase approximately 13% compared to the first quarter of fiscal 2015 primarily due to the expansion of our sales organization and increased enrollment in clinical studies. And then finally net loss is expected to be in the range of $11 million to $12 million, or a loss per share of $0.35 to $0.38 based on 31.5 million average shares outstanding.

We remain committed to expanding the vascular intervention market. A large and growing number of people suffer from vascular disease and our innovative and unique solution provides excellent outcomes in real world populations, including very different to treat patients, including Rutherford Classifications of 4 through 6 in PAD, a previously untreated population. Specifically, our products routinely treat calcium, have an excellent safety profile and the data to back it up in real world populations. We provide a low profile and alternative access capability which reduces procedure times, and we allow physicians to treat the most difficult disease states while preserving the integrity of the native artery. Individually these are powerful differentiating points when doctors and hospitals are evaluating what treatments to use. Combined, they set CSI apart.

Finally, before closing, I would like to thank our Chairman, Dr. Glen Nelson, for his guidance, unwavering support and steady governance of CSI for more than 10 years. His passion for improving the quality of care for patients has touched everyone here at CSI. Dr. Nelson, you did good. Our accomplishments to date and growing opportunity in front of us have benefited from his passion. At our annual shareholder meeting next month we will look forward to Dr. Nelson's continued support of CSI as he retires. He will be both chairman emeritus and he will also be one of our most significant shareholders. Dr. Nelson, we just can't thank you enough. Look forward to seeing you at the annual meeting. This completes our prepared remarks. Operator, we are ready to take questions.

Thank you. (Operator Instructions) And our first question comes from Ben Andrew of William Blair. Please go ahead.

Good afternoon, guys. I have a few questions for you, if we might. Dave, as you look at the opportunity for the low profile device, obviously a big increase year-over-year in the utilization of that within the mix. Where does that go over time, in your view?

The 1.25 millimeter, it is one of the most exciting franchises in vascular intervention. It goes everywhere. If you think about measuring market opportunity and contribution, in fact, we've got those three vessels in the heart that we are approved for. We are uniquely able to routinely treat the three vessels in each of your calves, and unfortunately if you've got disease in one leg you've got it in the other, and we can go right down to the big toe.

So, our market opportunity is measured by where the disease is and patient need is extraordinary. So, I see years and years of runway with the device as a primary treatment therapy. And it does dovetail with the future of vascular intervention. We are all very excited about the contribution that might be in place for drug therapy and we think this is just an initial volley. Right now it is on a balloon. We think as time progresses there are more efficient ways to deliver drugs and we think that a 360-degree sanding of that artery before application of the drug in order to preserve uniform and predictable uptake is a great idea. So, we couldn't be more excited about it.

Okay. And let's drill into the peripheral business a little bit more. So, what percentage of revenues in this quarter came from the retrograde product, the tibiopedal product compared to, I think it was 5% last quarter?

Ben, this is Larry. I think for that specific 60 centimeter that you are talking about, it was a comparable percentage. I think it was 5% last quarter, again, 5% this quarter for that product specifically, which actually was good because, of course, initially we got some uptake from some of the early retrograde users. So, we felt good that it contained -- consistently remained at that level in summer quarter.

Okay. And then the 20% growth in volume I think we saw in peripheral the way we calculated it. I'm not sure it is right based on what your comments on ASP, but how did you feel about that and how did that trend during the quarter, if you have additional detail for us?

Yes, it was about 20% based on volume in PAD. The summer quarter tends to start a little slow, but it did ramp throughout the quarter and we had a very strong September finish.

Okay. And you said you added 27 reps to the organization in the quarter. How long does it typically take those newbies to kind of ramp their productivity and what is your plan for rep hiring for the balance of the year separate of the retraining, obviously, the hybrid group?

Well, it will take them a while to get productive, but, of course, as part of this, because we are cross-training hybrids and we are dividing territories as well, so a lot of them aren't going to start with cold turf, I guess. So, they will be productive. I would say, in general, productivity will probably flatten out for a while because of this cross-training and rearrangement of territories. But overall it should be very consistent with where we've been in total. As far as going forward, we are evaluating our optimum sales model. At this point we hired 27, potentially we could hire more. We are continuing to evaluate that going forward. We will report more on that next quarter.

We don't know what optimal is, but the reason why is there is an expanse based on good news. If you think about a year ago, we didn't have the great commercial coronary outcomes. We were hoping for approval, we didn't have the excitement that surrounds the new access points that can be delivered only with our 1.25 franchise, the tibiopedal product included. So, everything worked in a good way that allowed us to kind of reevaluate what optimal is. And training and physician support is still a big part of the adoption equation, so 27 now and we'll have to monitor over time what optimal is. But even in the early going, those representatives who are carrying both the coronary product and the peripheral product in a smaller territory, they've got better commercial metrics and they are delivering great service to the customer.

Okay, last question for me. The devices per customer usage in the quarter for peripheral in particular, should we see that ramp over the year as it typically has and kind of where would you see that exiting the year? Thank you.

Yes, it was down in the quarter. Still a little bit above where we were last year, but it was down from our fourth quarter and that is primarily the summer quarter impact. And we should see progress in that probably a device or so per quarter throughout the year.

That's a big increase, so you said one device per quarter sequentially through the year?

Oh, no, for the year.

For the full year, great. Thank you.

Our next question comes from Danielle Antalffy from Leerink Partners. Please go ahead.

I just wanted to touch on the hybrid reps, just two questions for me, the hybrid reps first. As we think about sales force productivity, is it reasonable to assume the hybrid reps can essentially double their productivity level, or will there be some cannibalization as they focus some efforts on coronary and some on peripheral? I mean, I assume that most of the time they are calling on the very same physician for both peripheral and coronary, so how do we think about that?

Well, the market need is big enough for them to double, no doubt about that, over a period of time, a long period of time. Initially we are going to -- we are going to continue to be an outcomes-based company. We are going to focus on preserving the awesome commercial start in coronary and great outcomes. We have had some great outcomes with our new access points in tibial arteries. Training for both positions and for sales pros, that requirement has never been higher right now, so we recognize that there is a lot of relationship handoffs and things to do, but outcomes is number one. We will take a little productivity hit upfront, but the prospects going forward are exciting, and one driver is to serve the enormous market opportunity. The other is to have exciting profit in the future. And this hybrid model, the ability to have both franchises in one sales bag and to concentrate service and support in very small territories, sometimes as small as two accounts, that is a wildly profitable model in the future.

Okay, that is helpful. And then I was hoping you could comment on the competitive landscape. Obviously, some acquisitions made in this space, and just wondering what you are seeing out there from a competitive perspective particularly from the larger players now, like Boston Scientific. Has anything changed from a pricing standpoint from your competitors? And also how you view drug-coated balloons. Now that Lutonix is approved, do you see any cannibalization from drug-coated balloons? Thanks so much.

Yes, the first part, big companies versus small, you know, the big companies had low single digit growth in the US with their bundling and their pricing, so that is one thing that has happened. We've got a unique strategy and that is to offer outcomes-based opportunity for new and untapped markets, and so that is where we are, so we've got a little different makeup. And you see that in the growth rates and some of the clinical outcomes and economic outcomes rates, so we will continue that. But the consolidation in this space in large part has been driven by people broadening out their portfolio. I think it is very competitive in the big company arena in terms of bundling, but our outcomes approach and our value proposition to payer, patient and physician is different and we are not involved in that. We don't bundle.

I think your second question was about the impact of drug-coated balloons. I think there is excitement in the space. We are on the verge of a massive amount of investment and time and messaging for an underserved disease state in the United States. So, I think there will be a lot of trial. I think everyone is wide open to what the optimal procedure technique might be, and I think there is a lot of interest in using what is offered today. And that great news for Lutonix Bard as the opening volley in maybe an era where we can get better outcomes, more durable outcomes, two-, three-, four-, five-year outcomes for these patients who are in need of intervention. So, I think there is a lot of excitement and enthusiasm.

Okay, thanks so much.

Our next question comes from Mike Matson of Needham. Please go ahead.

I just want to follow up on the DCB questions, I guess. So, I guess we are going to be seeing the definitive DAART data soon at VIVA, and I was just wondering if you think that would, assuming it is positive, is that rising tide going to help everyone, or is it going to be viewed more as specific to the Covidien TurboHawk product?

Well, calcium is the biggest impediment to a good result with a drug-coated balloon, and there is one company that treats calcium everywhere, so we think we are in a great spot to be an asset. And as the primary therapy, we are the first device used. One, it really sets up for a great outcome and a great case for the physician; and two, they are at that -- they can make the choice, then, post Diamondback what to use and where. That is how we view it and that has been the initial experience that we have seen, and that is an example that we put in from Dr. Mustapha. Right out of the gate he had a patient that he enrolled in LIBERTY 360. He was excited to treat calcium and remove the biggest impediment to a durable result and then apply the drug-coated balloon. That might be a good recipe.

Okay, but I guess what I was getting at, if the headlines kind of say atherectomy plus drug-coated balloon, are better than drug-coated balloon alone, do you think that will kind of benefit all the atherectomy players or --

All atherectomy types? No, I don't think so, because the mechanisms are completely different. And if you walk right on down the line of the list of those things categorized as atherectomy, they all work differently and they don't have access, for example, to calcium everywhere. And the larger part of the market, which is those three tibial arteries in the calf so critical to outflow in a durable result, as well as calcium behind the knee and in the thigh. So, if your device can't get there, you can't prepare the vessel. So, that is one thing, just getting to where the need is and where the disease is. The second is the mechanism of action, so what is it that the device does predictably or unpredictably? Ours is the only device that preserves the media, that middle layer of the vessel, and we leave a smooth tubular lumen with a native artery that is intact and ready for predictable uptake. So, we are going to study it, put the science to it. We are very optimistic that our mechanism of action is going to provide the biggest benefit for those DCB. It could help in general, though. In general I think overall the atherectomy category was a higher grower and absolutely all tides could rise a little bit. The atherectomy category certainly won't be hurt.

Okay. And then I guess just given that you have trained some of the peripheral reps now on coronary, what steps are you taking either from an incentive perspective or other means to try to prevent them from focusing too much on coronary and dropping the ball on peripheral?

That is a balancing act and that is something that we talk about and look at a lot. On the pro side, on the benefit side, a smaller territory allows for less travel time and more concentrated lab time. There also is the efficiency of 7 out of 10 of our current users doing both coronary and peripheral interventions in the same week. But we will have to manage that over time. It's a good question.

Mike, the quotas do interact as well, so they can't favor one over the other. They do need to work with both.

All right, that's all I have. Thank you.

Our next question comes from Bob Hopkins of Bank of America. Please go ahead.

You talked a lot about reps and where you are adding and you mentioned that you are now in coronary. I think you have standalone 24, did you say? And I'm just curious, is that also a group that you are adding to over time and kind of where do you think you will be in six months?

It's a great question. We are not going to add to that coronary-only group. A big thank you to them because the outcomes and the dedication and how they set up our US commercial effort is outstanding. But over time we will evaluate whether or not they would become hybrids. We haven't answered that question right now, but it is what we are looking at, but we won't be expanding that specialist group right now, no.

And is that because you are just seeing more or enough success out of the hybrid model or --

Yes, that's true. We are seeing efficiency and some validating metrics with the hybrid model, that is exactly right.

Okay. And then I'm just curious, in coronary, at this point you are a couple of quarters in now, what is the type of account or the type of disease where this is being used? I just want to gauge your confidence in kind of where this coronary opportunity is going for you. I heard the guidance for next quarter, but just want to get a little better sense as to where the product is being used and your enthusiasm for kind of rapid growth as we move out here over the next couple of quarters.

We are nine months of experience with some really big institutions with key opinion leaders and in fact faculty members. You know, Columbia and Saint Francis, Mount Sinai, they are having a great experience starting with clinical outcomes. Usage has been strong. We still have a lot of work to do in the top 75 accounts in the United States. We have barely scratched the surface. And then the news of the outcomes have spread, so there is demand across the United States, but we want to be really calculated and methodical about the way we train.

We have been used in a patient-specific kind of scenario. The toughest cases, I mean, we have gotten some amazingly difficult cases that would not have been done with any other device, and the device performs. We are growing a very great trust relationship with the physician. We would over time like to expand it beyond those quote, unquote, train-wreck cases, and that is an opportunity for the sales force at this stage.

And how many accounts are you in currently? I'm sorry if I missed that.

We are in total 150, I think. We prefer to focus on select accounts and drive deeper in those, so we may not continue to grow at that rate, and our guidance reflects that.

And then, Dave, from a big picture perspective, revenue growth at your company has accelerated now every quarter for the last four quarters and you approached 40% this quarter. And so quite exceptional performance over the course of the last four quarters. And as we think about the next period forward, not just Q2, but looking forward a little bit further, as has been mentioned, you'll face a little more competition, but then again you are very early in coronary, drug-eluting balloon world is just starting. I'm just trying to get a sense for your confidence that you can keep the revenue growth of you company over 30% as you look forward the next year or two given some of the moving parts that you face over that time period.

It will be a challenge over time, but we will be a high growth company. The outcomes are great and the patient need is enormous, and that right there is going to make us a double-digit grower for a long period of time. But there will be issues and challenges going forward. I think the onus on us is to continue to put out that clinical proof. A big day for the Company is the two-year ORBIT II data. Right now the commercial experience has been great. One year data looks fantastic. The cases in Japan went great, but two years is important, durability important, delivery 360 also on its way to one-, two-, and eventually five-year clinical and economic results. I think it is scientific proof that ultimately is going to drive how long we'll be a high growth company. We are very optimistic about that.

And just lastly on that same point, though, I'm just curious, and you may not be willing to disclose, but I am just wondering, is there, as we look forward over the next two years a growth rate that you would be surprised to dip below for any meaningful period of time? Is 20% a line in the sand? I'm just kind of curious how you are thinking about all the moving parts?

In a healthy way we have not thought about lines in the sand. It's really been a patient outcomes-based story. We are working on our value proposition. Things will take care of itself if we take care of patient outcomes and if we service our customers better. We have had great organic growth, if you think about shareholder-friendly we've been. With what we developed internally, I think we have an appetite to look outside the Company for growth opportunities, again, in the category of those procedures and tools that would drive a procedure that would lead to a better patient outcome and a better economic outcome. There is a real need for that in the United States. We are doing a great job so far at this very, very early stage, so I think you will see more, again, growth opportunities. I also think you'll see the Company look outside for other ways to accelerate that growth.

Got it. Thanks very much. Appreciate the time.

Our next question comes from Ben Haynor from Feltl & Company. Please go ahead.

First off, the number of coronary sites grew quite substantially this quarter. I guess what is that a reflection of? Is it sales force productivity? Is it more training, better training, just straight-up demand? Getting backs up to speed more quickly? What went on there?

It got into more hands in our sales force. So, by training those hybrid representatives, we expanded beyond the 20-plus coronary specialists and into some of our peripheral sales force. So, it was more hands, more accounts.

Okay, that makes sense. And then kind of the same question on the peripheral side or similar, anyway. I remember we used to talk about adding kind of about 40 accounts per quarter, roughly. It seems the last four quarters that's run 50 or even above 50. Is that something that you think can continue and what is driving that? Is it the outcomes? Is it the data? Is it more sales guys?

Yes, it's more people, but I think also with the growing office-based labs that has added to the quarter as well, so 50 is probably reasonable.

Great, that's all I had. Thank you very much, gentlemen.

Our next question comes from Ed White of Laidlaw & Company. Please go ahead.

Just a question on the building of the new manufacturing and headquarters in Minnesota. CapEx was very high in the fourth quarter of last year and then you had a progress payment of $2.6 million this quarter. How should we be thinking about CapEx in fiscal 2015? And then also, how is the new manufacturing going to impact gross margin in the long run? When can we see that coming online?

I think the new facility is about $31 million roughly in total. We are $17 million into that through the first quarter, so we have the rest of that to go this fiscal year. I think it will be captured as far as the gross margin. I have indicated I believe we can stay in the high 70s with the projected costs we have per unit in our ASPs, so it should be fairly neutral and absorbed in that number.

Yes, a special thanks to Paul Koehn, Heather McDonald, Lou Gilbert, Paul Bies and the team. They have really got that building up and running. That went from groundbreaking to the walls up in a hurry. We are going to have equipment in that building before year end and we are really excited about it. It is set up perfectly for honoring our commitments to physician training, top shelf, blue-chip engineering, and manufacturing quality, among other things.

Okay. Well, that's all I had. Thanks a lot, Dave and Larry.

Our next question comes from Jose Haresco from JMP Securities. Please go ahead.

Just housekeeping items in case I missed it. How many peripheral accounts are you guys in now and how many did you add in the quarter? And then same questions for the coronary side.

So, the peripheral accounts in PAD life to date, which is probably how you are tracking it, we're in about 1,600. So, the change from fourth quarter was 57. Coronary we are in 150. The change from fourth quarter was 82. And they pretty much overlap, so we only had one coronary account that wasn't also a peripheral customer.

Okay, thank you. And then you mentioned that the pace of -- what's the right way to think about new account adds going forward? There are obviously a lot more cath labs out there. Should we assume that you'll eat into those 1,600 accounts over time? 82 is lot of add in the quarter. I'm just trying to figure out how to model this going forward.

I would, if you're looking forward, 82 is quite a bit, and I think we have a lot of hybrids out there, as we said. I would say somewhere around 50 PAD, 40 coronary, that's probably a reasonable number.

Okay, thanks. For the folks who have had the coronary device a lot, early adopter so-to-speak, within those types of accounts, whether it's Mustapha or somebody else, are you starting to see a trend where, as you mentioned earlier, Dave, you are not getting the worst of the worst anymore? They are treating the more average case? Are you seeing, I guess, risk people? Are you seeing people move down that curve?

At this early stage we are getting the worst of the worst. It's a compliment. The device is really easy to use and it's extremely safe, and there has been some tear-jerker stories about people who had no options and we saved them with the device and a willing superstar physician and staff. So, it's a great story and the business is very healthy, but I think people look for facts and data. That MACE trial that we are engaged in is proving that there is more calcium out there than physicians have recognized. And now that there is a tool that they can use, I think they are a little more excited about looking at the facts and reducing cost and complications.

I think ultimately, and we're not good at this yet, but there is a great payer story here. We've got an opportunity over the next couple of years to form a relationship with payers, because our clinical and economic story is really, really great for patients that are in the charge of these big payer organizations. So, we are excited about that. We need to build some programs and let the clinical data and economic data age a little bit, but we are getting closer.

Okay, thank you. Do you have any visibility yet on what the next calendar year's data flow could be from the major conferences for you guys?

The two-year ORBIT II data is what our eyes are on right now, and, Larry, do we have a date for that?

No, we are evaluating where that will be released, but it will be in the spring next year.

Okay. All right, thank you very much. Congratulations again.

Our next question comes from Jan Wald of The Benchmark Company. Please go ahead.

I guess I have -- a lot of the questions I had have already been answered. Let me ask maybe a couple things. In terms of, Dave, I think you used the term optimal sales force a couple of times, and I guess just -- you've got some experience with the hybrid model now. What are your thoughts about what that optimal sales force would look like? Is it going to include hybrid plus coronary plus peripheral? How do you see the sales force evolving over time?

Well, we had hoped before we started the project that we could get 75% of the sales force to a hybrid position, and I think we assumed upfront that we would always need some specialists in coronary and some specialists in peripheral, but in a good way we are kind of rethinking that, so we don't know yet. We are going to have to look at it. It is just the hybrid model is patient outcome friendly, it is physician and staff service friendly, it is travel light, it parlays on a synergy that exists in our customer base of 7 out of 10 doing both peripheral and coronary interventions in the same week. And it is a great path to profitability and independence on the go-forward. So, I think at this very early stage the metrics and the experiences with sales pros and physicians and their staffs are telling us that we are going to achieve this 75% marker that we have. And I think you'll just have to watch closely as to whether or not we keep, decline or expand the specialist wings of the remaining 25%.

Okay. And I guess in terms of the clinical trial issue you have going, one of the more interesting ones is the LIBERTY 360. It's an all-comers trial, so who is coming? What are you seeing as devices that are being used or procedures that are being used that you are comparing against now, and what's the ratio?

It's a really good question. It is right now overweighted Diamondback and for a good reason. A lot of patients like Dr. Mustapha's, who were headed for amputation are for the first time being exposed in the trial, and we're not only willing to do that, we're excited about it. So, we are treating a lot of CLI patients, we are treating a lot of Rutherford 4, 5 and 6, a lot of calcium patients. These are patients that have been excluded from every trial ever, so it is overweighted with our device because our device works routinely there. But we have seen other device usage.

And one kind of maybe follow-on to where I think you're going is, so what will it prove? If this trial proves that it can be done and it being routine treatment of those patients headed for surgery, amputation, then that is one great answer that the market needs, because we don't, in the United States, routinely treat these patients. So, it can be done, and this LIBERTY 360 is set up rigger-wise and over time-wise and patient enrollment-wise to answer that question. And the second question that it will answer is, should it be done? Is the freedom from complication and the durability and the clinical and economic outcome both of which we are tracking up to five years, will it tell us scientifically that it should be done? That every hospital should have an amputation prevention program; that every physician has a routine part of their vascular intervention training should be trained on some of the new access points that we have enabled, and some of the new disease and vascular places that we can go with our device that just haven't routinely gone before? So, I think it will answer those two questions. But right now it's primarily done in back with some other, but just in lower numbers, with some other devices also.

Just one last question on the COAST study. I recognize that part of it is going on in Japan and if there is going to be approval, it's going to happen over there. That will take some time, but when do you think the data from the COAST trial will be reported? I know Greg Stone is doing something here in the US. When do you think the data is going to be ready to be [presented], a year or two?

We don't have a day or a month to point out right now, but our focus has been getting those first few patients treated and off and running, which happened on Tuesday of this week. Bob Thatcher, Paul Koehn, a number of others, are over doing some great work over there. We got great patient outcomes. We will definitely report when we do have a quarter or a time period with which to point you to a presentation. We'll do that maybe in the next couple of earning calls.

Okay, thank you. I was actually looking for a year, but that's okay. Thanks a lot.

Our next question comes from James Terwilliger, Newport Coast Securities. Please go ahead.

Just some housekeeping. I've missed some of this. You said you have 24 specialists in the coronary market, 60 cross-trained, and was it 107 in the PAD market?

That is correct, going into second quarter, that's right.

Okay. So, the second question, maybe this is -- the second question is, can you walk me very quickly through kind of what is the cross-training process in terms of how does it work and in pulling a person off of the focus on PAD cross-training and into the coronary market? How big would the class be and how long does it take to get that person cross-trained? I think it's fabulous that you are doing that, but there is also a risk element in losing focus on the peripheral market and maybe not being as astute as possible going into the [hybrid] market.

Yes, that is true. That is a risk and we are keenly aware of that. The training is focused on having an expert in that cath lab for the very first case, very attendant to patient outcomes and a trust relationship with the doctor. So, it's a multi-step training process. Jim Breidenstein and team have done a great job running a disciplined process. We do pull -- and there is risk here -- we do pull those hybrid candidates out of the field for up to two weeks for some intensive training and testing. There is a whole process and system for pre-training before they get there. There is a ton of testing and role play in the classroom factor, and then there is -- we do have some great regional sales managers and sales directors to follow-up with in-field training. We've also got a training department to support it, and the clinical department has been really great in transmitting information and expertise to these people so that we can continue the great track record of patient outcomes. But that needs to be attended to every class. The class sizes have ranged from 8 to 22, and we've got the capability to get that done so far, but we'll have to stay on top of that over time.

You guys know, Dave, I've spoken to you before, you know how important everyone's clinical reputation is, and you guys seem to be executing very well on this in this cross-training. And I think anyone should be excited because it's really going to have tremendous benefits one to two years out, once you continue to have the momentum and the cross-training. Another quick question for me is more on the R&D. We had a little bit of a jump in terms of total R&D expenditures year-to-year, and I just wanted to know if you guys can comment a little bit on what's going on within the R&D pipeline?

Yes, we are building out. We've got a short-term, mid-term and long-term R&D pipeline. It is, I think you've seen evidence now that it's rich with coronary and tibial launches, and we've got the capability. We are hiring the right intellect in order to incorporate the drug opportunity. We think that is a wide open field for contribution, and after the Diamondback that may add to durability and efficacy. So, we've got some intellect in-house now that can work on that. We've also got some line extensions and new products that we are working on as well.

And then we have studies, of course, in place with the COAST and the MACE study, which we talk about, which is evaluating the complications and costs of calcium is out there as well, and of course LIBERTY 360, and those are driving increases in the clinical costs within our R&D.

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

I show no further questions at this time. I'd like to turn it back to David Martin for closing remarks.

Thanks, everybody. We are growing the market, the vascular intervention market by providing physicians with a safe, effective tool in alternative access sites, allowing them to treat calcified lesions throughout the body. We look forward to updating you on our market expansion efforts in the next quarter. Thanks again.

Thank you. Ladies and gentlemen, this does conclude today's conference. Thank you for your attendance. You may now disconnect. Everyone, have a great day.