Cardiovascular Systems Inc (CSII) 2015 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Cardiovascular Systems, Inc. second-quarter 2015 earnings conference call. (Operator Instructions). As a reminder, today's program is being recorded. I would now like to introduce your host for today's program, Larry Betterley, Chief Financial Officer. Please go ahead.

Thank you, Jonathan. Good afternoon and welcome to our fiscal 2015 second-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 fact.

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. In CSI's second quarter revenues increased 38% to $44.7 million. We made great progress on our clinical initiatives and we expanded our sales force and simultaneously continued the cross training of our peripheral sales representatives to handle the coronary opportunity.

CSI is positioned for strong growth in the second half of our fiscal year and beyond. And the factors driving over market opportunity have never been more compelling. The incidence and diagnosis of calcified lesions continues to increase. Recognition of the cost and the complications of underestimating calcium is growing.

18 million or more Americans now suffer from PAD. 4 million have critical limb ischemia, a vastly undertreated disease dominated by calcium in small vessels. CLI contributes to 160,000 imputations annually in the US alone and the cost is staggering. CSI is the proven leader in minimally invasive alternatives for these patients. Our mission is to provide relief for all of them.

Fortunately for this growing group of patients there are more physicians than ever who are available to treat the disease. Today there are over 32,000 interventional cardiologists, vascular surgeons and interventional radiologists in the United States alone. Approximately 10,000 of these physicians perform interventional procedures and could use our technology today. We have only begun to scratch the surface.

There are more sites of service than other before, more places for patients and their families to get relief. In addition to several thousand hospitals today a new site of service, the office-based lab, is at about 600 sites and growing in the US.

At this early stage there are large and untapped channels for our product. In December we signed an agreement that opens the door for patients to receive the Diamondback 360 in over 260 government and medical facilities including 150 VA hospitals.

VA hospitals alone serve 6.6 million patients every year. With nearly 22 million veterans in the US this is a great opportunity for CSI to improve the outcomes for our veteran heroes in need and simultaneously reduce cost for the US taxpayer.

Scientific proof continues to amass. We are adding to the 800 coronary patients in our CSI clinical proof reservoir, which include Orbit I, ORBIT II, COAST and MACE studies. Next month we will achieve a major scientific milestone when we share the two-year data from our ORBIT II study. We are the only technology ever studied and proven effective for the calcified coronary population.

On the peripheral side, scientific proof for patients in need is overwhelming. We have enrolled nearly 5,000 patients in studies to date. Our LIBERTY 360 will ultimately have 1,200 patients or more, all comers in the first head-to-head study comparing clinical and economic outcomes using our device verse any other therapy.

Our technology pipeline is rich with over 10 projects in process or under evaluation. We are developing advancements to our unique orbital platform that provides physicians with new and safer points of access in the foot, the thigh and the arm.

Tibiopedal access uses a four French introducer sheath. Smaller sheaths have been shown to reduce procedure and recovery times, access site complications, contrast levels required for patients and radiation exposure for both patients and healthcare professionals and more. The team at CSI and our technology is redefining minimally invasive for vascular intervention.

Finally, reimbursement has been attractive and has improved in 2015 for procedures using our products, particularly in small vessels below the knee and in coronary arteries where no other technology routinely and safely treats the calcified patient.

With these factors in mind we are motivated to grow our business capability and reach. We recognize the need to expand our distribution model in the United States. Patients suffering from critical limb ischemia and calcified coronary artery disease represent a $10 billion plus market opportunity for our technology.

To help serve this market we've added about 50 representatives in the first half of fiscal 2015, 28 of them during the second quarter just ended. The total amount is about 210 going into our third quarter and looking ahead we expect to continue to add to our sales organization although at a more modest pace -- it will reach about 250 by the middle of fiscal 2016.

We also continue to cross train about 25 peripheral representatives a quarter. CSI will begin the third quarter with approximately 80 of these hybrid reps. By cross training our representatives we enable them to sell two product applications in the same account. The focus is on deep penetration into top accounts in the United States rather than covering a large number of accounts.

With all of our success we are hardly underpenetrated when compared to the disease state and the interventional volume in top US accounts. Time and execution will solve this huge opportunity.

Adding sales representatives while simultaneously cross training our peripheral representatives and optimizing sales territories is a large task. Our focus is on maintaining a high level of service to our customers while we move to the optimal distribution and service model.

Ultimately the successful development of optimized clinically strong hybrid sales organizations put this Company on a strong path to sustainable high growth and profitability.

Larry will now discuss our quarterly financial results in more detail and then I will return to comment on our clinical research and other activities.

Thank you, Dave. CSI's financial performance for the second quarter of fiscal 2015 continued to be very strong. Compared to last year's second quarter total revenues grew 38% to $44.7 million, which is at the upper end of our guidance range.

Device revenues represented 89% of the total. We sold nearly 13,000 devices bringing life to date totals sold to about 182,000. Devices sold included over 1,600 coronary units generating $6.3 million in coronary device revenue.

Reorder revenues were 95% of total revenue, slightly less than the 96% in the prior year. The decline is due to a lower rate in our coronary base which is still in an early commercialization stage. We added 62 new peripheral accounts and 68 coronary accounts.

Gross profit margin increased to 79% from 77% last year. The gain is largely due to lower cost per unit from higher production volumes and a greater mix of coronary units that carry higher ASPs.

Operating expenses rose 25% over last year primarily due to coronary investments, additional sales and marketing professionals and programs, expansion of clinical studies and product development projects and general expenses to support growth. These investments set the stage for continued adoption of our technology and growth.

Operating expenses did however come in below our second-quarter guidance. This was largely due to a lower than expected impact from the sales force expansion and the timing of projects. Our third-quarter guidance reflects the full quarter effect from the second-quarter expansion as well as planned additions during the third quarter.

Net loss was $5.3 million or $0.17 per share versus a loss of $8.7 million or $0.32 per share last year. Weighted average shares outstanding rose to 31.5 million from 27.2 million last year. The increase was primarily driven by the issuance of 3 million shares of stock in our November 2013 stock offering, warrant exercises and stock issued under employee stock plans.

Adjusted EBITDA was a loss of $1.3 million versus a loss of $4.6 million last year. Excluding net expenses related to our coronary launch, adjusted EBITDA was once again positive for the quarter. At quarter end we had a cash balance of $101 million.

Our cash is being used to fund growth investments including sales force expansion, coronary launch initiatives, clinical studies, product portfolio expansion, education programs and future international expansion.

In addition, progress payments on the construction of our new manufacturing and corporate headquarters facility in Minnesota totaled approximately $7 million in the quarter with about $9 million of payments remaining. Our final debt payment was also made during the quarter, so we are now debt free.

We believe we have sufficient cash to fund our current growth strategies and reach profitability. Though we may seek additional funding in the future if we identify additional opportunities to enhance value for our shareholders. I will now turn it back to Dave for further commentary. Dave?

Okay, thanks, Larry. I will now update you on our clinical programs which help drive the adoption of our new technology. We continue to add to our 5,000 patient plus reservoir under study. These studies are critical as we seek to establish the use of our orbital atherectomy systems as the standard of care to treat PAD and CAD.

In the second quarter we continued to advance these clinical initiatives. Our COAST, or coronary orbital atherectomy system trial, is enrolling up to 100 patients in the United States and Japan. This study is designed to assess the safety and efficacy as well as economic outcomes of our new micro crown orbital atherectomy system.

The COAST study is also designed to facilitate approval of our system in Japan. We completed the required enrollment in Japan during the second quarter and a special thanks to Bob Thatcher, Chief Healthcare Policy Officer, and nearly a dozen US-based CSIers who spent weeks at a time overseas to help Japanese patients in need and receive an extraordinary new treatment in the form of the Diamondback 360. Thanks guys and gals.

The foundation for international growth and profit is being set today. When our Micro Crown is approved by the Ministry of Japan it will be available to serve the world's second largest coronary market with over 250,000 PCI procedures performed annually. We are making progress with our regulatory path and our organization in Europe as well.

In the near-term, we look forward to sharing data from our ORBIT II study at the CRT in Washington DC next month. Recall that this study evaluated the Diamondback 360 safety and effectiveness in treating calcified coronary lesions.

The one-year data revealed an extraordinarily high freedom from major adverse cardiac events, or MACE, and provided a 95% freedom from target lesion revascularization. We anticipate that the two-year ORBIT II results will continue to demonstrate excellent clinical and economic results.

Enrollment in our LIBERTY 360 trial is now about halfway complete with over 600 patients under study. LIBERTY 360 is designed to evaluate the acute and the long-term clinical and economic outcomes of our orbital atherectomy systems for treating PAD.

This study is unique; it is the first study that is trying to compare portable atherectomy to any other PAD interventional treatment option. We anticipate completing enrollments in 2015 with data available next year, though we may publish subset data at an earlier date.

We are also anxious to share the results of some smaller novel breakthrough studies being completed by leading investigators that show the benefit of using our orbital system to treat vessels when calcium is present.

Last year Dr. Fanelli of the Department of Radiological Sciences at the University of Rome studied the correlation between the efficacy of a drug coated balloon and the severity of calcium. He concluded that calcium is the barrier to optimal drug absorption.

In initial preclinical testing results from Dr. Edelman and his team at MIT and Harvard, using the Diamondback 360 orbital system as the primary treatment before delivering paclitaxel showed a trend of significant improvement of drug absorption, especially for vessels below the knee.

That is the major market opportunity and that is the critical need for these patients, below the knee outflow to the foot. Diamondback 360 is the primary therapy and there are strong indicators that it may facilitate the benefits of other therapies.

In addition, preliminary results from a cadaveric evaluation by Dr. Virmani, President and Medical Director of CV Path Institute and clinical professor at several leading universities, indicate that a severity of peripheral calcification is underestimated and underappreciated especially below the knee. And that orbital atherectomy modifies both intimal and medial calcification to make the vessel more pliable. We change it all.

These types of studies provide powerful information to educate physicians on the benefits of using our orbital system as the primary treatment when calcium is present. We entered into the second half fiscal year 2015 with many favorable market factors including unique products, addressing multibillion-dollar market opportunities that other technologies do not serve and at attractive reimbursement levels.

As a result we are expanding our sales organization to take full advantage of these opportunities. We expect this expansion to continue building our market leadership and enhance our future growth and profit.

Looking ahead to our fiscal 2015 third-quarter ending March 31, 2015, we anticipate revenue to be in the range of $46 million to $47.7 million, representing year-over-year growth of 32% to 36%. This includes approximately $7 million of coronary revenue.

Gross profit as a percentage of revenue will be similar to first-quarter results. Operating expenses to be approximately 17% higher in the second quarter of fiscal 2015 primarily due to the sales force expansion. And net loss will be in the range of $10 million to $11 million or a loss per share of $0.32 to $0.35 based on 31.6 million average shares outstanding.

That complete our prepared remarks. Operator, we are now ready for questions.

(Operator Instructions). Ben Andrew, William Blair.

Wanted to check on a couple of topics with you if we may. Can you talk about the coronary guidance? I thought I just heard you say $7 million for the third quarter. Is that right, David?

Yes, that is right.

Okay. How do we think about kind of a durable sequential increase? Because obviously you are continuing to train the reps, the older guys that have been doing it for a little longer becoming more productive, the new guys pick up their ramp.

But is there kind of a programmatic number we should be thinking about on a quarter-to-quarter basis anchoring off of maybe the last couple of quarters or is that not helpful?

You know, it is early. The great news is we will continue to grow and we are getting great outcomes out there. But I don't think we have got a predictable ramp quite yet.

No, right now, Ben, it is pretty missionary. As you saw, we're adding a lot of new accounts. Our specialist sales group is helping in the transition so there is a lot of moving parts right now. So I wouldn't say right now is indicative of the future. It should improve as we go forward. Right now with the early commercialization it is going to take a little longer to ramp.

Okay. And then, Dave, maybe looking at some of the accounts where you've been selling coronary for a while now a little over a year, what are you seeing in terms of the cases that you are doing? Have you moved beyond zeroing out Rotoblator and it is now market expansive -- preventing people from going to surgery starting to capture people that otherwise weren't getting treated? What are you learning in some of those older centers?

Yes, that is exactly right. People are comfortable with the tool, they know what it can do, they are confident, they are looking for cases. We are expanding the market. We are pulling people out of just on medicine because they didn't previously qualify for a minimally invasive treatment or surgery. We are heading off some surgeries and we are making those really hairy calcified coronary catheter-based procedures a lot nicer.

And it is showing up in the numbers. We have got -- some of our original reps are doing extraordinary volumes and now that they have been a year at it. But in terms of sales productivity they are well above the average and they still -- a number of these still have not, 20 have not, 24 have not joined in the hybrid opportunity, so they are going to bring a lot to the table there.

In terms of top volume institutions in the US, Columbia, Florida Hospital, Beth Israel, St. Francis, Mount Sinai -- our penetration rates, the number of CSI procedures compared to the number of PCIs is above our expectation.

Dr. Shlofmitz has been open about his number from the podium; he thinks he is using us more than 10% of the time. An early indicator for us about traction and adoption was 10% penetration. So he is one great example about the utility of our device and the growth potential across the US when we get to every account.

Okay. And then last question for me. You talked about 600 office-based labs now in the US and growing. Talk about your penetration there and what your expectations are and what is baked into the guidance just to make sure we are clear on where you are assuming the growth is coming from. Thank you.

Yes, we are in about 250 accounts in the office-based lab. So it is a good number and it is growing, it has increased as a percentage of revenue. About a year ago it was probably in the teens, high teens, we're up to around 21% of our PAD revenue now.

Great, thank you very much.

Danielle Antalffy, Leerink Partners.

Congrats on get another good quarter. Dave, I was hoping maybe you could comment a little bit on the evolving competitive landscape. So obviously now Boston Scientific is a more -- at least a more viable competitor and they're a very large cardiology company with the ability to bundle.

Not sure what is going to happen with Volcano and Atheromed, but just maybe you could talk about what you are seeing so far in the marketplace as the competitive landscape continues to evolve?

Yes, there are some big footprints out there and some dedication of the vascular space, but without the technology they are not going to compete for that large calcified market and that is what we are seeing. So specifically for coronary calcified arteries our orbital technology is unique.

The clinical proof and some of the economic proof is impressive and being enjoyed by the hospitals that we have gotten to at this very early stage. Two-year data is going to be extraordinary and we are really looking forward to that coming out, it is going to be both clinical and economic for this patient population.

And then on the peripheral side complete revascularization, a move to four French technologies, redefining minimally invasive in a way that is favorable for patients, doctor and payer. We are doing that and we are the only ones that can do that with our orbital technology. So there are some big footprints out there and it is a competitive environment, but we are winning the business with great outcomes.

Okay, and no impact as far as you can tell from competition on pricing?

Our competitors have dropped prices for quite some time while our ASP rose over the course of years, the last four years. The Silverhawk device, for example, is just one example of decline over those same four years.

Really our price strength, our margins strength is based in utility and contribution. People are willing to pay for a device that reduces complications acutely and extends their ability. So it is -- our device is something that people have been looking for.

We are backing it up with clinical proof, we've got great medical education programs and we have invested quite a bit in the organization -- not just the sales organization but internally here in every department including R&D to even get better. So today we are performing, but I am really excited about the pipeline and the future.

That is great. Thank you for that. And then I was hoping you could comment a little bit more in depth on reimbursement. So obviously it is a little complicated because it is bundled now for the outpatient, but at a significantly higher rate. So maybe you could provide some context around that and how that could continue to contribute to growth here.

Yes, we like it, we like bundled. You know (technical difficulty) has not worked for several decades especially in the peripheral space, right, spot welding above the knee and the absence of looking or treating below the knee that didn't work. We know that.

So we like the movement towards bundled. And for us it is pretty extraordinary. Reimbursement increased by 62% in a critical area for the patient below the knee and an area that only we treat routinely and safely. So a 62% increase or a $5,720 increase for below the knee intervention is one example, but across the board, whether it be site or anatomy, there were increases.

Coronary atherectomy, the gold standard drug-eluting stent, also increased, it increased 92% or $7,100. So there is no economic barrier to doing the right thing for the patient and the Diamondback as the primary treatment therapy is doing some great work in both legs and hearts. We are a market expansion play and the way we've treated some of these patients, calcified patients is costly and is not lead to good outcomes. We are really excited to change the standard of care.

Great, thanks so much, guys.

Bob Hopkins, Bank of America-Merrill Lynch.

Hi, guys, this is Kevin Strange in for Bob. Thanks for taking the questions. So I think you added roughly 80 new coronary accounts last quarter and roughly 70 this quarter, which I think is a little bit higher than you were expecting.

How should we think about the pace of new account adds going forward? Is this pace that you are on right now sustainable? And then if you could also touch on the pace of peripheral account adds too, that would be helpful.

Yes, I think the peripheral side we had 62 this quarter, that is probably a reasonable level. We did have a surge on the coronary side. I wouldn't expect that for the remainder of this year. As we transition it can be a higher level again, but I would say more in the 40 range on the coronary.

Okay, that is helpful. And then can you just give us a sense of your growth in the below the knee segment of the market relative to the above the knee segment? And if you could just talk a little bit about the competitive dynamics you are seeing specifically below the knee. And then just a quick update on how your tibiopedal product is being received, that would be great.

Yes, thank you. Well, that is our turf. We are great in small vessels with really complicated difficult to treat plaque morphologies. We solved a lot in the past where we just had a femoral approach. We now with the tibiopedal approach the doctor has got more options. We've got a lot of cases now going through the arm as well.

There are unbelievable advantages to a smaller hole for the patient, for the doctor, for the payer it is really extraordinary. You use less tools, less contrast, there is less complications. Less devices. For a tibiopedal entry site you don't need a closure device, to cross the CPO you don't need a CPO device, they're easy to cross from below.

But it is really -- it is dependent on our wispy hair like sized technology. And so the size plus our orbit and how we treat that vessel leave the (inaudible) intact but remove and modify the plaque, it is extraordinaire.

So that is our turf. We've got a huge market share down there. Other people have told me that we have got a 70% market share in below the knee intervention. It is hard to tell because the category is growing quite a bit. I think at atherectomy over the last three years Millennium report says that the category of atherectomy is growing 17%.

I think below the knee is leading that category, it is over 20% and you can see that CSI is growing at 38%. So we are the lead sled dog based on contribution and scientific proof of the cases that we are completing en masse now.

And then just lastly for me -- maybe I missed it in the script, I apologize if I did. But can you just talk a little bit about the launch timing for Europe and Japan coming up?

Yes, right now we are pouring the cement, which means getting the clinical work done to get approvals. We are working on CE Mark in Europe and we explained a little bit about the COAST trial which will enable us to get approved in Japan.

When we complete all 100 patients that starts the clock, about nine months after that we will get that Micro Crown, which is an unbelievable device, approved in the US for coronary, that also triggers the next step in getting Japanese ministry approval.

For Europe, we have got some employees now who are in the process of setting up our business in a way that we have got clinical proof, scientific proof over there, that we are developing key opinion leaders and future trainers. But we are going to be real methodical about that.

Our focus is on great patient outcomes in every place that we go like Japan and the team did a great job in Japan with those patients. And we do have an eye on growth in profit. So we are looking at models that maybe are -- we will be choosy about where we go in Europe and how we go about it so that we can have a -- great patient outcomes but profitable business overseas.

Thanks for taking the questions and congrats again on the good quarter.

Brad Mas, Needham and Company.

I think they gave the wrong name. It is supposed to be Mike, but this is Brad in for Mike Matson anyway. How are you guys? So just two quick questions. First one, just for -- kind of back to the University of Rome and Harvard clinical trials that you guys were talking about. Have you guys -- the drug coated balloon has been in the market now for a little bit. Have you guys seen any impact positive or negative on your PAD sales?

Yes, we haven't seen a trend, but we've got a few of those cases enrolled in a LIBERTY trial, got really positive feedback from doctors who used the Diamondback as a primary therapy and then gave a drug coated balloon a try. You could really -- not only do you modify the plaque but you remove the barrier for uptake is what these doctors feel strongly about.

But I wouldn't say any trends have emerged at this early stage. So what we are trying to do is to provide the scientific proof so that we can make a trend. And so I think that Edelman study is important, Virmani study is important. I think if physicians have some scientific proof that what they think is happening is actually happening they will do a lot of it and that means the Diamondback is the primary therapy.

Great. And then just one last quick one for me. You guys -- 62 new PAD customers and then the coronary customers. Are those all existing PAD customers, those 68?

Yes, all but four of our coronary customers overlap with peripheral right now.

Okay, great. Thanks very much, guys.

Ben Haynor, Feltl and Company.

On that sales force expansion, were a lot of those guys added towards the end of the quarter that impacted Q2, and now the full results should come in in Q3? Or was it also some people not getting hired in Q2 that you originally planned on and you plan on adding them in the current quarter?

Yes, I think it was all of the above, Ben. The hiring was a little lighter than we anticipated and then the timing was later, training was less, transition comp was less. So all of that will come back and we will get the full effect in Q3.

Okay, that is helpful. And then on the reimbursement for Medicare going off have you seen any impact now that we are about a month in here on the level of interest from accounts due to that?

I think it is a relief. We could save payers a lot of money by avoiding amputation or the complications in any area of the anatomy, heart included, that come with calcium. So I think physicians continue to be outcomes focused and they have got a new tool. And the fact that there is improved reimbursement just backs up their good judgment and I think is a relief for them and their hospitals.

Okay, that is helpful. And then on the -- it looks like the ASP for the peripheral devices ticked down maybe a shade below 3,000. Is that just noise or are you discounting -- what is going on with that?

Yes, for peripheral it still is a little north of 3,000, that does fluctuate by quarter, it will depend on the customer mix. It is very similar -- it was actually flat with Q2 last year and down a couple percentage points from Q1. But that does fluctuate with basically who is buying what type of volumes they have, (inaudible) which has ticked up a little bit. So that is why that fluctuated.

Okay, that makes sense. All right, thanks a lot, guys.

Thank you. This does conclude the question-and-answer session of today's program. I would like to have the program back to David Martin for any final comments.

Thanks for joining us today. We are committed to treating a growing patient population suffering from calcified arterial disease. We have just scratched the surface in a $10 billion market opportunity for CSI's safe and uniquely effective technology. As we begin calendar 2015 we are excited about CSI's future.

The therapy we provide consistently treats calcium everywhere. CMS reimbursement is favorable and our technology delivers excellent patient, doctor and payer outcomes while saving the cost and complication of current therapies today for that patient population.

Finally, we continue to optimize our professional team of sales representatives. This optimization will allow CSI to continue expand the market. Our team of doctors, their staffs and the hard-working CSI employees will establish our orbital Diamondback 360 system as the standard of care for treating calcified artery disease, a $10 billion plus market opportunity. We look forward to updating you on our achievements next quarter. Thanks, everybody.

Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.