Stereotaxis Inc (STXS) 2007 Q1 法說會逐字稿

Good morning. My name is Rick and I will be your conference operator today. At this time I would like to welcome everyone to the Stereotaxis first quarter 2007 conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer period. (Operator instructions). It is now my pleasure to turn the floor over to your host Ben Carmichael of Russo Partners. Sir, you may begin your conference.

Good morning and thank you for joining us today for the Stereotaxis first quarter 2007 investor conference call. By now, you should have received the press release. If for some reason you have not received the press release, please go to the investor relations page of our website at www.stereotaxis.com.

Speaking today are Bevil Hogg, Chief Executive Officer and Jim Stolze, Chief Financial Officer. Before we get started, we would like to remind you that this conference call may contain forward looking statements regarding future events or the future financial performance of the company, including without limitation statements regarding operating results in calendar 2007, growth opportunities and other statements that refer to Stereotaxis' plans, prospects, expectations, strategies, intentions and beliefs.

These forward looking statements are based on the information available to the company today and the company assumes no obligation to update these statements as circumstances change. For additional information, please see the cautionary statements included Stereotaxis' most recent public filings filed with the Securities and Exchange Commission. At this time, I will turn the conference over to Stereotaxis' CEO, Bevil Hogg. Please go ahead, Bevil.

Good morning, everyone. On this call I would like to update you on the positive sales momentum that we generated during the first quarter in terms of new orders and revenues. Also update you on our backlog and pipeline trends in the U.S. and international markets, on utilization and on some new important product introductions to be presented at this week's Heart Rhythm Society Conference which we believe have the potential to make Stereotaxis the standard of care for the treatment of arrhythmia. I'll then ask our CFO Jim Stolze to provide you with additional information on our financial results.

First of all, I'm pleased to report a strong performance in our first quarter. Our revenues of $9.2 million represent an over 400% increase over the same quarter in the prior year and importantly exceed the high end of our own guidance for this period. In similar fashion, our gross margin for the quarter at 65% exceeds our internal expectations and compares very favorably with the 29% margin achieved in the first quarter of 2006.

Although we offer no guidance with regard to new order generation, we are pleased to note that the approximately $11 million of new orders, giving us a March 31 ending backlog of approximately $49 million, positions us well to achieve the 90% to 100% revenue growth that we had earlier projected.

Acceleration of order activity in the U.S. continues as we had anticipated and U.S. orders in the first quarter again significantly out phased International orders. The conversion cycle from order to revenue was consistent with recent experience. Our order volume for the quarter is further evidence of our building sales momentum which is also reflected in the continuing robustness of our sales pipeline or funnel. More specifically, the all important mid to late stage pipeline now comprises over 250 accounts focusing our confidence in 2007 sales projections and beyond.

Additionally, overall market interest continues to accelerate as seen by the pre registration sellout of approximately 900 to 1,000 physicians for our joint responsive HRS symposium. As we stated in our last earnings call, in common with other hospital equipment makers, we expect our revenues and orders to be somewhat back end loaded in 2007 but less so than the prior year. There is seasonality to our business that would indicate that our fourth quarter will tend to be our strongest. Our expectation is that roughly 60% to 65% of our revenues and orders for the year will occur in the second half and that a similar distribution will exist between the first and second quarters of the year.

Our first quarter results are ahead of this guidance. Of course, we continue to be cognizant for the potential for lumpiness in our quarterly revenues resulting from hospital construction and installation schedules.

In summary, we are very pleased with the increase in our sales pipeline and backlog which we believe will provide the momentum necessary to achieve revenue growth in 2007 at least in the range of 90% to more than 100% and very significant rates of growth thereafter.

Stereotaxis is pioneering a major new industry, computer aided interventional medicine and the markets that we're addressing are large and growing rapidly, driven by demographics of aging populations and the desire of patients for less invasive treatments. We note that a recent research report by an analyst not covering Stereotaxis alluded to a market survey they had conducted in which 91% of 30 electoral physiologist respondents indicated that they expected to invest in computer guided navigational systems for their labs in the next three years.

When considered against the backdrop of roughly 1,500 to 2,000 electrophysiology labs worldwide, this represents a very major market opportunity both for Stereotaxis and ultimately its nearest competitor, particularly once the labs are able to overcome its regulatory uncertainty in the U.S. Our own pipeline, with well over 500 prospective accounts, represents roughly one third of all advanced electrophysiology labs in the world and further underlines this potential.

We have a major head start from creating a large new industry. We believe that our strategy of rising incremental patient volume with phased computer guided approaches to complex treatment thereby enabling hospitals to build and to expand their intervention of electrophysiology practices without imposing a burden on their operating budget for profitability will enable us to build on our existing momentum and continue to dominate this new industry.

We are confident that we're well positioned with both the superior technology and a significantly lower cost position in terms of lifetime ownership and operating costs. The combination of these factors will allow us to capture a dominant share of the EP market and expand our offering into vascular applications in the near future. We see nothing in the competitive environment to change this perspective as the majority of our prospective customers making purchasing decisions have already taken into account competitive alternatives.

Stereotaxis has shipped roughly 70 systems worldwide of which the majority is installed in the U.S. We continue to make good progress with our training programs and usage rates our systems in the first quarter were excellent. Although it has not been our practice to refer to specific usage rates, I believe it is instructive to show our clinical progress with the 4 mm catheter and other existing devices before the arrival of higher energy catheters.

In the first quarter across our fully trained and install base worldwide, we achieved usage rates on the order of 130% of the prior quarters. In other words, up one third over the prior quarter. This is across a much broader install base. This number is not adjusted for downtime or other factors negatively impacting lab output. We expect this number to continue to grow for routine arrhythmias and then to achieve an upward point of inflexion with regard to complex arrhythmias in the months to come as a result of regulatory approvals for new catheters.

Specifically, Stereotaxis has recently received approval in both the U.S. and in Europe for its part in the higher energy 8 mm catheter and in Europe for its part in the irrigated catheter. Is latter is expected to be approved in U.S. in line with previous guidance. It is important to note here that all Stereotaxis partnered ablation catheters are specifically approved for ablation in the U.S. and in Europe.

Stereotaxis values its longstanding partnership with Biosense Webster. This close collaboration has over several years allowed us to comprehensively integrate our technologies and to develop and produce a complete family of electrophysiology ablation catheters culminating with the irrigated version recently approved in Europe. Our press release announcing the expansion of our partnership with Biosense Webster refers specifically to this irrigated catheter for which we believe Biosense Webster has important know how and intellectual property.

We have therefore extended the duration of our exclusive royalty based agreement for this device only with improved economics for Stereotaxis by roughly an additional two years. Both companies are also work together to explore new areas of collaboration such as shell delivery to treat heart failure. Research publications on Stereotaxis in the first quarter were robust with eight papers published spanning the full gamut from simple right sided [SPT] procedures with improved safety and efficacy to complex procedures such as a trial fibrillation, ventricular tachycardia and rare but potentially lethal pediatric arrhythmias. These publications were authored by a diverse or of Stereotaxis centers indicating both the depth and breadth of our clinical adoption.

To highlight one particular publication by the group at Mass General Hospital published in circulation in March, Dr. [Satya Reddy] and colleagues reported on Stereotaxis' advantages and mapping and the blazing difficult to reach ischemic ventricular tachycardia, although Dr. Reddy prefers to use the irrigated catheter to place in the left ventricle, one third of the patients in the series were nonetheless treated with the 4 mm magnetic catheter because he found he could not navigate a manual catheter to the required points.

Interestingly, he had excellent success even with the 4 mm catheter indicating the potential paradigm shift and lesion formation and clinical efficacy made possible by accurate and consistent magnetic adhesion of our catheter. As I noted in my last earnings call, what makes the Stereotaxis Niobe system unique is the fact that it is an intelligent system using computer controlled magnetic fields to remotely navigate interventional devices directly at the additional working tips. Its key attributes are its ability to integrate diagnostic and image guidance information and to automate treatment using highly flexible gentle touch disposables.

Because we don't use mechanical controls, we're able to continually evolve our software automation products to bring about unprecedented levels of system intelligence driving ease of use, performance and safety, especially in the beating heart. Simply put, we believe the evolution of interventional medicine is all about information integration and management.

We will be demonstrating new clinical solutions at this week's Heart Rhythm Society Conference which demonstrates our achievements in this area. First, we will introduce and demonstrate a new automated linear navigation program for our catheters that moves well beyond our auto mapping capabilities and takes us into the realm of programmable target specific catheter behavior. Our work in this area of automation will continue to evolve and advance over the course of the coming year and we expect comprehensive push button automation of all aspects of electrophysiology ablation in 2008. We're also taking integration to its logical conclusion by combining multiple information sources from screens within the electrophysiology interventional lab into a single visual display.

As we noted in our press release on Odyssey this is the culmination of our drive to fully integrate our systems with the diagnostic information they rely on while at the same time enabling remotely network clinical support and training. We're working with Global Crossing, a leading IP or Internet Protocol network provider, to link our clinical services center to every one of our labs enabling us to remotely support their clinical procedures by providing clinicians with on demand technical support and training at the touch of the button.

We believe this is the first ever networking of the interventional lab and expect that Odyssey, our proprietary solution, will provide a foundation for a family of future network products and services for which we intend to charge. Odyssey will enable us to reduce our field based clinical support, substituting real time online capabilities and adding to our sources of recurring revenue.

We look forward to showing those of you will be attending HRS this week our new mobile truck mounted cath lab which we believe is the world's very first truck based fully functional EP lab in which we will be demonstrating our new automation software and of course odyssey. Thank you very much.

I will now ask our CFO Jim Stolze to provide a more detailed discussion of the quarter's results. Jim?

Thank you, Bevil. Stereotaxis reported total revenue of $9.2 million including systems revenue of $7.2 million in the current quarter, compared to total revenue of $1.7 million, including $1 million of systems revenue in the comparable year ago quarter. We sold six systems this quarter, compared to the single system delivered on the prior year quarter.

Our disposable service and accessories revenue increased to $2 million this quarter, compared to $749,000 in the prior year quarter driven by the increased install base as well as an improving first system utilization of disposables within that install base. Our gross margin for this quarter amounted to $5.9 million or approximately 65%, compared to $500,000 or 29% in the prior year quarter. As we move to a more normalized level of operations, our margins improved across all aspects of the business; systems, disposables, service and software test.

The margin we achieved in the first quarter was further supported by the favorable average selling price we achieved on systems sold this quarter, an increase of approximately 22% compared to the prior year quarter. First quarter operating expenses of $16.7 million were $1.7 million or approximately 11% higher than the year ago quarter.

The increase year over year costs are primarily attributable to added sales and marketing headcount and related costs as well as expanded training and clinical activities and to a lesser extent increase non cash stock compensation costs.

Our R&D expenses decreased approximately 7% compared to the year ago quarter primarily related to the timing of certain projects related to our systems development and costs. Net loss for the 2007 first quarter was $10.5 million or $0.31 per share based on 34.4 million weighted average common shares outstanding Versus a net loss of $14.6 million or $0.47 per share based on 31.2 million weighted average common shares outstanding for the 2006 quarter. The change in weighted average shares primarily relates to the issuance of approximately 1.9 million shares and companies registered direct completed in March 2007 as well as the exercise of warrants throughout 2006.

The company used approximately $6.3 million of cash in operations in the first quarter of 2007. As a result of the registered direct offering completed in March in which we raised approximately $20 million, we ended the quarter with $49.4 million in cash and investments as compared to approximately $37 million at year end 2006.

Total debt at March 31st, 2007, amounted to approximately $1.7 million. In February, we announced increase in our back line of credit which now stands at $25 million available through April 2009, of which we had $1 million drawn at the end of the first quarter. Given our current cash investments as well as our improved bank line, we continue to believe we have sufficient liquidity and borrowing capacity that will take us to break even, which we are anticipating to occur in late 2008.

Looking forward, the company has a backlog of purchase orders and other commitments for its systems of approximately $49 million. We began the quarter with a backlog of approximately $45 million, added $11 million in new orders and reduced the backlog for the system revenue recognized this quarter. Please note the company does not include orders for disposables, service or accessories in its backlog data. We remain comfortable with the previously communicated annual revenue guidance of a 90% to more than 100% increase in revenue or the $27 million reported in the year 2006.

To reiterate, Stereotaxis sales cycle similar to other companies selling capital equipment to hospitals is relatively long and can be subject to lumpiness from quarter to quarter as hospital budget decisions and equipment installation schedules are often subject to last minute delays. Prudence dictates that we should anticipate the occasional impact on our quarterly results of such unexpected delays. I would now like to open the call for questions. Operator, please?

(Operator instructions). Your first question comes from Tao Levy of Deutsche Bank.

Good morning. Can you hear me okay?

We can hear you perfectly.

Great. Thanks. I was wondering, Bevil, if maybe you could expand a little bit into the new Biosense Webster relationship. Is this in any way a response to any work that a competitor might have been doing on a magnetically irrigated catheter? I'm just trying to better understand why the need for these extra two years.

The additional two years is to give us sufficient runway so that we can comprehensively revise our catheter supply agreements going forward beyond 2009 and also our alliance agreements pertaining to our Navigant integration which is currently exclusively without partners at Biosense Webster. So the broad sweep of our relationship as it was laid out in our S1 documents, has only been changed in one regard and that is we have carefully considered all of the intellectual property perspective surrounding the irrigated catheter and believe that J&J's Biosense Webster division has a very strong position in that area.

We believe this is a very important device and we thought it prudent to give ourselves and J&J an opportunity to negotiate the balance of our agreement which is much broader without having to worry about an impending deadline.

Okay.

To more specifically answer the competitive dynamic, we have very substantial intellectual property and the ability to key our systems to recognize specific catheters so we're not concerned about any competitor that might introduce a competing product.

Okay. And also, maybe you could flush out you had a brief comment in your prepared remarks regarding your confidence that upcoming orders will not necessarily be impacted by Hanson's recent approval. What gives you that confidence? How do battle the near term from sort of disrupting the near term order flow?

The first point to make is that people who are placing orders with Stereotaxis have known about Hanson for a long time and they've had plenty of time to contemplate Hanson, to listen to their presentations at conferences to try out the system and to evaluate it. The Hanson regulatory approval did not change this competitive dynamic at all.

Secondly, when we look at our mid to late stage pipeline which has increased to 250 accounts, we do not see yet a single account that we have lost to Hanson; not one. That doesn't mean to say that in the future there won't be real competition and we welcome it because this is a very large market and we would much prefer to be dealing with a real competitor then somebody who has been shadowboxing on Wall Street for the past year or so.

Thank you. Your next question comes from Mimi Pham of HSBC.

Good morning. Bevil, could you give us more color on the status of the U.S. irrigated catheter approval, where you are on the regulatory process, and what clinical or non clinical data would be included in regulatory submission?

Mimi, hi. The submission of the irrigated catheter is identical to all other submissions, like the 8 mm and the 4 mm. It's a PMA supplement meaning that there's no clinical data required. It's leveraging Biosense Webster's existing PMA approvals for these catheters. We were pleased with the approval of the 8 mm and we expect to achieve approval of the irrigated catheter in line with our earlier expectations without any hiccups. Obviously, FDA managers irregardless of our wishes but we nonetheless remain very optimistic and we see no issues or problems associated with the submission yet.

I guess I'm just wondering what kind of clinical or data you may have once you launch the catheter in the U.S., just because there's some competitive chatter questioning how well the irrigated catheter can be manipulated.

You mean in terms of performance?

Yes.

With all due respect to whatever competitor might be pining on the catheter seeing as I've never seen one, never use one and it's unavailable in the marketplace, I would be extremely surprised that that went beyond rhetoric. However, to more specifically response to your question, we believe that our irrigated catheter navigates phenomenally well and of course we have done thousands of hours of testing and are extremely confident that the navigational attributes of our system are everything that we have claimed them to be. In fact, if you're privileged to attend the HRS symposium tonight I'm sure you'll hear more information on the catheter performance of Stereotaxis Systems.

Thank you.

Thank you. Your next question comes from Rick Wise of Bear Stearns.

Good morning, Bevil, maybe I will tackle systems; you sold six units this quarter. Can you give us a little color on the international U.S. breakdown and maybe tie that in if you could to gross margins and implications for gross margins. Obviously, gross margins came in very positively. I assume driven by the strong disposable sales. But to what degree did the systems and the higher SB, how do we think about that whole mix altogether?

Rick, we have been able to raise our prices significantly over the past year and I would say that is the primary driver of the excellent gross margins in the quarter. But as Jim Stolze said earlier, the gross margin has increased across all sectors of our business including disposable software service and all the components of our revenue stream. The distribution between the U.S. and Europe was two thirds U.S., 1/3

I'm sorry. Are you through?

I'm sorry, Rick. I gave you the information backwards. The revenues in the first quarter were two thirds European and one third U.S.

Okay. And just following on the gross margin point, you certainly came in ahead of our gross margin assumption with 60%; you came at 65%. When thinking about the outlook for the year, that certainly would suggest that the average for the year, one would assume would be higher than that. Can you give us any more color I assume as volumes build, as consumables grow, as you ramp some of the new products, gross margin should certainly improve.

Over time they will improve, we believe. The gross margins are really driven in terms of revenue based gross margins by which units we happen to be recognizing in a given quarter. Because these orders were written in nine to 12 months ago, if not earlier, there is a certain randomness to the distribution of these units recognized to revenue. So I would not look for quarter to quarter arithmetic or geometric improvements but overall for the year we feel very optimistic about the gross margin trend.

Okay. I'll sneak in one last one. Odyssey, obviously I understand it highlights your information management strategy and ease use. Should we think about it in economic factors associated with it? Do we now see I don't know whether that's booked in systems sales or consumable sales do we see an actual dollar amount associated or step up associated with odyssey in the coming quarters? Thank you.

I think, Rick, that it will be awhile before we see the revenue impact of Odyssey, but we believe that Odyssey is a disruptive technology in that it allows us to deliver services to a hospital for which we can charge through our own private network. We haven't fully sorted out the economics, but we anticipate that we will be able to charge a few thousand dollars for Odyssey on a monthly basis, depending on the level of content signed up for by a hospital and that this could grow in time as we improve the content and expand the capabilities of the network.

Thank you. Your next question comes from Larry [Tesh] of Goldman Sachs.

Good Morning, guys. A couple questions. First, Bevil, I don't think you mentioned this in the prepared comments. Can you talk a little bit about where you are on interventional cardiology side? I know you've been doing some work on CTOs and where does that stand?

I'm glad you asked that question, Larry, because once the intense focus that we have brought to the Heart Rhythm Society Conference, which is of course going on this week as you know is over, we will direct considerable attention to the preparation for the upcoming PCT conference and we don't just lurch from conference to conference. There is significant work that has gone on in the area of guide wire improvements. We have a whole new family of guide wires that we believe now can finally perform better then manually navigated guide wires.

We are moving toward with our various partnerships that make up our CTO platform and we expect to be introducing the early version of our CTO solution which is built up around 3 D CT registration and reconstruction and the use of a series of wires culminating and an RF Pip wire. We expect to be able to achieve increases both in terms of systems sold to interventional cardiology departments and also might I mention interventional radiology or peripheral vascular departments over the coming months and years, but also to greatly increase the usage of our systems for these wire based procedures.

Bevil, could you just speak to sort of the regulatory strategy for the CTO RF system?

Absolutely. Our guide wires are all approved or approvable by our 510K predicate process and we have had great success in getting our guide wires approved. Likewise, we believe that our 3 D reconstruction software for vascular navigation will be relatively easy to obtain; however, with regard to and RF wire our initial focus will be on peripheral vascular applications in the legs, the lower extremities, because the regular pathway is much more straight forward in that area and we would expect a longer time line to approval in the coronaries.

Thank you. (Operator instructions). The next question comes from Charley Jones of Next Generation.

Good morning. Thank you for taking my question. Can you hear me okay?

Hi, Charley. Yes, we can hear you fine.

Thank you. We discussed better economics in the new J&J agreement and I'm wondering when will that go into effect and although I don't expect you to give us the new range since you haven't given us the old range, can you tell us how much it's increased as a percentage?

the old range was actually I believe published in our S1 or at least there was a certain amount of detail surrounding it in our S1. The increase in royalties would take effect immediately across the full range of our catheters, not just the irrigated catheter and would be on the order of about a 20% increase in royalty over a royalty base that is already growing, driven by a formula that is based on install base and also gross margin incretion. We have an incremental 20% on top of an already growing royalties split.

Two other ones. As far as Medtronic goes, where are you at in that trial? And as far as the RF side wire could that be here by (inaudible)?

With regard to Medtronic, we think we're making, let's call it steady progress, with regard to our CRT optimization study. This is a fairly complicated study so it's not going to be completed we believe before the end of this year. With regard to the RF wire, we don't expect it to be commercial before next year.

Thank you. Your next question comes from Steve Ogilvie of ThinkEquity.

Hi. Could you break down the backlog in terms of international versus domestic?

Steve, our breakdown has not substantially changed except its trend is a little bit more in the direction of domestic. It's currently running at about 75% domestic, 25% international which is a shift that used to be running more like 55%/45%. It has gradually shifted toward domestic.

(Inaudible question).

Not necessarily. We have surprised ourselves in being able to generate very attractive gross margins and ASPs overseas as we would note in the first quarter of this year.

Just a quick follow up. G&A expenses higher than we expected. Is there something one time that's in there or is that a level we should expect going forward? Thank you.

G&A is just a touch higher. The run rate for the whole OpEx for the first quarter is a bit beneath what we had forecasted for the year of 15% growth. There's some training increases in current period in there. The G&A number is probably just a touch higher than we would expect.

Thank you. The next question comes from Keay Nakae of Unterberg.

From Stereotaxis perspective, can you give us potential opportunities or threats related to the recently announced collaboration between Medtronic and Biosense Webster?

I think let's just call this an opinion Because I'm not privy to any inside information at either of those companies regarding their collaboration, but in my opinion, we're seeing some major tectonic shifts among these large companies as they position themselves to try and take advantage of the tremendous growth inherent in the treatment of atrial fibrillation and also to deal with what has been a relatively flat or static market for devices.

Clearly, we note the recent St. Jude announcement about their alliance with a competitor of ours. We see all of these announcements as harbingers of things to come and we would anticipate that over the next year there will be other developments that would tend to bring these companies together around common interest in improving clinical support to their customers and further integrating technology. We think that we are very well placed in having a solid longstanding relationship with the J&J Biosense and very cordial ties with Medtronic.

Thank you. At this time, I would now like to turn the floor back to Bevil Hogg for any closing remarks.

I'd like to thank you all for your time and attention. We look forward to seeing those of you who will be attending the HRS Conference in the next few days. There is a very interesting symposium that is being presented tonight. We hope that many of you will be able to make it. Thank you very much.

Thank you. This concludes today's Stereotaxis conference call. You may now disconnect.