Stereotaxis Inc (STXS) 2007 Q4 法說會逐字稿

Welcome to the Stereotaxis conference call. (OPERATOR INSTRUCTIONS)

I would now like to turn the conference over to Mr. Doug Sherk. Please go ahead, sir.

Thank you, operator. Good morning, everyone. Thank you for joining us at this early hour for the Stereotaxis conference call and webcast to review financial results for the fourth quarter of 2007. Before we get started, we would like to remind you that during the course of this conference call, the company may make projections about forward-looking statements regarding future events or the future financial performance of the company, including, without limitation, statements regarding operating results in 2008, growth opportunities and other statements that refer to Stereotaxis' plans, prospects, expectations, strategies, intentions, and beliefs. These statements are subject subject to many risks and uncertainties that could cause actual results to differ materially from expectations.

For a detailed discussion of the risks and uncertainties that affect the company's business and qualify the forward-looking statements made in this call, we refer you to the company's recent public filings filed with the SEC, specifically the Form 10-Q for the third quarter of 2007 and the annual report on Form 10-K. The company's projections and forward-looking statements are based on factors that are subject to change and, therefore, these statements speak only as of the date they are given. The company assumes no obligation to update any projections of forward-looking statements. Finally, on behalf of management, I would like to apologize for the rescheduling of this morning's call. Given very recent developments, we made a decision late on Friday to move up the call in order to provide investors with a comprehensive review of the company's progress as quickly as possible. With that aside, I would like to turn the call over to Bevil Hogg, Chief Executive Officer of Stereotaxis.

Thank you, Doug, and good morning, everyone. With me today is Jim Stolze, our Chief Financial Officer, and Dr. David [Burkhart], our Chief Medical Officer. At Stereotaxis, we're building a company that is pioneering a new standard of care in interventional medicine for the treatment of complex arrhythmias as well as the treatment of cardiovascular and peripheral vascular disease. There is ample evidence that our approach is being accepted by most of the world's leading clinicians and institutions. We believe that no other modality offers the same potential for safety, efficacy and cost effectiveness in the treatment of complex cases.

We believe we have established leadership from every perspective in the emerging market for the interventional robotic treatment of atrial fibrillation. A substantial market that currently has a penetration rate of less than 1% for manual procedures and where we believe as many as 50% of the cases are being self-referred at certain leading centers. We have a business model that benefits the hospitals' practice while evidencing increasing pricing power to us. At the same time, we're positioned to create favorable returns to our shareholders. Today, I would like to focus my comments on how we intend to do just that. Jim will follow up my comments with a review of our financials and then Jim, David and I would be pleased to take your questions.

While we are the clear leader today in the field of interventional automation and information management, by the time we talk to you at this time next year, we expect our leadership to be even more pervasive. There are tangible facts that reinforce our perspective. First, in 2007, our average installed base for the year was roughly 60 Niobe magnetic navigation systems. We expect this average number to grow approximately 100 in 2008 and 150 or more in 2009. It is this rapidly growing average installed base that drives our expectations for the number of cases performed by our system. In 2007, more than 6,000 procedures were performed on a Niobe system without the availability of an irrigated catheter and that number could potentially be closer to 10,000 in 2008 and 20,000 in 2009. These numbers, of course, are dependent on the full commercialization of our partnered magnetic irrigated catheter.

We have a robust pipeline of more than 275 prospects in the mid to late stages of decision-making. Our backlog has continued to grow, and its conversion to revenue has improved year by year despite the lack of a magnetic irrigated catheter's availability. This strongly supports our contention that the Stereotaxis Niobe system is an effective platform for the full Spectrum of arrhythmia treatments ranging from right-sided SVTs to the most complex ischemic ventricular tachycardias. Second, in conjunction with our rapidly growing installed base, we have gained substantial pricing power in the marketplace. Our gross margins in 2007 were nearly 66% and this year should approach 70%, which is a sharp contrast to our competition.

For the first time, our per procedure disposable revenue associated with the magnetic irrigated catheter cases in Europe has crossed the $1,000 mark. These favorable trends, in combination with the availability of the magnetic irrigated catheter, position us to continue the strong growth of revenue from disposables. Our disposable revenue doubled in 2007 from 2006 and we believe it could grow substantially in 2008. The third factor driving our optimism is that we continue to experience no material impact on our backlog or orders due to competitive efforts or offerings. Part of this situation exists because the vast majority of the competition's sales to date are to institutions outside our electrophysiology target market. We are, in fact, largely addressing different market opportunities. As a reminder, our target in this sector is defined as the roughly 250 to 300 EP labs estimated by us to be undergoing construction or refurbishment each year. To illustrate this lack of impact, it is interesting to note that we believe only two institutions in our total target market have to date purchased competitive offerings and, therefore, the impact on our mid to late stage pipeline remains negligible.

The fourth factor driving our leadership is the continuing innovation we're bringing to the market. This innovation simplifies complex procedures while enhancing procedure efficacy in both patient and doctor safety. For example, in 2007, we began to move into the large interventional cardiology and peripheral vascular markets and expect 5-10K clearance this year for our RF wire device which is used to open totally occluded arteries.

During 2008, we expect to introduce at the Heart Rhythm Society conference major transformative software that will substantially improve the simplicity and efficacy of our Niobe system user interface while at the same time enhancing our automation of procedure workflows. In addition, we are in strategic discussions with a number of major industry participants regarding the partnering of our Odyssey information management back bone for the interventional laboratory in order to extend its potential far beyond the Niobe market opportunity. As a reminder, the Odyssey system not only consolidates the sources of information within the cath lab into the single mouse and large screen format, but it's private network capability to which we expect to add archiving capacity later this year makes it uniquely able to provide clinical support services on a global basis, and to connect hospital labs within each hospital and between hospitals.

Meanwhile, we continue to build interest in orders for Odyssey within our existing EP lab market and are optimistic about its prospects for 2008. To date, we have sold about 11 Odyssey systems and our goal is to deliver 20 or more during 2008. Finally, we expect to extend our leadership for improving our financial performance in generating returns to our shareholders. Once we have the full commercialization of the magnetic irrigated catheter, we anticipate strong demand for our system as well as an increase in utilization. In fact, at the eight European centers and one Canadian center that have participated in an external evaluation of the magnetic irrigated catheter currently being conducted by our catheter partner, average utilization increased to 4.5 cases per week across these sites. This external evaluation has involved roughly 250 cases to date and the results are currently being reviewed. We understand that about a 94% acute success rate was achieved in these cases with exemplary safety. There was only one minor and transient adverse event, which was not attributed to the performance of the system or the catheter.

We are proud of this continuation of our historical safety record. Most importantly, the average economics for complex cases from disposable revenue at Stereotaxis was approximately $1000 for magnetic irrigated catheters, which is the first time we have achieved this economic threshold. We expect that this number will continue to increase in the years to come. Overall, we're extremely pleased with the results and have invited Dr. [Burkhart] to answer your questions in this regard. Our success with the irrigated catheter has clearly attracted the attention of others and we have knowledge of two other device companies that are developing irrigated magnetic catheters that we believe are intended for introduction in the EU this year for use with our system.

While we are respectful of our capital partners' interest and mindful of our own superelectal property we, nonetheless, see this as a tremendous endorsement of our own technology. At the same time, the external evaluation phase of the catheter launch has identified a relatively small number of catheters that exhibited signs of char formation. Although it is our observation that changes in temperature setting and saline flow have largely resolved this issue in the clinical setting, our catheter partner has advised us that these characteristics are inconsistent with the product specifications. Consequently, they have notified us that they will be temporarily halting procedures done with magnetic irrigated catheters and will be delaying the full commercialization until this issue, which is an extremely high priority for them, is resolved.

Our catheter partner has attributed this issue to inconsistencies with specifications and this information, together with the observations of our own engineers, leads us to believe that the root cause lies in the area of manufacturing conformance to specifications and should be addressable accordingly. Given the very recent developments concerning the magnetic irrigated catheter, we are not yet in the position to provide formal guidance for 2008. However, assuming the magnetic irrigated catheter is available for full commercialization by mid year and that we have reference sites during the second quarter, we can share with you our potential for the year which represents our internal expectations.

First, we believe we can set the stage for substantial revenue growth during 2008 by converting at least 50% of our beginning backlog of approximately 58.5 million to revenue during the year. In addition, we expect to generate a substantial improvement in new order generation versus 2007, of which about 5 to 10 million will be converted to revenue during the year, we believe. Based on our preliminary experience in Europe, disposables and other components of occurring revenue are expected to grow by well over 50% and we expect to generate an important new source of revenue from the sale of more than 20 Odyssey systems during the course of the year. With this revenue growth, we believe our gross margins will approach 70%, and we expect to benefit from our planned reduction in overall expenses, centered on R&D, enabling us to hold these below last year's run rate. Finally, with this type of performance in 2008, we would be better positioned to achieve profitability in 2009.

As we get further clarity on the status of the magnetic irrigated catheter, we expect to provide specific guidance for the year. At this point, it is difficult to estimate the likely duration of financial impact of this temporary interruption in the commercial launch of the irrigated catheter, but it is reasonable to assume that any delay in the available to the irrigated catheter could materially impact our revenue and order ramp, particularly during the first half of the year. In summary, although we are disappointed with the potential for additional delay in the availability of the magnetic irrigated catheter, we believe that the approximately 250 cases performed to date in Europe and Canada with this catheter have established a new standard for the safe efficacious treatment of complex arrhythmias and we can build on this, as well as on our successful new Odyssey platform and new offerings in the vascular arena to achieve continued strong growth in our business. Now I would like to turn the call over to Jim to review the financial highlights.

Thank you, Bevil. Stereotaxis reported total revenue of $10.3 million in the fourth quarter compared with $14 million in the fourth quarter last year. Included in the total was systems revenue of 7.6 million in the recent fourth quarter compared with 12.4 million in the 2006 fourth quarter which sold seven systems during the quarter. Of these, six replaced in the U.S. and one was international. Our disposable service and accessories revenue was a record $2.6 million this quarter compared with $1.6 million last year, reflecting continued growth in the installed base and improved utilization. The gross profit was $6.5 million in the fourth quarter, or 64% of revenue. This compares with a gross profit margin last year of 59%. The year-over-year improvement reflects an increase in our average selling price of approximately 5% and the increasing contribution of disposables and service to our recurring revenue total.

Operating expenses in the fourth quarter were 18.9 million, 28% above the fourth quarter last year. The increases were principally due to increased sales and marketing expenses to support the growth in our business as well as higher research and development expenses. The higher R&D was a result of incremental spending for new products platform improvement and device enhancement. We generated a net loss of $12.2 million, or $0.34 per share. This compares with a net loss of $6.2 million, or $0.18 per share in the 2006 fourth quarter. In the recent fourth quarter, average shares outstanding were 36.3 million compared with 34 million in the same period last year. The increase was primarily due to the issuance of 1.9 million shares of stock in a registered direct offering completed in March 2007.

We used approximately $9 million in cash for operations during the quarter. Cash investments at December 31, 2007, totaled $23.7 million. Subsequent to the close of 2007, we received $20 million in one-year unsecured loan commitments from two of our investors. With our cash, the loan commitments, and funds available from our working capital facility, Stereotaxis has approximately $60 million in liquidity, which we believe is sufficient to fund our operations well into 2009. Total debt at the end of the fourth quarter was $7 million. The increase from the third quarter reflects the drawdown of $5 million under our working capital facility. As Bevil indicated, our backlog net of systems taken to revenue this quarter grew to $58.4 million at the end of December. As a reminder, we do not include orders for disposables, service, or accessories in the data. We would now be happy to answer your questions.

(OPERATOR INSTRUCTIONS) Our first question comes from the line of Tao Levy from Deutsche Bank. Please go ahead.

Good morning.

Hi, Tao.

Bevil, I was wondering maybe if you could go into a little bit more detail regarding your discussions with J & J and on the catheter. How long is it going to take them to get catheters back on spec, I guess, and then do we have to go through another beta launch and also surround that with the probability that you think you could hit a mid year launch of irrigated catheter, which you talked about sort of in your informal guidance I guess?

Tao, we're not yet in a position to make definitive, or even well-informed prognostications until a root cause analysis has been completed. However, it is our observation, as we noted in our call comments, that the issue appears to be centered on conformance to specifications and if this turns out to be the case, most manufacturing problems are resolvable and our catheter partners have tremendous experience in this domain and have placed a very, very high priority on resolving the issue. As to whether or not catheters are available by the midpoint of the year, our earlier guidance on this was that we did not expect the catheters to be in broad distribution before the midpoint of the year. So I will stay with that original guidance, although my hopes center obviously on getting the catheter out as soon as possible.

Okay. Since you have Dr. [Burkhart] on the phone, maybe you could go into a little bit of detail. Your experience with charring, either with the manual irrigated catheter implications for patient safety, and then just lastly, Bevil, can you remind us on the contractual agreements that you have with J&J? When does it expire? What happens if other companies launch a European irrigated catheter to, again, to your relationship with J & J?

Perhaps we'll do this in reverse order. I'll answer the question about our contractual issue, which is business issue, and then hand the mike to Dr. [Burkhart]. With regard to our contractual alliance with our catheter partner, we are committed to them exclusively for catheter development and supply through at least the midpoint of 2009. However, this does not preclude other companies I said developing and commercializing magnetic devices. So I wouldn't be able to comment more on that other than to say that other companies have clearly noted the success of the catheter and our growing installed base and apparently are willing to invest their own funds in entering this arena. David?

Yes, charring is one of the overheating related complications seen in all catheters potentially. In general with irrigated catheters, manual and magnetic, we expect less overheating-related complications and that's something that we actually have seen with, with both with the exception of steam pops, which is one of the things that we see more, or tend to see more, with irrigated catheter. So manual irrigated catheters in some of the initial experiences had a large report of steam pops. Char does actually appear to be seen sort of less in general, particularly with the manual irrigated. The charring, however, that's been reported with this is different than typical charring. In fact, it's more coagulum formation, so on both manual, nonirrigated and irrigated catheters, charring and coagulum that tends to be seen is usually seen on the very tip of the catheter or the distal portion of the, what we call the distal electrode. In general, what has been seen on this is very small amount of coagulum or what's called char that I've seen is actually charred coagulum. That's at the proximal edge of the distal electrode. So it's a little bit different. In terms of the clinical outcome of this, as we've seen with the European experience, even though this catheter appears to have had this occur, it's been actually remarkably safe, considerably safer than the manual irrigated catheter in comparison with its initial release.

Great, thank you.

Thank you. Our next question comes from the line of Keay Nakae from Collins Stewart. Please go ahead.

Yes, just a follow-up with Dr. [Burkhart]. The fact that J & J feels the catheter is off spec, is that related to the size or, the size of the out, the outflow ports not being of consistent size or could you be more specific about what you think the manufacturing specification issue is related to?

I don't think that has been resolved and that's one of the things that they are looking into.

Okay, and just to follow up on one of Tao's questions, once they have it ready to go again, do you see them having to go through a second beta launch?

The answer to that, while not definitive, is probably not. Our initial information is that the beta launch is largely complete, that it was successful from a clinical standpoint or clinical end point, and that it would unlikely to be, would be unlikely to be repeated in Europe. It's possible that there could be a short prelaunch in the U.S. because the catheter hasn't been launched in this country, but we don't think there will be a repeat in Europe.

Okay. With respect to the other third parties who are developing magnetically-enabled irrigated catheters, if they are not car toe-enabled, Bevil or Dr. [Burkhart], how attractive do you think that would be as an option for use with Niobe?

I'll answer that question initially just based on my observation that the, that we have seen widespread, fairly widespread use of competing systems to car toe with our system and our assumption would be that they would be used in tandem.

Dr. [Burkhart], do you have any opinion about that?

Yes, I think for, particularly for people in the U.S., at least the ones that I'm familiar with, the availability of a catheter that could be used with a competing system would be, would be something people would certainly reach out to.

Okay, and finally, Bevil, the, the upgrade to the software that you talked about launching later this year, could you be more specific about the functionality that we would see included? Is this going to, at least on the software side, include a gating to respiration?

We are still in the final stages of development of our new 3.0 software release and we see this as a transformative improvement or upgrade to our software capabilities and that everything should become a lot easier and we believe that it will significantly enhance our automated routines. But I don't want to talk about specific aspects of it yet because these are not complete.

Thank you. Our next question comes from the line of Rick Wise of Bear Stearns. Please go ahead.

Good morning, Bevil.

Good morning, Rick.

Couple questions, first, I'm a little confused why the OUS experience seems to be different than the domestic experience. I mean I assume it's exactly the same catheter. Am I missing something here?

Rick, the irrigated catheter has only been released in Europe. It does not go into broader release in the United States because it has not completed its external evaluation phase, so the only cases that have been done, those roughly 250 cases that I referred to, were done in Europe.

I see. I thought you were suggesting that they had been some evaluation cases done in the United States.

Oh, in Canada, yes, but not in the United States.

Were the cases centered in a particular lab? Is it handling at all, or was this -- was it a widespread experience?

Well, it's fairly widespread. There were roughly nine sites, and these are all relatively high-volume sites. One site in Canada and eight in Europe.

Okay. Turning to the income statement, it was encouraging to see disposable income even with the modest contribution from the irrigated up strongly. Am I understanding correctly, am I saying it correctly that gross margins were sequentially lower in the fourth quarter than they were in the third quarter? Can you help me understand why that should be given, the strength in disposables?

I'll defer that question to Jim because it's more of a technical/financial question than a business model question because from a business model standpoint, as our case volume increases and as the proportion of irrigated catheters which sell for higher ASP and, therefore, higher royalty predominate, our situation should improve. Jim?

Yes. Rick, the, the disposable and other margins, as Bevil said, will continue to improve. As you get the higher percentage of royalties, the systems margins can move a point or two in each quarter, depending on the ASPs that happen to fall through. The actual margin difference in the quarter is driven, about half of it by the systems, which is driven by really insignificant changes in the ASP of the actual systems recognized, as well as some field service costs that we incurred in the fourth quarter. That's all wrapped into one number. So they are generally going obviously in the right direction. You'll get some small variances quarter to quarter.

Okay, but there's nothing significant that would have happened fourth quarter versus third quarter?

No.

Okay. Thank you very much.

Yes.

Thank you. Our next question comes from the line of Larry Keusch from Goldman Sachs. Please go ahead.

Hi, good morning. Bevil, on the charring issue in the, as you guys think perhaps the challenges of manufacturing to the specs, you haven't talked about any potential involvement of the FDA here. Do you suspect that they will get involved in some way and have they been notified?

We don't handle regulatory communications with the FDA, but here's what we believe and what we understand. First of all, we do not see any clinical safety issue here based on the 250 or so cases. And obviously all adverse events are reported and, you know, I think we've been pretty aciduous in doing so over the years. I noted one transient adverse event that incidentally was not attributed to the use either of the catheter or of the system. With regard to manufacturing conformance, I do not believe that that is a regulatory issue. It's simply a manufacturing process issue and obviously there may be notification to the regulatory bodies at the appropriate time, but we, and this is we, Stereotaxis, are not qualified to opine in this area but, nonetheless, do not expect that to become a significant issue.

Okay. And at this point, again, everything that you guys have seen and looked at, you are, it sounds like pretty confident that this is not a design/engineering issue and that, again, this is manufacturing-related?

Well, our confidence stems from a number of sources, not the least of which our catheter partner statement that the issue relates to specifications, but the vast majority is catheters performed extremely well, without coagulum or char, so obviously if you can make some that perform well, then the fact that you can't make them all perform well in our view is a manufacturing issue and not a design issue.

Okay, and then just a couple of other quick ones. Just talking a little bit about the guidance that you, well, you didn't provide guidance but as you sort of thought through 2008 and some of the comments that you have made, when you talk about your income statement and the expense line items, it sounded like you -- I just want to clarify, are you assuming that both SG&A and R&D are at levels below your 4Q exiting run rates for the year of 2008, both line items?

Yes, our clinical OpEx should be on the par with or below last year, but I will give that specific question to Jim to answer.

Right, yes. Larry, I would suggest R&D would be the biggest adjustment and that, as Bevil says, target total OpEx remained below 2007 levels. On a year-over-year basis you would see sales and marketing continue to grow and we would hold some incremental smaller growth in SG&A, but the R&D line would go backwards.

And what exactly is changing on the R&D side?

It's project driven, as you know. There's been a lot of Odyssey development work in 2007. There was continued work on integration. There's continued work obviously on device development. As you know, Bevil talked about the RFR developments. So there's a lot of projects in 2007 which will not need to continue into 2008. So it's a selective review of projects that are completing and as we stage new projects.

Right, okay. And then just lastly, a few other ones, this is sort of nit picky, but the $1,000, Bevil, that you talked to concerning the per-procedure fees that you're generating out of Europe on the irrigative side, I'm just trying to translate that to the U.S. Is that $1,000 translated back in sort of Euros that you're picking up over there and we should be thinking about this as $800 in the U.S., or are you selling in dollars and so it would be consistent here in the U.S. as well?

Okay. Larry, first of all, let me say that my comment about the $1,000 is not sort of precise enough to translate directly into U.S. experience, but roughly we're looking at an irrigated catheter in Europe that sells for, we believe, somewhere in the region of 3000 Euros and a royalty on that, on the order of about 15%. And then we have our own cardio drive disposable which has increased gradually its ASP over time and we're now negotiating new contracts at around $600 for the cardio drive. But I just loosely used a $400 price point for that device. That more or less gets one to $1,000.

Okay, and then last one for you, Bevil, since you mentioned it, the 150 systems that you expect to be installed in 2009, obviously this business runs a lot on back order and presumably by mid '09 you would have to have some visibility as to where you're going to get. So should we be thinking about the visibility on that 150 systems developing in the, as has in the past, in the second half of '08 and into the first half of '09?

Larry, could you be more -- could you restate the question? I understand you're asking about the sort of average install base in 2009, and we calculate -- we need to calculate the average installed base for each year so as to use it in our modeling and financial projections and, as I said, the average installed base was about 60 last year, should be around 100 this year. And most of these installed base systems are coming out of backlog. They don't need to -- we don't need to generate a huge number of new orders in order to accomplish these average installed base numbers. And then the projection is for roughly 150 systems in 2009 and that would largely depend on the state of our ending backlog this year.

Right. That's what I was getting to. So no -- you're not looking for some inflection point other than the approval of the catheter and then that backlog builds and that's how we get to visibility in '09?

I think that we're going to see a continuation of strong order flows and revenues from systems, but we're noting a very substantial contribution from recurring revenues, which we expect to grow over time as our cardio drive ASPs move northward and our royalties increase on more expensive devices multiplied by larger installed base. So the contribution from non-Niobe revenues is going to evolve substantially upwards over the next 24 months.

Right, okay. Thanks very much.

Thank you.

(OPERATOR INSTRUCTIONS) Our next question comes from the line of Ed Shenkan from Needham & Co. Please go ahead.

As far as adverse events recently, you mentioned one in your press release. Are there any others that are, you could mention that have happened?

Not that I'm aware of, Ed. And generally, I'm aware of adverse events.

And as far as Europe, you mentioned you expect to place or sell 20 units in 2008. Can you give us some -- why do you feel so confident that you're going to place so many units, given the issue that we discussed earlier today?

Ed, the 20 units refers to Odyssey.

Oh, okay.

And we are very -- we have a very large backlog, Ed, and as I indicated in my comments, we expect 50% of that backlog or more to flow to revenue during the year and we also have an extremely large pipeline. Our pipeline exceeds 600 prospects. We have had very little or no attrition to that pipeline from our competition, and we have target delivery dates and installation dates and order generation dates for all of our backlog units and for most of our late stage pipeline units. So we have a pretty reasonable perspective on what can happen and we don't think that these drivers of our system revenues will be substantially impacted provided the, the hiatus in the availability of the irrigated catheter is relatively short.

And is this solely a manufacturing issue? And how have you rolled out that it isn't perhaps design related?

I mentioned a bit earlier in my comments that because the substantial majority of the catheters are to specification and appear to have performed extremely well, that would indicate that they are manufacturable and have been manufactured successfully. What we're looking at here in our view, and this is only in our view, we cannot speak for our catheter partners who are experts in this field. In our view, what we're looking at is a manufacturing conformance to specification. Many, many catheters, irrigated magnetic catheters, have been built that conform to specification.

And what is Stereotaxis' role in this, if you will, investigation or review versus J & J's role?

J & J is the developer and manufacturer of the catheter, and our role is advisory and participatory as an observer, but we are not involved in making the final decisions.

And last question would be your sales people, how are they going to address this issue in the U.S. and abroad?

Our sales people are busy selling systems and we have never told our customers that irrigated catheters will be available now or tomorrow or next week. Our customers are quite able to make their own informed judgment as to the value proposition of our system with or without irrigated catheters. I will note that we did over 6,000 cases last year without an irrigated catheter and we are receiving orders and we believe we will continue to receive orders in line with our expectations.

I'll jump back in queue.

Thank you.

Thank you. Our next question comes from the line of Steve Ogilvie from ThinkEquity. Please go ahead.

Thanks. Could you clarify on the Odyssey, you said you sold 11. Does that mean you'll recognize the revenue, and could you give us an ASP? And does that replace, when you talk about system sales, replace Niobe sales, in terms of guidance you gave?

No. To the last question, but let me go back to the first part of the question. Odyssey is a, you could call it an information management work station that is the front end for an integrated EP lab and, as such, we are currently selling Odyssey for an ASP that is, well, let's just say we're selling it for a list price that is well in excess of $200,000 and an ASP that is around $200,000. We've sold 11. Some of the early Odysseys were sold on lease programs, but currently this is a straight-forward sale, with a service agreement to follow.

Okay. So then the 11 systems you said, that's not a backlog. You'll actually recognize that revenue in the first quarter?

The -- I'll defer that to Jim, because of the lease aspects here, Steve, recognizing revenue on many of the 11 systems is not an immediate thing. Jim?

Right. Yes, that's -- we use the word "sold," that means taken orders for, Steve, not recognized revenue necessarily. So we've had a couple of those recognized to revenue. As Bevil said, some are on a lease basis where the revenue gets just filtered in over the period of the lease. So there's not a significant amount of revenue in 4Q.

Okay, and then on the magnetic irrigated catheter that's being developed by someone besides J & J, is that something that you're working with them at all and do you get any economics on such a product ?

We are not working with any other catheter manufacturer or developer currently other than with our principle catheter partner. Our economics are centered on our cardio drive disposable, for which the list price has recently reached $1,200.

Okay. Then just to follow up, what were the royalty economics you were hoping for on the irrigated magnetic catheter? Thank you.

I don't think it's a matter of hope. We have been getting royalties on the irrigated catheter on the order of about 15%.

Great, thanks, guys.

Thanks.

Thank you. Our next question comes from the line of Mimi Pham from JMP Securities. Please go ahead.

Hi, good morning.

Hi, Mimi.

Bevil, can you clarify. Did you say that all nine of your evaluation sites saw the charring in the magnetic irrigated catheter?

I don't think so but let me defer that question to Dr. [Burkhart]. David?

It was about a half actually. Some sites had it more than others.

Okay, but it wasn't just like one single user?

No, the majority were actually in a couple of centers.

Okay.

But, no, it was not -- it was more spread out in about half.

And did these centers see the, see this charring like in the cases that were reported at the AFIB conference in Boston?

Yes, and so the people who were on stage, several of them did report seeing some.

Again, clinically, they didn't see it during the case. They just saw it when they pulled the catheter out and then J & J said, hey, this is an issue?

It was pulled out and reported on a detailed case report form that was filled out for every case.

Okay. Because when I first -- I guess it was always the case where they didn't expect to see any charring or just as bother some was the distal -- sorry, it was the proximal part of the catheter versus the distal part?

Mimi, I'll answer that. It's not that they didn't expect to see any charring because charring occurs on all catheters.

Correct.

What I think to serve a partner was the sort of randomness of the issue and the fact that it appeared to be related to specifications in the device and when you have a randomness in the specifications, it's important to revisit manufacturing operations and other aspects of the production of the device.

Okay, and then also at the AFIB symposium, I think someone had mentioned they ideally wanted to see more reach in the irrigated catheter, now that they have more experience. Is this an issue with any of the centers or would you say overall the nine centers feel that they can maneuver the magnetic irrigated better than the manual irrigated?

The satisfaction rating or ranking given by the centers at the last time that the data was reported was, I believe, a 4.5 out of 5 scale and the issues have reached had largely been addressed. It was a matter of inexperience in placement of sheath rather than the ability of the catheter to perform. I think David could probably talk about the performance of the catheter.

And I would agree in that most people have rated the performance very high and the ability to achieve independent users end points also greater than 90% overall.

David, perhaps you could allude to your earlier experience with the initial launch of the manual irrigated catheter.

Our initial U.S. experience with the manual irrigated was actually quite a problem in terms of, one, overheating-related issues mostly in the form of steam pops, tamponade, that is blood accumulating in the sack around the heart. We actually saw quite a bit, around 20%, 100% steam pops at higher powers and powers that are even typically used. And then 20% of this blood accumulation in the initial experience. And so in terms of complication rates and overheating related complications, this catheter has performed remarkably well. In fact, it was surprising to me that we, that no steam pops had actually been reported in the initial experience, particularly with some centers using higher powers. So in terms of that performance and that safety, it's in stark contrast to our initial experience with the manual catheter, but I think that experience with the manual catheter is one of the reasons, or I suspect it's one of the reasons, that bio since has released the catheter with this type of evaluation.

Okay, thank you. Then one last question. On the 275 accounts in your mid stage, mid to late stage pipeline, would you say that most of these labs are planning to upgrade or build out a new lab starting 2008 so that they want make a decision this year to purchase a Niobe or not?

I don't know the exact distribution of the placement dates for labs within mid to late stage. Clearly late stage would principally be in 2008 that they would place their order. Remember that this order generation comes before installation. So the bulk of these accounts would fall from an installation standpoint in revenue recognition standpoint, would fall into 2009.

Thank you. (OPERATOR INSTRUCTIONS) Our next question comes from the line of Spencer [Nam] from Summer Street Research partners. Please go ahead.

Thanks for taking my questions. I have a couple of quick questions for all of you. How do you calculate the average install base for the year?

Jim, you can answer that specifically, but we look at the number of systems that are installed in January versus February versus March and essentially the average install base would be the sort of average number of systems that was, that were in operation for the year as a whole. Jim, would you want to be more specific?

Sure. We go to the actual install date, so when a system is sold, there are several weeks before it's actually completely installed, the training has occurred. So there's some period of time before it's actually able to produce revenue. So we, we try to factor in a number that is relevant to the system's ability to actually begin producing revenue.

So the installed base is based on the time that the system is able to produce revenue and --

Yes.

Okay, great. Appreciate that. Quick question, are you planning to add any sales reps this year?

Yes, we are. We will continue to grow our sales force. They have a lot to do selling systems and now -- I mean Niobe systems and now Odyssey systems. So we will expand our sales force, but the cost of that is largely being offset by reductions in R&D, hence our statement that the overall spend should be on a run rate basis consistent with or lower than last year.

Great. Thank you very much.

Thank you.

Thank you. (OPERATOR INSTRUCTIONS) Our next question comes from the line of Ray [Tang] from E-Tech Advisors. Please go ahead.

Good morning. Dr. [Burkhart], with regard to the comment that Bevil made (inaudible)

Operator, we can't hear his question.

Can you hear me? Hello?

A little better. Operator?

I did adjust the line, sir. Go ahead.

Yes, we could not hear the question at all.

Okay. Mr. Tang, can you repeat the question, please?

Can you hear me right now?

No, not really.

Well, let me try it offline, then.

And our next question comes from the line of Keay Nakae. Please go ahead.

Yes. Bevil, wanted to follow up on the new higher list price for the cardio drive. What should we be modeling as an ASP for that device going forward and would you charge more for it if someone is using a third party catheter instead of a J & J catheter?

We like to think that we favor our partners and their customers, so typically we would be inclined to provide beneficial pricing to joint customers, in as much as that is per missable, depending on the jurisdiction. However, to be more specific about the ASP of the cardio drive, we have gradually been increasing the ASP over time from the low 300s to the mid 400s and we're currently pricing it in the $600 range on new contracts.

Okay, and as we look forward to mid '09 and your exclusivity with J & J expires, what would be the downside of not renewing that exclusivity with J & J?

We have an excellent relationship with J & J and we would certainly work hard to continue our collaboration with them. Obviously as Stereotaxis needs catheters that conform to specifications and we're very hopeful and confident that our current principle catheter partner will be able to achieve this objective.

Okay, and finally for Jim, with respect to modeling the revenue that comes in from Odyssey, what's the typical term of the lease that these folks are signing?

Okay. We've been able to convert most of these new quotes into just a capital sale. So for the most part, systems that we'll be recognizing will be a one-time capital revenue transaction. We'll have some historical systems that will bleed in, but that's a handful.

Okay, so going forward, the goal is to sell them outright?

Yes, sir.

Okay, very good. Thanks.

Thank you. Our next question comes from the line of Tao Levy. Please go ahead.

Just a quick follow-up. On Odyssey, you mentioned in the press release discussions with other partners. What type of agreement would you hope to strike? Would it be with one company, with multiple companies, would it involve royalty, would it involve an upfront payment? Just I guess your hopes in an arrangement. Thanks.

Tao, Odyssey is a very new approach to information management and networking in the cath lab. We believe it's absolutely unique in this regard. There are really two components or two parts to Odyssey. One is a piece of equipment which, as Jim said, we will be selling and are selling for roughly an ASP of $200,000. Clearly our reach currently is to be able to sell these Odyssey systems into Niobe labs or into Niobe labs or into Niobe labs prospects. That's the capacity of our sales force. So -- current capacity of our sales force. So one of the things we would be looking to do in order to expand our reach beyond the Niobe installed base and Niobe prospects would be to find a partner whose sales force and other distribution capabilities would enable us to place more Niobe -- excuse me, more Odyssey systems into more labs, not necessarily Niobe labs alone. For example, to illustrate this point, we've had an inquiry from a hospital, actually a Hanson customer who is talking to us about placing an Odyssey system in the Hanson lab.

So the capabilities of Odyssey extend beyond our own install base, but our capacity to sell and distribute the product at this point is limited. The market, we believe, is virtually unlimited because it includes 2500 EP labs and then obviously there are all the other 30,000 or so interventional labs outside of the electrophysiology arena. But there's more to Odyssey than just distribution of a product, which presumably would be done at a transfer price with a distributor margin. But there is also the network connections and network content and we would hope that we would retain some level of control over that and have an opportunity to charge for content and network distribution. Finally, Tao, there are accessories to, or other services attached to Odyssey, such as archiving capabilities or connectivity within the hospital to viewers in various areas of the hospital, which would carry additional charges and would generate additional income.

Okay. Is there a timeframe when you expect to finalize finding partner or partners for Odyssey?

Would you say that again, please?

Is there a time line where you would expect to conclude that the partnership talks and announce something a little more formally?

I wouldn't put a time line on it, because these are fairly complex and far-reaching talks. For example, we have partnerships with Siemens and Phillips and both of them are obviously interested in the integration of their systems with Odyssey and how by bringing Odyssey into the front end of their labs they could enhance under the information management and procedure workflow capabilities. But there are also device companies, like our partner in catheter partner or other catheter and device companies. So we're going to move slowly and steadily toward perhaps a series of strategic relationships that will be built around integration distribution, call center and networking sharing and so on.

Okay, thanks.

Thank you. Our next question comes from the line of Ed Shenkan from Needham & Company. Please go ahead.

Yes, as we're two months into the first quarter of this year, just wondering what you're expecting as far as the trend compared to maybe the fourth quarter of '07. Should -- would you expect it to be kind of flat sequentially or up or down?

Ed, we're not prepared to give guidance for the first quarter, particularly given the hiatus with regard to the irrigated catheter. But certainly we think that the impact of irrigated catheter is most likely to affect us in the first part of this year. So certainly we wouldn't look for substantial growth at all in the first half of the year.

Thanks, Bevil.

Thank you. I'm showing that we have no further questions at this time. Please continue with any closing remarks that you may have.

I just wanted to thank everyone for your time and appreciate your being here to talk to us early on Monday morning. Thank you very much.

Ladies and gentlemen, that does conclude our conference for today. Thank you for your participation. You may now disconnect.