Spectranetics Corp (f/k/a SPNC)

[Democritus_of_Abdera]

CSII as competitive threat to SPNC ...

In SPNC’s Q3 2007 Earnings Call (Oct 31, 2007), the following exchange occurred in the question and answer session:

<Q – Amit Bhalla>: .... Can you kind of talk a little bit about what kind of impact you’re seeing from competitive atherectomy players in the market, if at all? ....

<A – John Schulte>: .... As you know there is a new atherectomy competitor, CSI, which received approval in the third quarter. It’s a rotational atherectomy technology that’s focused primarily on the lower leg, and it’s limited in artery diameters from about 1.5 or 2 millimeters up to 3.5 millimeters. As you are well aware in this field, physicians are anxious to try all types of new technology, whether it be atherectomy or stenting and whatever, so certainly a trialing will take place and everyone kind of knows who the top volume physicians are for treating below the knee disease, so certainly they will get some trialing. We believe that any impact that we might have, we think will be temporary for a number of reasons. Any technology to gain long-term traction has to demonstrate that it performs well in terms of four parameters: Outcome, safety, ease of use and cost. We think that our atherectomy technology has by far the best clinical data as it relates to both LACI and the recently published Cello data. We think we have a very strong safety profile with, I think, the acknowledged lowest disembolization rate of virtually any atherectomy technology. In fact. even lower than balloons and stents. In terms of ease of use, the only technology that can do thrombus through calcium and the ability to treat arteries ranging from as low as 1.5 millimeters up to 7 millimeters in diameter and in some cases with a new TURBO-Booster with a single catheter. So we think there’s a high cost effectiveness advantage in our favor as well. So that being said, I also believe that the more atherectomy companies that there are in the market, the better it is for all of us. We estimate that atherectomy represents only about 20% of all endovascular procedures in the leg. And my guess is that if we can demonstrate solid clinical benefits atherectomy could represent as much as 50% of all endovascular procedures. So the more companies that are preaching the benefits of tissue removal, the better it is for all of our companies, and we feel confident that we can share the advantages of our atherectomy technology over other atherectomy technology. ...

I agree with John’s assessment that the impact of CSII will be temporary, but for a different reason. I think that CSII is entering the field too late to be a competitive threat to SPNC on the basis of price and convenience, the only advantages that I believe that CSII’s Diamondback technology might have over SPNC’s TurboBooster. By the time CSII comes up to speed, SPNC will have enough CVX-300 lasers in place to be able to offer volume discounts if price becomes an issue. I believe that physician experience with and the demonstrated efficacy of the TurboBooster will trump any incremental advance in convenience that the Diamondback might offer.

A detailed understanding of CSII’s current corporate stature can be found by reading its Prospectus filed on Jan 22, 2008 (see http://www.sec.gov/Archives/edgar/data/1222929/000095013708000782/c21812s1sv1.htm ). <You might need to copy and paste this url if the last section is not transferring upon a direct click.>

In my opinion, the key issues are:

1. The management team at CSII is new and the company is under-staffed. For example, David Martin is currently CEO, CFO, and President of CSII. He joined CSII about 1 year ago. He is no doubt very talented having been both COO and Executive VP of Sales and Marketing of FoxHollow Technologies, but a company needs an independent CFO to add balance to the corporate structure. The sales and marketing team has increased from 6 employees at the beginning of 2007 to 29 employees in December 2007, but they will need to grow further. And, CSII plans to manufacture Diamondback in-house. They have limited commercial manufacturing experience and no experience manufacturing this product in the volume that they anticipate will be required to achieve planned levels of commercial sales. The manufacturing enterprise must meet FDA Quality Control Standards, not an easy task unless experienced people can be hired.

2. CSII will need to expand its authorized use of the Diamondback. The Diamondback currently has 510(k) approval for PAD; it is not FDA-cleared or approved for treatment of carotid arteries, coronary arteries, within bypass grafts or stents, of thrombus or where the lesion cannot be crossed with a guidewire or a significant dissection is present at the lesion site. CSII plans to seek a PMA to use the Diamondback 360° in treating patients with coronary artery disease, but this will take several years to accomplish in my opinion.

3. Continued funding of operations will be a chronic headache for CSII. They will recieve about $85M from their planned stock offering, and they expect these funds to last more than 12 months. However, the Diamondback is not generating sufficient revenue to yield a positive net operating cash flow in the forseeable future, implying that additional funding will be required. In the past CSII has resorted to convertible preferred offerings and the holders of these convertible shares have a substantial presence on the current Board of Directors. I think that if times get tough, CSII may be forced into toxic financing schemes and a possible corporate death spiral.