Spectranetics Corp (f/k/a SPNC)

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Spectranetics, Q1 2008 Earnings Call Transcript

John Schulte

Thanks Don. And good morning to everyone joining us for today's earnings call. As usual I am going to open up the call with some comments on our financial performance. And then focus on the key accomplishments in the first quarter. I will highlight some of our goals for the second quarter so you can measure our performance for the next call. The, Guy will review our financial operating performance in more detail for this past quarter. And then we will open up the call to your questions.

I have to say I am very pleased with both our top and bottom line performance in the first quarter of 2008. Our total revenue was 23.8 million this quarter, up 37% from the prior year quarter. Importantly, we saw strong revenue growth in every product line across our business. Total disposable product revenue grew 39% over the prior year.

Our vascular intervention business grew 36%. And our lead management revenue increased 48%. This strong performance on both sides of our business validates our decision to separate our sales force into two groups. One focused on vascular intervention, and the other on lead management.

I believe we now have the second largest sales force in the U.S. concentrated on peripheral vascular intervention and we have by far the largest team addressing lead management.

Equipment revenue was up 56% from the prior year and as expected, down 22% from a very strong fourth quarter. Importantly, we placed 24 new lasers last quarter, bringing our worldwide install base to 767 systems with 607 of these in the United States. I believe we are now about half way to our potential of approximately 1,500 laser systems worldwide. So while we have experienced a lot of growth in laser systems over the past three years, we still have plenty of room to grow.

In addition to strong growth in the United States, we also continue to see very nice growth internationally. Revenue outside the U.S. grew 35% and represented 11% of our total revenue. I am optimistic about the growth prospects outside the U.S. And expect a strong growth internationally will continue throughout the year.

On the bottom line, while we experience the pre-tax loss of $685,000, we expected a loss and in fact came in ahead of our plan. As usual, the year is front loaded with certain extensions such as the global sale meeting, so were pleased with a loss which was smaller than expected.

Although some of the savings in relation to our expectations was timing related and will likely be spent later in the year, we do expect to return a profitability in the second quarter. I am particularly pleased with our strong top line performance given our strategic decision during the fourth quarter to split our sales force into two separate groups, which was accomplished and executed seamlessly in January this year.

Following our fourth quarter call, many investors and analysts expressed concern that we were diverting resources away from atherectomy and toward lead management and it was perceived that we had lost confidence in the growth potential of our atherectomy business. In fact, quite the opposite is true.

To illustrate prior to the split, we head 90 full line sales people which included 14 managers and we estimate that they spent approximately 70% of their time on vascular intervention sales. That affectively implies a 63 people sale organization supporting the vascular intervention business.

In addition, we have 14 sales professionals dedicated to the lead management business. Plus an implied 27 sales professionals within the full line sales team, which gave us a total of 41 professionals selling lead management products prior to the split. So in summary we had effectively 63 individuals selling vascular intervention, and 41 individuals selling lead management products prior to the split.

As of March 31st, we had a total sales organization of 111 professionals. That's and add of seven. This included 76 supporting vascular intervention which was made up of quota carry reps and 12 sales managers. We also have 35 professionals supporting lead management of which 16 are quota carrying and 15 clinical support specialist and four sales managers.

This team managed to grow our disposable products revenue significantly on both a year over year and sequential basis during the same quarter that the sales force split was implemented. My hats off to the sales leadership team who did and excellent job executing the split of the sales organization. I am extremely proud of their accomplishment.

The most important initiative to the vascular intervention sales force is a successful expansion of the TURBO Booster. While the initial experience with a broad base of users demonstrated significant looming gains over our standard 2.3 and 2.5 millimeter laser catheters, some physicians felt that the technique was a bit cumbersome. They felt that the saline flush was more complicated than the standard setup and that in challenging lesions it was difficult to keep the laser catheter properly positioned on the TURBO Booster guiding sheet requiring repositioning with lengthen procedure time.

We were able to simplify the saline flush technique greatly shortening procedure time setup. We also determined that are what called the splitage issue was caused by the hyrdofilling coating on the laser catheter. We found there was a simple fix. We simply shortened the coating on the laser catheters so that the TURBO Booster was always locked down on an uncoated portion of the catheter. This solved the slippage issue.

Once these changes were implemented, case times drop significantly and user satisfaction increased as indicated by our strongest sales month of the quarter in March. We also made nice progress on the two clinical trials focused on the treatment of instent restenosis or ISR.

We have now enrolled 15 patients in Payton the ISR trial in Germany, which will evaluate the TURBO Booster plus PTA. There are now five hospitals enrolling in that trial. The salvage trial which is being done in the United States is also getting started very nicely. We have five patients enrolled in salvage and have four sites capable of enrolling. We expect to add six new sites in the second quarter.

Salvage is an ISR trial combining laser atherectomy with the TURBO Booster followed by a gore of viabon coverage stint. This is a 100 patient physician sponsored IDE trial jointly sponsored by Spectranetics and W.L. Gore. We certainly feel that scientifically based clinical trials evaluating the safety and ethicacy of laser atherectomy with the TURBO Booster will be very important to establish the clinical benefits of this treatment strategy.

This quarter we also initiated our first coronary trial in many years. The Tammy trial is a 200 patient randomized in five hospitals in Poland. The principle investigator in Tammy is Darius Dudek a world renowned intervention cardiologist in the treatment of acute myocardial infarction, or AMI.

Tammy will treat AMI patients with large thrombus burtons. One group will receive laser plus direct tinting and the other will get balloon androplasty instinting. The in point will be a combination of SP resolution. Which is resolution of EKG abnormalities and the amount of distal embolization as measured by myocardial blush scores. Tammy will focus on the most complex AMI patients and represent a very nice new opportunity in the coronary market.

As we currently have very little business in this segment at the present time. We enrolled our first two patients in the first quarter. We are excited about the prospects of the Tammy trial and our excitement was fueled by a recent publication of and article of International Journal of Cardiology entitled "XMER laser in acute myocardial infarction single center experience on 66 patients."

This paper describes the laser experience of a hospital in Italy. The authors noted significant improvement in timmy flow, excellent ST resolution, a very low rate of distal embolization as measured by very high blush scores. A low complication rate and event free survival of 95% at six months follow-up.

The clinical in points documented in this paper are consistent with the clinicals of the Tammy trial. I am very excited about the progress we have mad in advancing our strategic initiatives in growing our vascular intervention business and building business in the future with these new trials.

We also made very good progress toward achieving our goals to accelerate the goal of lead management. In addition to completing the sales force split, we held two very successful master summits focusing on lead management. More than 40 physicians attended these live case training sessions with leading physicians as operators and moderators.

The goals of these master summits is to demonstrate best practices for removing pace maker and defibrillator leads as well as open up a dialogue regarding which types of leads should be removed in which types of patients.

This quarter we are also co-sponsoring a symposium at the heard rhythm society meeting entitled "Lead Extraction 2008: A critical review and implementation of heart rhythm guidelines." This symposium was developed under the offices of the Cleveland clinic and will feature a world class faculty. You can log into the heart rhythm society website for details of this very important symposium.

One goal of our lead management team is to demonstrate that the complication rate of lead extraction in centers using our lead extraction and system is very low in a broad variety of situations, including infection, malfunctions, and system upgrades. This month a paper published in the heart rhythm society medical journal based on the experience of the Bringham and Women's Hospital in Boston described their single center experience.

This consisted of 498 patients with 975 leads removed over seven years all using our clear system consisting of our laser sheet and lead locking device. The major complication rate was .4%. That's two major complications in 500 patients with no death and a success rate of 97.5% complete lead removal was achieved.

This landmark paper certainly demonstrated the safety and efficacy of removing pacing and defibrillator leads with our laser extraction system. This paper certainly supports the hypothesis of our lead management story.

In closing, I am very pleased with the progress we have made this quarter. We grew our top line and all of our products lines. We successfully completed the sales force split giving us significant market power and advanced our key clinical initiatives.

Our goals for the rest of this half are to accelerate enrollment in our three clinical trials, including Payton, Salvage and Tammy. We'd like to complete as least one business development deal that will either be a distribution arrangement or a bolt on acquisition using our existing cash resources and continue to execute as two separate sales organizations to grow the top line in both our vascular intervention and lead management businesses. I am very confident that we are well positioned to achieve our key goals for 2008 and beyond.

Now I will turn the call over to Guy who is going to provide some more color in our financial performance in the first quarter and will provide our financial guidance for 2008, and then we will open up the call.

Guy Childs

Thank you John. I am very pleased to report revenue of $23.8 million, up 37% compared with the 17.4 million during the year ago quarter. In flack compared with the fourth quarter of 2007 as expected.

Disposable product revenue was the most meaningful contributor to the growth and was up 39% on the strength of both vascular intervention and lead management sales, which grew 36% and 48% respectively.

On a sequential basis vascular intervention sales up $13.7 million were up $1 million or 8%. In lead management sales up of $6.4 million were down approximately $500,000 as expected and consisted with historical seasonality in this business. Within vascular intervention sales, our arethectomy business which includes laser arthectomy devices and the TURBO Booster products combined with our quick cross support catheters both contributed to the growth during the quarter.

Laser revenue was 1.7 million and an increase 56% compared with a year ago quarter and was down 22% from a very strong fourth quarter 2007. We are also pleased with laser placements of 24 during the quarter, which were in line with our expectation in compared with 34 placements in the year ago quarter.

On a geographic basis, U.S. revenue was $21.3 million, which represents 89% of worldwide revenue, an increase 38% on a year over year basis in 1% as compared to the fourth quarter of 2007.

Revenue outside the U.S. this quarter totaled $2.6 million which was up 35% compared to last year and down 10% on a sequential basis primarily on laser sales which was anticipated.

Gross margin for the fourth quarter was 72%, which was down from 73% in the year ago quarter and flack on a sequential basis. Operating expenses in the quarter were 18.5 million up 40% from the prior year quarter, due primarily to an expanded field organization, which now totals 111 employees as of March 31st, 2008 up from 79 a year ago, and 104 as of the end of 2007.

Within the 111, we have a total of 76 dedicated to our vascular intervention business and 35 to lead management business. We continue to expect in the year with the field sales organization of the range of 115 to 120 employees.

Of that total, approximately two-thirds will be supporting our vascular intervention business and one-third our lead management business. We also intend on expanding our sale organization outside of the U.S. primarily in Europe by 8 to 10 professionals in 2008 of which four were hired during the first quarter of 2008.

Pre-tax loss for fourth quarter - pre-tax loss for the first quarter of 2008 was $685,000 compared with pre-tax income of $165,000 for the first quarter of 2007 and pre-tax income of $628,000 in the fourth quarter of 2007.

I will close with some commentary on our annual financial guidance for 2008, which is unchanged form the guidelines provided on our fourth quarter call. We expect revenue for 2008 to be within the range of 104 million to 110 million. Representing 25 to 33% growth compared to 2007.

Gross margin is expected to be with in the range of 72 to 74%, research development and other technology costs are expected to be approximately 14 to 15% of revenue and SG&A costs are expect to be in the range of 55 to 58% of revenue.

Gross margin and operating expense cost may fall outside the ranges provided above at any given quarter due to factors that include, but are not limited to, timing and move related costs associated with the move of our manufacturing operations to an expanded facility, product development costs, clinical trial enrollment rates, and expansion of field sales organization.
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