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Vascular Solutions Inc. (NASDAQ:VASC)

Q3 2008 Earnings Call Transcript

October 21, 2008 4:30 pm ET

Executives

Howard Root - Chief Executive Officer

James Hennen - Chief Financial Officer

Analysts

Phil Nalbone - RBC Capital Markets

Ernie Andberg - Feltl & Company

Chris Cooley - FTN Midwest Securities

Matthew Scalo - Canaccord Adams

Operator

Ladies and gentlemen, thank you for standing by. Good afternoon and welcome to Vascular Solutions' Third Quarter Conference Call. At this time, all participants are in a listen-only mode. (Operator Instructions). As a reminder, ladies and gentlemen, this conference is being recorded today, Tuesday, October 21, 2008.

I would now like to turn the conference call over to Mr. Howard Root, CEO of Vascular Solutions. Mr. Root, you may begin.

Howard Root

Thank you. Good afternoon, everyone, and welcome to Vascular Solutions' Third Quarter Conference Call. Joining me today is James Hennen, our Chief Financial Officer. This conference call is being webcast to the public and is completely open to members of the media, Vascular Solutions shareholders, and other interested parties. After our remarks, we will open up the call to questions.

First, the necessary preamble. Today's conference call is a proprietary Vascular Solutions' presentation and is being recorded by Vascular Solutions. No other recording, reproduction, transmission, or distribution of today's call is permitted without Vascular Solutions' consent.

This call is being audio simulcast on the Internet by our company website at vascularsolutions.com. A replay of the conference call will be available on the Internet shortly after this call is concluded, through Tuesday, October 28. To listen to the replay, visit the investor relations portion of our website.

Forward-looking statements made in the course of this conference call and webcast are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements can be identified by words used such as may, will, expect, continue, or other similar expressions.

There are certain important factors that could cause the company's actual results to differ materially from those anticipated by the forward-looking statements as described in our annual report on Form 10-K and other recent filings with the Securities and Exchange Commission. Forward-looking statements are made based on our analysis as of today's date, and we undertake no duty to update the information provided on this call.

Today, we issued our press release with results for the third quarter ended September 30. With all the negative economic news in the financial markets recently, it is a pleasure to report that the third quarter was by far the most positive and profitable quarter in Vascular Solutions' eight years as a public company. As we entered the quarter, we had already eliminated the distraction and expense of litigation, which resulted in the third quarter's double-digit sales growth, strong gross margin, and excellent cost controls flowing directly to an 11% operating margin, $1.7 million GAAP net income, and $0.11 per fully diluted share net income.

The third quarter clearly demonstrated the benefits of the multiple product business that we have built over the last five years, now that our growth is unobstructed by the uncertainties that historically plagued us.

Looking forward, we believe that the third quarter is just the beginning of what we can deliver with our strategy, and that with our planned new products, new distribution opportunities, and improved operational efficiencies, we can deliver consistent and increasing profitability for the foreseeable future.

In this call, I will first provide an update on the components of our third quarter net revenue by product category. As a reminder, we group our products into five product categories. Hemostat products, that include our D-Stat Dry, D-Stat Flowable, and Thrombi-Gel products, all of which utilize thrombin to clot blood. Extraction catheters, consisting of the Pronto V3 and other catheters for the removal of intravascular blood clots. Vein products, including our Vari-Lase laser console and procedure kits for the treatment of varicose veins. Specialty catheters, including our Langston, Twin-Pass, Gopher, and Gandras catheters for unique clinical niches in catheterization procedures. And Access products, including our micro-introducers, guide wires, and snares, used during percutaneous access of arteries and veins.

After summarizing the results and developments in each of these categories, I will then provide guidance for net revenue for the fourth quarter of 2008 and preliminary thoughts on 2009. Finally, James will review the financial details of the third quarter and comment further on our financial projections.

In the third quarter, we increased our net revenue by 18% over the third quarter of 2007, to $15.5 million. Net revenue in the quarter came in above the midpoint of our guidance with strong growth in the access products and extraction catheter categories. U.S. net revenue increased by 17%, while international sales increased by 21%. Our transition in Germany from a direct sales operation to an independent distributor model was completed at the start of the second quarter. And during the third quarter, our German distributor, Nikolai, continued their excellent performance without issue.

Increased international sales in the third quarter more than offset the revenue reduction due to the change from hospital pricing to distributor pricing that occurred with our sales transition in Germany.

Our highest sales product category in the third quarter was our hemostat products, with $5.8 million in net revenue in the third quarter, a decrease of 4% from the third quarter of 2007. The three causes for the decline were the continued reduction in sales of our Duett sealing device, which is our legacy product that we have chosen to not actively promote, the as-planned conversion from hospital pricing to distributor pricing in Germany as a result of the switch to a distributor sales model, and the decline in sales to King Pharmaceuticals.

In the third quarter of 2008, King purchased $90,000 of Thrombi-Gel and Thrombi-Pad, with an additional order planned but delayed by us until the fourth quarter due to our recently completed facility expansion. We recently -- we expect King purchases to continue at the current level until we receive FDA approval for the surgical indication for the Thrombi-Gel product, which we currently target for the end of 2009.

D-Stat Dry sales were essentially constant on a sequential quarter basis, as we have maintained our leading market share in the face of intense price competition from the non-thrombin patches.

Our second highest sales product category was our extraction catheters. In the third quarter, we recorded net sales of $3.8 million with the Pronto catheters, which was an increase of 45% from the third quarter of 2007. Sales of the new Pronto LP, or low-profile product, constituted 13% of our extraction catheter sales in the third quarter, an increase by 44% sequentially from the second quarter.

The LP version extends our sales efforts into treating thrombus in smaller vessels, and therefore helps to grow the overall extraction catheter market. Our launch of the Pronto V3 in Japan in the third quarter resulted in strong international sales in what is normally a slow quarter for international sales.

We continue to see growth in the aspiration catheter market, resulting from broader acceptance to the clinical data at the medical meetings, such as the recently completed TCT meeting. We believe that our extraction catheter category will continue to deliver substantial sales growth in the fourth quarter and into 2009.

Our third-highest sales product category was our vein products, principally the Vari-Lase products for the treatment of varicose veins, which recorded $2.4 million in net sales, a 14% increase over the third quarter of 2007.

Sales of the disposable components of our vein products were strong in the third quarter, even in spite of the normal summer slowdown in varicose vein procedures. While we often get asked if the reduction in the number of cosmetic procedures being performed affects our Vari-Lase business, it is important to remember that treatment of varicose veins is a medical, not a cosmetic, procedure that is almost always reimbursable under customary insurance plans. As a result, we have seen no slowdown in Vari-Lase procedures.

With the litigation with VNUS and Diomed now resolved, and AngioDynamics acquiring Diomed's assets, we have solidified our position as the number-two supplier within the endovenous laser market and we expect our growing product portfolio, combined with our excellent clinically-based nationwide direct sales force, will result in continued growth as the smaller competitors either leave the market or are also forced to adjust to the patent litigation quagmire.

Sales of our access products were $1.6 million in the third quarter, an increase of 106% over the third quarter of 2007. In the third quarter, we launched the EXPRO Elite snare, as a complement to the MICRO Elite snare that we launched in the second quarter under our distribution agreement with Radius Medical Technologies. We exceeded $500,000 in combined snare sales in the third quarter.

We have continued to increase our guide wire offerings with the Axis and Jiffy wires fully launched in the third quarter with excellent customer response and new versions of these guide wires in the pipeline.

In the fourth quarter, we expect to launch our newest Access product, the Grub set, which is a specialty micro access kit with a substantial market potential. As a result, we expect access products will continue to be our fastest growing product category on a percentage basis throughout 2009, with several additional products planned for development and distribution.

Sales of our specialty catheters were $1.1 million in the third quarter, an increase of 53% from the third quarter of 2007. During the third quarter, we benefited from broader clinical use and substantially increased sales of the Gopher support catheter, which is used in challenging interventional procedures to assist in treating tight lesions. We also completed market evaluations of the Gandras catheter, which is principally used in uterine artery embolization procedures, and we released the Gandras catheter for full worldwide launch in the third quarter with excellent clinical results and good physician reception.

Looking forward, we have the Minnie catheter that we expect to launch in the fourth quarter, that has the potential to add $5 million in annualized sales to this product category.

License and collaboration revenue was $375,000 in the third quarter. This line item includes the recognition of licensing revenue from King Pharmaceuticals as well as payments from King for the preclinical and clinical work we are performing to obtain a surgical indication for the Thrombi-Gel and Thrombi-Paste products.

Turning to future sales guidance, in the fourth quarter we expect growth across all product categories, with the benefit of expanding sales of recently launched products such as EXPRO Elite snare and the Pronto LP. Benefiting from the new product launches and continued sales growth, we expect between $16.3 million and $16.6 million in net revenue for the fourth quarter, resulting in full year 2008 net revenue above $61 million, which is in line with the guidance we've previously provided.

Looking into 2009, we have 10 new products that we plan to launch in the U.S. during the year, with the majority of those also scheduled for launch in our major international markets during 2009.

In addition, we are in discussions with several companies concerning distribution of their products through our direct U.S. sales force, similar in structure to our existing relationships with Zerusa concerning the Guardian hemostatic valve, and Radius concerning MICRO Elite and EXPRO Elite snares.

All of the products we expect to launch or distribute in 2009 are consistent with our clinical strategy of bringing unique and differentiated products to interventional cardiologists and interventional radiologists through our direct U.S. sales force and international distributor network. We also continue to make excellent progress with our larger development opportunities.

In the third quarter, we finalized the design of all of the components of the mechanical Duett invasive sealing device, and we completed two feasibility animal studies with good results.

By the end of the fourth quarter, we expect to design freeze the mechanical Duett, and prepare for international clinical studies in 2009. The mechanical Duett addresses an approximately $500 million market for invasive sealing devices, of which over $100 million is in international markets where we believe the mechanical Duett could be launched as early as 2010.

One important benefit of the conclusion of our litigation is that we have now been able to focus more of our attention on the progress with the mechanical Duett project and our Acolysis Therapeutic Ultrasound device, as well as to pursue distribution of larger market potential devices through our U.S. direct sales force. All of these items will be a component of our long-term sales growth after 2010.

In the interim, we believe that we have the devices either on the market or in development that will allow us to achieve $100 million in annualized net revenue before the end of 2010.

James will now review the details of our third-quarter financial results and the rest of our financial projections.

James Hennen

As Howard described, net revenue for the third quarter was $15.5 million, an increase of 18% from net revenue of $13.1 million in the third quarter of 2007. U.S. net revenue represented $13.5 million, or 87% of third quarter revenue.

Our product gross margin for the third quarter was 56.0%, down 60 basis points from 66.6% in the year ago quarter, primarily the result of changes in our product selling mix as access products were our highest percent growth category over the past year and carry a lower gross margin.

Looking forward, we expect to maintain our product gross margin at between 65% and 66% in the fourth quarter. Sales and marketing expenses were $5.1 million, or 33% of revenue in the third quarter, compared to $4.8 million or 37% of revenue in the year-ago quarter. We continue to gain leverage on our sales and marketing expenses as our sales grow. At the end of the third quarter, we had a total of 81 field sales and sales management employees in the U.S., essentially constant from the beginning of the year. We don't expect to add headcount in our field sales organization in the fourth quarter and, as a result, we estimate sales and marketing expenses will continue to decline to approximately 31% of revenue in the fourth quarter.

U.S. product sales generated per U.S. field sales employee was $180,000 in the third quarter, or $720,000 annualized. We continue to believe that we can grow this annualized number to over $1 million per field employee by 2010 with our current and planned new products.

Research and development expenses for the third quarter were $1.5 million, or 10% of revenue, compared to $1.2 million or 9% of revenue in the year-ago quarter. The increase was a result of our continued emphasis on investment in new products. We project R&D spending to be approximately 9% to 10% of revenue for quarter for the foreseeable future, as we develop the 10 new products planned for launch in 2009 and make progress on our larger development projects.

General and administrative expenses were $1.037 million in the third quarter, or 7% of revenue, compared to $1.7 million or 13% of revenue in the year ago quarter. The decrease of $658,000 was primarily the result of lower legal expenses as all material litigation expenses were concluded in the second quarter of 2008. As a reminder, the marine polymer technology's verdict and interest in the amounts of $5.1 million is under appeal, and will be recognized as a gain only upon a favorable appellate decision, which we estimate will be decided in the middle of 2009. We project G&A expenses will be approximately 6% of revenue per quarter for the foreseeable future.

Clinical and regulatory expenses in the third quarter were $792,000, or 5% revenue, compared to $813,000 or 6% of revenue in the year-ago period. The slight decrease was the result of timing of our clinical studies and regulatory submissions, as well as a reduction in the number of full-time employees in those departments. We project clinical and regulatory expenses will be approximately 5% of revenue for the foreseeable future.

In the third quarter, we did not incur any thrombin qualification or litigation expenses and we do not expect to incur any additional thrombin qualification expenses going forward.

Interest income was $28,000 for the third quarter as we yielded a 2% return. We anticipate a similar rate of return for the remainder of 2008.

Interest expense was $10,000 for the third quarter. We repaid the outstanding balance on our equipment line of credit on July 9 and, as a result, now have no outstanding balance in our bank lines.

Foreign exchange lots increased to $22,000 for the third quarter. We sell our products to our new German distributor at prices denominated in Euros. We also purchased a small number of inventory items as prices denominated in Euros, as well. As a result, we are exposed to foreign exchange movements during the time between the shipment of the product and payment. We currently have terms of net 60 days with our distributor and net 30 with our vendors under their agreements, providing for payments in Euros.

Income tax expense was $22,000 for the third quarter as a result of alternative minimum tax and high estate taxes where we do not have sufficient NOLs to offset our income. We estimate we will incur approximately $6,000 in additional tax expense for the remainder of 2008.

The resulting GAAP net income for the third quarter was $1.722 million or $0.11 per fully-diluted share, compared to net income of $15,000 in the third quarter of 2007. After adjusting for non-cash stock-based compensation in applying a 38% tax rate, we achieved adjusted net income of $1.362 million or $0.08 per fully-diluted share in the third quarter, compared to adjusted net income of $356,000 in the third quarter of 2007, an increase of 283%.

Looking forward, for the fourth quarter we project our GAAP net income per fully-diluted share to be in the range of $0.14 to $0.16 and our adjusted net income per fully-diluted share to be in the range of $0.09 to $0.11. Looking into 2009, we are providing preliminary guidance for GAAP net income per diluted share to be between $0.56 to $0.64, and adjusted net income per diluted share to be between $0.40 and $0.45 for the full year.

Regarding the balance sheet, we ended the third quarter with $5.6 million in cash with a positive cash flow of $193,000 in the third quarter, making this our eighth consecutive quarter of positive cash flow operations.

During the third quarter, we incurred $500,000 of capital expenditures, mainly consisting of leasehold improvements related to our recent expansion of our manufacturing facility. We continue to project total capital expenditures in 2008 to be approximately $1.1 million.

We expect our inventory levels to continue to increase slightly through the fourth quarter and end 2008 at approximately $11.5 million.

Overall, we expect to continue to improve our cash position in the fourth quarter and end 2008 with approximately $6.5 million in cash and no debt.

We continue to believe that our current working capital of $17.4 million is sufficient to fund all of our foreseeable operating results -- or, requirements. We also have additional working capital flexibility with our $10 million bank line of credit. The GAAP calculation of our weighted average fully-diluted shares was 16.0 million in the third quarter. We expect this number to increase to 16.1 million by the end of the year due to fully diluted calculations. We currently have 15.8 million shares outstanding, with 17.3 million shares fully diluted on a share count basis.

Finally, looking longer term, we are reaffirming our more general targets. We continue to believe that we can achieve $100 million in annualized net sales by the end of 2010. In this timeframe, we target our product gross margin to be approximately 64% to 66%, an unblended rate across all of our products. As a percentage of net revenue, we have targeted our 2010 research and development expenses to be 10%, clinical and regulatory expenses to be 5%, general and administrative expenses to be 6%, and sales and marketing expenses to be 25%, with the resulting operating margin at approximately 20% of net revenues.

With that, I will turn the conference call back to the operator for questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). We will take our first question from Phil Nalbone from RBC Capital Markets.

Phil Nalbone - RBC Capital Markets

Thank you very much. Good afternoon, Howard and James. Can we start with vein products? Howard, you said that disposable sales were strong despite seasonality. Could you elaborate on the kind of growth rate that you're seeing in the third quarter? And what do you think is the current market rate of growth on an annualized basis for this market?

Howard Root

We're not going to break out exactly the split between consoles and disposable kits, except to give you the general guidance that disposable kits increased faster than consoles did, which is in line with the guidance that we've given the last couple of quarters that we see the U.S. market -- I wouldn't say saturated, but fairly mature in the number of locations for laser consoles. Certainly not increasing off of what we've sold as consoles quarterly before.

But the procedure kits, we see that growing at about a 15% year-over-year kind of rate. I think we're growing right about where the market is. There is still some shakeout I think left in the market with these low-cost providers getting called into the VNUS lawsuit and having to deal with that. No one has left the market other than Diomed, and that was acquired by Angio. But there is still other, you know, three or four other suppliers in the lower rung areas that are clearly in the middle of this patent litigation with no resolution that I can see for where they are right now.

Phil Nalbone - RBC Capital Markets

Howard, what has been the response so far from those smaller players? Have they raised prices? Have they pulled back their participation in the market? Are they exiting the market?

Howard Root

They certainly are not raising prices. If anything, they are trying to sell more quickly, I think, maybe as, in some cases, as a last gasp before they have to get out of the market. They are considerably below us. I think we said on the last conference call that we had a substantial price increase as a result of the VNUS royalty, as did AngioDynamics. And so, the spread between the two of us and the rest of the players is kind of broader. Maybe there's others that are in and around us, but I think almost all the other small players are really lower in price.

I don't really -- I don't see them getting out of it until they are forced to get out of it, but I think they're caught in a situation where the legal expenses alone drain their capital. And I don't see a real good solution for that, but that's kind of me looking at their business rather than understanding what's going on inside.

Phil Nalbone - RBC Capital Markets

Great. Can we move to the mechanical Duett? I missed kind of the timeline you gave us in terms of the development milestones, and can you talk a little bit about the characteristics of the product? I'm sure you don't want to say too much for competitive reasons, but what would lead you to believe that mechanical Duett would kind of make inroads into what already seems to be a pretty mature and saturated market?

Howard Root

The mechanical Duett, as far as I'll go into because there is some patent reasons, we haven't completed all of our patent filings yet, but it's a mechanical design so it's a purely mechanical seal of the arterial puncture. Fully bio-resorbable, not relying on the biological component of what we had, or still have, in the original Duett.

I think we know this market very well, 11 years we have been working on it with the Duett, and then looking at designing the mechanical Duett. It's a challenging market to get correct on the economics as well as the performance and the safety profile, that there's some other competitors who had come behind us, a couple of them on the market now, that we don't think have the clinical and economic mark hit to expand the market. I think that's what's really holding back is Angio-Seal's got a new generation but it's a lot like the old Angio-Seal, and there's been nothing else that's transformed this market since then. So it's gotten up to $500 million and pretty much stayed there.

We think, with the mechanical Duett, we certainly can take share from the existing competitors, and that's giving us the comfort that this is a big opportunity. We also think we can grow the market, because if you can hit the right price points as long -- as well as the right clinical outcomes and the right safety profile, people are still looking for a device that they would use in essentially every one of their catheterizations. But it has to be a better performing, lower cost, and more safe product than what they have right now. That's what we think we have.

Having done two animal studies, I can't give you comfort that we're there, but we think we have the right design. We're looking at it through our animal studies, and it's looking good right now. What we've done so far is we've done two animal studies, kind of observing the deployment. We've done some bio-resorption studies to get comfortable with the timeframe of bio-resorption. We expect to have a design-freeze by the end of this year, which means all of the components finalized, made, deployed on the bench, and an animal where we can see that it actually works.

Then, in 2009, we take that into the European clinic, do a first in man clinical study, then we would have to do a broader clinical study for CE mark approval, and that's going to be 2009. In 2010, we would hope to have the CE mark approval and be on the market by the end of the year. U.S., 2009 probably not going to be the clinical study, more like 2010, and more like 2011 for the U.S. market to expand to us. But of that $500 million, clearly over $100 million of that is outside the U.S., the vast majority of that being where the CE mark controls. So even with the European market, this could be our number one product in the whole portfolio.

Phil Nalbone - RBC Capital Markets

Thank you for the information.

Howard Root

Thanks, Phil.

Operator

We’ll now move on to our next question from Ernie Andberg with Feltl & Company

Howard Root

Hi, Ernie.

Ernie Andberg - Feltl & Company

Hello.

Howard Root

How you are doing?

Ernie Andberg - Feltl & Company

I am excellent today.

Howard Root

Good.

Ernie Andberg - Feltl & Company

I thought on the last conference call, you had tentatively targeted the middle of the year for potential CE mark. Are you signaling any delay here?

Howard Root

Is that on the mechanical Duett you're referring to?

Ernie Andberg - Feltl & Company

On the mechanical Duett, yes.

Howard Root

I don't know exactly. I mean, these are rough, rough estimates based on what we can do. I don't think it will be the first half of the year. Certainly, by the end of the year, could we get it done? Possibly. But I think we're looking -- we're not building anything for mechanical Duett into our 2009 revenue. We're building it in 2010.

Ernie Andberg - Feltl & Company

Okay, fair enough. You said economics, clinical results, and safety were the key driving factors here. Can you, at this point, talk about the economics to the user?

Howard Root

I’d just do so far as to say it needs to be under $200 to the end-user price. You have to be able to price it in that area, and have a very good gross margin at that. And with what we have right now, we're very comfortable with that metric being met.

Ernie Andberg - Feltl & Company

Okay. James? When you were discussing capital expenditures, you said that you had $500,000 of CapEx in Q3. And then you said $1.1 million. Did you say $1.1 million more in the fourth quarter?

James Hennen

No, that would be for the entire year of 2008.

Ernie Andberg - Feltl & Company

Okay, for the full year.

James Hennen

And of that $500,000, about half of that we're being reimbursed by our current landlord but we have to put it on our books as capital equipment.

Howard Root

It was a facility expansion, that's paid for by signing the new lease.

Ernie Andberg - Feltl & Company

Okay. You don't have to comment on my earnings numbers, but you look like you potentially on a lower sales level can have the same kind of earnings power that I thought you might have on slightly higher revenue, Howard. And I haven't been able to go through James' comments on the percentage in terms of each of the expense items. Where is the leverage coming next year?

Howard Root

Most of the -- or almost all of the leverage is going to come from the sales and marketing side. As we said in this call, we don't expect to substantially increase our headcount in the U.S. sales direct force right now. So that leverage is all going to come from sales and marketing. So, as our revenue increases, sales and marketing expenses should be relatively flat on each quarter of 2009.

Ernie Andberg - Feltl & Company

Okay. So, the 31% that you get to in the fourth quarter goes down in 2009?

James Hennen

That's right.

Ernie Andberg - Feltl & Company

31% of revenues. Okay, that's good. Thank you very much.

Howard Root

Thanks, Ernie.

Operator

We’ll now move on to Chris Cooley with FTN Midwest Securities.

Chris Cooley - FTN Midwest Securities

Good afternoon, Howard and James. It's Chris with FTN Midwest. I just have two quick ones for you guys. And again, great quarter here. Just so I fully understand or fully appreciate the leverage that you delivered here in this quarter, you talk about the G&A line being at 6%, which looking back to the model here, it hasn't been at these levels, quite frankly, since the -- prior to you guys going public. Just curious, how much of that burden was litigation related to versus maybe some other cost saves that you've implemented there at the corporate level? Just so, as we kind of think about printing this forward, how much of that was with litigation burden versus maybe -- again, management -- managing down the cost? And I have a quick follow-up after that.

James Hennen

It's safe to say that almost all of it is related to the litigation expenses and legal fees in there. Quarter-over-quarter basis, there was $650,000 less this quarter compared to last quarter, of Q2 in 2007.

Chris Cooley - FTN Midwest Securities

I guess from what I am hearing, then, James, is you feel comfortable that's sustainable. I realize you provided that in your guidance. But when you look at what's on the plate, or at least over the next, say, 12 to 18 months, you're comfortable with those levels of spend.

James Hennen

Correct.

Chris Cooley - FTN Midwest Securities

Okay. And then secondly, maybe if I could get you to -- either maybe yourself or Howard to comment a little bit more on -- you kind of tempted us there at the outset of the call with discussions about additional distribution opportunities. You know, clearly you have a very well-established sales force. Sounds like a great opportunity there to further ratchet up their productivity. Any areas of particular focus or any additional color that we might have on that?

Howard Root

This is the kind of thing that we really can't say anything until something is signed. And it's going to go from nothing to what it is. It was like the Radius snares, which is relatively small but it's a great product for us and doing $500,000 a quarter is a nice additive bonus that we didn't even have in our plan at the start of the year.

You read were at the TCT meeting. I mean, sometimes I had to hide in the booth because there are so many companies that have products that want distribution but don't have a distribution channel, and trying to create a distribution channel for a single-product medical device company in the U.S. is almost ludicrous at this point. You have to have such a big thing to put it together. So those are out there. We sift through a lot of them.

The advantage of being outside of litigation is I can spend more time working through that, and all of those products have to be sold by our existing sales forces, existing customers, so we're not going to distribute a product that goes into surgery but it has go into interventional cardiology, interventional radiology. And there is just an awful lot of them out there. It's a great way of leveraging our organization because it doesn't cost a dime of R&D. We really almost always -- I mean, I almost applied prohibition against paying upfront amounts for them. We just get the distribution agreement. We put the money into launching it through our sales force. They're extremely able at grasping new technologies, clinically-oriented sales, and then going out there and making it happen.

And there's both U.S. and, even more so, European and other international companies that are looking for people to take their products into the U.S. market. Some of them are relatively small, in that Guardian, Radius snare range. Some of them are bigger than anything we're working on right now.

Chris Cooley - FTN Midwest Securities

Super. And I apologize, just one other quick follow-up and I'll get back in queue. I believe you said just in regard to the run-rate with King, you did not expect the surgical approval for the thrombin offering there until probably the end of calendar '09. Did I hear that correctly? I just want to make sure.

James Hennen

Yes, I think that's our current kind of assumption. As we're enrolling and trying to get this clinical study done. Has not gone as quickly as we wanted it to. We're retooling and pushing it forward and want to get it done, and then completed, and then get the approval by the end of next year.

Chris Cooley - FTN Midwest Securities

Understood. Congratulations on a great quarter guys.

James Hennen

Thanks, Chris.

Operator

We’ll now move on to Matthew Scalo with Canaccord Adams.

Matthew Scalo - Canaccord Adams

I wanted to get some clarification on the impact that Germany had. Were you basically saying it was a wash essentially moving to a distribution model? In the quarter, that 21% OUS growth?

James Hennen

No, I think there was outside growth in Japan that helped counter that, but it's still not back up to our current sales levels. It's growing nicely. We expect sometime in 2009 to be the same sales levels selling direct versus through a distributor, which means almost a doubling factor when you figure the spend -- the amount of the pricing to the distributor is about half of what it is to direct to the hospital.

Matthew Scalo - Canaccord Adams

Okay, so, if Germany was direct, what would OUS growth have been, I guess? Instead of the 21%, would it have been something like 23%, 24%?

James Hennen

I think you would add about $200,000 of revenue, so it's not -- maybe it's a percent of $200,000. Yes.

Matthew Scalo - Canaccord Adams

Okay, that's great, that’s helpful, thanks. On the Pronto LP, you mentioned 13% of total extraction revenue came from that one version. Where do you expect that to be? Could the LP take up 50% of the total revenue on that side? Is that how advanced that version is?

Howard Root

The version has some nice advantages, but the biggest one is that it is smaller. Also, that's the biggest limitation because if you've got a big vessel, you want the biggest extraction limit you can get. So we think, at full implementation, around 25% of sales should be Pronto LP. Part of that is taking what they would otherwise use -- a V3, but I think more than 50% of that 25% is new-market opportunity, places where they wouldn't otherwise use a V3, but they use the LP because it's a smaller vessel and they can get there.

Matthew Scalo - Canaccord Adams

That's extremely helpful. My last question would be kind of a theoretical question. But would you be willing to go cash-flow negative for the right opportunity, meaning you found a product that you would rather acquire versus distribute? Are you guys willing to give cash-flow negative, say, in 2009?

Howard Root

I am not willing to risk having to do a financing in today's markets. So I would say it would have to be just a perfect product for us to go the opposite way. Cash flow, we've got a $5 million cushion. That's not a lot, and I don't want to get it down to where we're having people question whether we're going to raise money.

Matthew Scalo - Canaccord Adams

Right.

Howard Root

And so, I'm not going to get into that situation at all. But if we had to have one quarter where we had $1 million or $2 million -- for the right product, I'm not saying we wouldn't do that, but I can't really imagine us doing that…

Matthew Scalo - Canaccord Adams

Fair enough, thanks guys.

Howard Root

Thanks, Matt.

Operator

(Operator Instructions). And it does appear we have a follow-up question from Ernie Andberg.

Ernie Andberg - Feltl & Company

Back on the King run-rate, you -- I think you or James said $90,000 in Q3, which was down from last year. And one of you made a comment that -- until you got the surgical application, it was going to run at this rate. I did not understand what you were suggesting the run-rate for the product was -- on a -- if you would have gotten the extra order in the quarter that you thought you would.

Howard Root

Yes, the $90,000 is a little low, compared to what our annualized rate is. We are always looking at around $1 million, but it's probably closer to $0.5 million to $1 million on an annualized rate, until we get that surgical approval. But it's going to be lumpy because the orders are big. So if one comes in, it can be $90,000 in one quarter. If we get two, it could be $180,000, or more.

Ernie Andberg - Feltl & Company

Fair enough, that's exactly what I was looking for, to understand what you meant by that. Thank you.

Howard Root

Thanks, Ernie.

Operator

I am showing no further questions. Please continue with your closing remarks.

Howard Root

As I said at the start, I was really happy with this quarter. I think it is the most positive and profitable quarter in the history of Vascular Solutions, but it's also only the beginning of what we can do, now that we're focused 100% on growing the business and managing to the bottom line. So, I thank everyone for participating today, and I look forward to an excellent fourth quarter and talking to you again in three months. Thanks.

Operator

Ladies and gentlemen, that concludes our conference for today. Thank you for your participation in Vascular Solutions' Third Quarter Conference Call. You may disconnect.

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Source: Vascular Solutions Inc. Q3 2008 Earnings Call Transcript
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