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The Spectranetics Corporation (NASDAQ:SPNC)

Q3 2008 Earnings Call Transcript

October 29, 2008, 11:00 am ET

Executives

Don Markley - Lippert/Heilshorn & Associates, Inc., IR

Emile Geisenheimer - Chairman, President and CEO

Guy Childs - VP and CFO

Will McQuire - COO

Mike Vos - VP & GM, Vascular Interventions

Jason Hein - VP & GM, Lead Management

Analysts

Amit Bhalla - Citigroup

Matt Dolan - Roth Capital

Jason Mills - Canaccord Adams

Brian Kennedy - Jefferies Group

Joshua Zable - Natixis Bleichroeder

Charles Chon - Goldman Sachs

Spencer Nam - Summer Street Research

Charley Jones – Barrington Research

Operator

Welcome to the Spectranetics Third Quarter 2008 Results Conference Call. At this time, all participants are in a listen-only mode. Following management's prepared remarks, we will hold a Q&A session. (Operator Instructions). As a reminder, this conference is being recorded on Wednesday, October 28, 2008. I would now like to turn the conference over to Mr. Don Markley. Please go ahead, sir.

Don Markley

Thank you. This is Don Markley with Lippert/Heilshorn and Associates. Thank you for participating in today's call. Joining me from Spectranetics are Chairman, President and Chief Executive Officer, Emile Geisenheimer; Chief Financial Officer, Guy Childs; Chief Operator Officer, Will McGuire; General Manager for Vascular Interventions, Mike Vos, and General Manager for Lead Management, Jason Hein.

Earlier today, Spectranetics released financial results for the quarter ended September 30, 2008. If you have not received this news release or if you would like to be added to the Company's distribution list, please call Lippert/Heilshorn in Los Angeles at 310-691-7100 and ask for Amy Higgens.

Before we begin, I would like to remind you that management will make statements during this call that include forward-looking statements within the meaning of federal securities laws. These statements involve material risks and uncertainties that could cause actual results or events to be materially different from those anticipated. For a list and description of those risks and uncertainties, please see the Company's filings with the Securities and Exchange Commission.

Spectranetics disclaims any intention or obligation to update or revise any financial projections or forward-looking statements, whether as a result of new information, future events, or otherwise. Furthermore, this conference call contains time-sensitive information and is accurate only as of the date of the live broadcast, October 29, 2008.

I will now turn the call over to Emile Geisenheimer. Emile?

Emile Geisenheimer

Good morning, everyone. Thank you for joining us today. I will begin today's call with a review of recent events and why I'm so confident in Spectranetics. Guy will follow with a more detailed review of our third quarter performance and then we will take your questions.

As you know, Spectranetics has recently faced some unique challenges. The Board has been dealing with these challenges since April when an employee of the Company raised concerns about certain Company activities. At that time, an independent committee of the Board retained outside counsel with extensive experience in FDA rules to look into the matters raised by the employee, and this review is ongoing. The Company is also continuing to cooperate fully with the FDA and with ICE to resolve these issues that they have raised. While there is not any additional detail that I can provide at this time, it is important to note that we continue to expect that business operations will continue in the ordinary course and indeed they are. It is also important to note that we are committed to insuring the highest standards of business ethics and regulatory compliance, both now and into the future. Our physician customers remain very supportive of the Company, and we're excited about Spectranetics technology and the benefit it creates for their patients.

During the quarter, Spectranetics products were showcased in three important scientific meetings, including VIVA, New Cardiovascular Horizons, and TCT. This included podium presentations, successful live cases, and well attended Spectranetics-sponsored symposiums. We are pleased with the exposure we gained through our participation in these conferences with our physician customers. We are even more pleased by the level of interest in our products that so many physicians expressed. The marketplace clearly recognizes that we offer an important treatment option for patients with peripheral artery disease, and the premiere treatment for lead management.

The Board and I are confident that with the leadership change we've recently announced, we're taking an important step towards putting our challenges behind us, so that we can build on a solid foundation that we have in place.

As many of you know, I've been a Director of Spectranetics since 1990 and I've served as Chairman of the Board since 1996. I also served as Acting CEO of Spectranetics from 2002 to 2003. So while I am in an expanded role, it is not a new one for me. I have been involved with Spectranetics for 18 years, and have almost 30 years of experience in the medical technology industry. I know this Company and our industry well, and with this knowledge base, I am very enthusiastic about Spectranetics and our market position.

Our solid operating performance in the third quarter reinforces this enthusiasm. For example, revenues increased by 26% and we posted our most profitable quarter of the year. We grew our install base by 25 laser systems. As a result, we now enjoy strong market position with more than 800 systems installed worldwide. Our balance sheet is also strong with $44.1 million of cash and invested securities and no debt. This strength provides a financial flexibility we need to support our continued growth.

We're very pleased with the dedication and focus of our employees, including our sales force, which has really done an excellent job. Even with the potential distraction, September was our strongest month of the quarter. And to-date, I'm pleased to say October sales are slightly ahead of July sales, each being the first month of the quarter, which is exactly where we expect to be at this important stage in the quarter. This sustainability of our performance is a testament to our Company's strength, namely Spectranetics people, our technology, and our strong customer relationships.

Over the years, we made important investments in expanding our talent base. For example, in the last three years, we've made key hires on the management team, doubled our US sales force to 111 professionals and expanded our sales and marketing outside of the United States as well. We've also significantly strengthened our product development, clinical research, regulatory affairs, manufacturing, and quality assurance organizations, with the addition of key staff. As a result, we now have a championship team in place with the goal of delivering self sustainable, profitable business model.

In addition to the recognition that we've received at the three conferences that I mentioned, Spectranetics success is also recognized locally here in Colorado. Last month, Spectranetics was named the number one technology company in Colorado by Colorado Business Magazine. In addition, Fortune Small Business has ranked Spectranetics 33rd on the annual list of 100 fastest-growing small companies in America. It marks the third consecutive year that Spectranetics has appeared on the list. We're very proud of these awards, which both recognize the contribution of our employees and have served to energize the entire organization.

All of us, the management team, the sales force, and all of the dedicated employees throughout the organization, are committed to making sure that our customers are receiving the superior service and product support that they have come to expect. Maintain close relationships with our customer, not only at the CEO level, but at every level of the organization is a key priority for us, and I am personally focused on this.

Looking ahead, we're committed to building on our success. This means continuing to work towards the resolution of the challenges we face, continuing to execute on our business plan, continuing to provide our physician customers with superior service and product support that they have come to expect. Given the strong team we have in place and the momentum we are seeing, I'm confident that we can execute on these goals and build on the strong position in the markets that we serve.

Now, I would like to turn the call over to Guy for more details on the quarter. Guy?

Guy Childs

Thanks, Emile. I am pleased to report revenue of $26.8 million, up 26%, compared with the $21.2 million during the year-ago quarter and represents a 1% increase over the second quarter of 2008. Our vascular intervention business increased 19%, compared with the prior year quarter, and was down 3% sequentially on a seasonally slow quarter. The year-over-year growth was supported primarily by growth in our Quick-Cross support catheters and the products acquired early this year from Kensey Nash, which totaled $1.3 million the quarter, the first full quarter of marketing these products.

Our lead management team executed another outstanding quarter, posting 49% year-over-year growth and 4% sequential growth. We continue to believe that the business will generate revenue growth for the foreseeable future as a result of favorable market dynamics, our market-leading position, and the highly capable expanded sales organization we've established in this area.

Laser revenue was $2.4 million, increasing 21% compared with the year-ago quarter, and was also up 10% from the second quarter of 2008. We were also pleased with net laser placements of 25 during the quarter, which were in- line with our expectations, and compared with 20 placements in the year-ago quarter.

Service and other revenue also posted growth, up 18%, compared with last year, and 2% from the second quarter of 2008.

On a geographic basis, US revenue was $23.2 million, up, which represents 86% of worldwide revenue. And increased 23% on a year-over-year basis, and 1% as compared with the second quarter of 2008. Revenue outside the US this quarter totaled $3.7 million, which was up 66% compared with last year, and consistent with second quarter revenue.

The international growth in the quarter was driven by strong sales in Europe of our thrombosis products acquired from Kensey Nash Corporation as well as lead management product sales. Within our international business, sales of products acquired from Kensey Nash totaled $700,000 or 54% of worldwide sales of these products.

Gross margin for the third quarter was 72%. This is down from 74% from the year ago quarter, and flat on a sequential basis. This decrease was due primarily to previously announced cost increases, associated with an expanded lease facility, as well as increased quality assurance costs to support the growth in our manufacturing volumes.

Pre-tax income for the third quarter of 2008 was $615,000, inclusive of the $422,000 of costs associated with the ongoing federal investigation. This compares with pre-tax income of $844,000 for the year-ago quarter. Our third quarter pre-tax income excluding investigation costs was $1.37 million and is better than our internal expectations. We continue to believe that pre-tax income is the most relevant measure of our profitability, as income tax expense is a non-cash expense, due to historical net operating losses available to offset our taxable income.

Cash, cash equivalents, and current and current and non-current investment securities totaled $44.1 million as of September 30, 2008, compared with $54.4 million as of the end of 2007. As previously announced in the second quarter, the Company paid $10 million to Kensey Nash upon closing of the acquisition of their endovascular product line.

The Company currently holds $15.9 million of auction rate securities within its non-current investment securities, including a temporary impairment write-down of $1.8 million recorded during the quarter based on a preliminary analysis performed by a third party with expertise in valuation of these securities. This temporary impairment has been recorded within other comprehensive loss, and did not impact the calculation of earnings per share during the quarter. A further adjustment will be recorded if required, based on completion of the analysis. We believe we have the ability to hold these student loan-backed securities that have a AAA credit rating until liquidity returns to this area of the credit markets.

I will close with some commentary on our updated financial guidance for 2008. The Company expects revenue to be within the range of $105 million to $106 million, representing 27% to 28% growth compared with 2007. This compares with prior guidance of $104 million to $110 million.

Pre-tax loss for 2008 is expected to be within the range of $3.4 million to $4.5 million. Including the $3.8 million of IPR&D costs recorded during the second quarter, and costs associated with the ongoing federal investigation in the range of $1.5 million to $2 million. Excluding these costs, the updated guidance for pre-tax income is in the range of $1.3 million to $1.9 million. This compares with prior guidance of $1 million to $5 million, excluding the IPR&D costs mentioned earlier.

Management believes that excluding IPR&D costs and the legal and other costs associated with the federal investigation from our guidance for pre-tax results, facilitates comparison of our forecasted results of operation, with our previous guidance that did not include these costs, as well as the financial results of other companies that do not include costs of this nature. The Company believes the pre-tax income is the most relevant measure of its operating performance as stated earlier.

In assessing the Company's financial guidance, Spectranetics management considered many factors and assumptions including, but not limited to, current projected sales trend data, status timing progression of the Company's product development projects, costs associated with the ongoing federal investigation, current projected spending levels to support sales marketing, development, administrative activities, and anticipated timing and costs associated with the relocation and consolidation of its headquarters and manufacturing operation, and other risk factors discussed in Spectranetics publicly-filed documents.

Now, we will open up the call for questions. Before we do that, I would remind investors that in addition to Emile, myself, and Will McGuire, our Chief Operating Officer, we have with us Mike Vos, our General Manager of Vascular Intervention and Jason Hein our General Manager of our Lead Management Business unit. With that, I will turn the call over to the operator.

Question-and-Answer Session

Operator

(Operator Instructions). Your first question comes from the line of Amit Bhalla with Citi.

Amit Bhalla - Citigroup

Hi, good morning. I wanted to start with a question on the investigation and primarily directed to Emile. Emile, can you talk about whether or not there was any internal investigation that may have led to the departure of John Schulte along with the other managers within the Company. Also, give us a little bit more color on the ICE portion of the investigation.

Emile Geisenheimer

I've looked through a combination, but I'm not going to spend a lot of time talking about the details of the ongoing investigation. In my initial remarks, I did say that beginning late last spring, the Board, through a special committee of the Board, made up of independent directors, did engage counsel skilled in conducting internal investigations in matters of this kind, particularly with regard to FDA regulatory matters. That investigation is ongoing and it would be inappropriate for me to comment any further than that. I thought it was important that everyone know that the Board took that action at that time and that we have those experts involved and the matter is ongoing.

Amit Bhalla - Citigroup

Maybe a couple of follow-ups then in terms of the actual business itself. Can you give us an early read on what you're thinking about in terms of growth rates for the VI and lead management business? As we look out into 2009, specifically in VI, should we be thinking in the 10% range or 15% higher? And lead management, talk about the sustainability of 30%-plus growth.

Emile Geisenheimer

I think I will pitch that one to Guy.

Guy Childs

Sure. Amit we're in a very early stages. In fact, next week, we're going to ramp up and go deep relative to our 2009 planning process. Given that we're not deeper into that at this point, I would hesitate to comment on any 2009 guidance. We do anticipate, just as we have in past years, providing guidance for 2009 in top and bottom line in our fourth quarter call, which we anticipate to be in the latter part of February.

Amit Bhalla - Citigroup

Can you provide some color then on the pricing versus volume trends on the disposable business in the current quarter? And also comment on atherectomy itself, the growth rate, if you X out Kensey Nash was about 8%, and then I just have one follow-up on expenses.

Guy Childs

Relative to the VI piece of the business, we indicated that that was up 19% year-over-year. And that was driven by our Quick-Cross support catheters as well as a full quarter of Kensey Nash. Having said that, unit volumes were relatively flat compared with last year. And there was no meaningful pricing changes in any of those businesses.

And when I say unit volumes being flat, I'm referring specifically to our atherectomy business. Not unexpected given the intensifying competition in this area, we're in the early stages of new competitors in the market. That does not take away anything from our belief in the sustainable competitive advantage of our products. Time will tell relative to the impact of competition over time. I think it is very early and the trialing is ongoing. We continue to feel very good about our product offering in that area, and we anticipate adding to it in the future.

Amit Bhalla - Citigroup

And just the last question on expenses, on the SG&A side, even with the legal expenses, it looks like you reined in SG&A for the third quarter when historically it has grown from 2Q to 3Q. What is sustainable going forward? And where are you cutting back on spending? Thanks.

Guy Childs

Sure. The main difference there is, we did not expand the sales organization during the quarter in any meaningful way. As you know, we began to add reps the latter part of last year, particularly into the dedicated lead management unit. We believe we're approaching critical mass there on both sides of our business, in VI and lead management. And as we said before, we're at the point now where we can moderate the growth in sales professionals. It doesn't mean that we're not going to grow it from here, but it is certainly going to moderate from historical levels, and that's the main driver of SG&A costs.

Amit Bhalla - Citigroup

Was there any sales force turnover that you could speak to?

Will McQuire

This is Will. I can speak to that. It wasn't radically different than anything we've seen in the past. We had in Q3 a total of 10 sales people leave the Company. And out of those 10, I believe only four were voluntary. The others were initiated by us.

Amit Bhalla - Citigroup

Thank you.

Will McQuire

Sure.

Operator

Your next question comes from the line of Matt Dolan with Roth Capital.

Matt Dolan - Roth Capital

Hi, guys. Good morning.

Guy Childs

Good morning.

Matt Dolan - Roth Capital

A couple I guess qualitative questions here. In terms of the investigation, what are you hearing -- it looks like September was strong, which is nice to see, and October is coming in, at least in line with your expectations. What are you hearing anecdotally from physicians out there with respect to their perception of the laser devices, their safety and efficacy, both just from the investigation, as well as the suspension of salvage which is really the first time any nitinol stent interaction concerns were publicly brought up to the physician community. And based on that feedback, how do you expect that to impact your expectations for the business over the next year?

Emile Geisenheimer

I will start that and then maybe some others, my colleagues may want to chime in. Down at the New Horizons conference right after the events with the FDA and ICE, and I saw quite a large number of physicians, who I know well and who are our customer, and do a lot of work with our products.

Each and everyone of them expressed confidence in our Company. They expressed the intention to continue to use our products. They expressed surprise that anyone would raise any safety questions. After all, our device has been in the marketplace, used clinically, for over 15 years, and many of these physicians have used it for all that time.

So, what I got was, it was shocking that anyone would even suggest that there are safety issues. And indeed, I am here, having been involved in this Company for a very long time to tell you, I am highly confident that there are no safety issues with respect to our products, approved or cleared indications of use.

With respect to the nitinol stent interaction question, I can't tell you what is going to happen with the salvage trial, because as I believe you would probably know, the salvage trial is being conducted under a physician-sponsored IDE. So, the company which is supporting it financially and technically is not in control of the study.

So, it is up to the IDE holder to do that. At the same time, we have submitted extensive safety data to the FDA that, frankly, shows that there is no difference in failure rate of stents extensively exposed to the laser than the failure rate of stents not exposed. Indeed, there were no failures in our tests of stents exposed to lasers.

So, we're highly confident that whether or not the trial restarts, it is certainly not connected with the safety of the laser.

Mike Vos

Matt, I would like to add to some of Emile's comments. This is Mike Vos. In talking to our physicians, they're very supportive of us. They understand that this is obviously difficult to go through. But what is most important to them is there are no issues with safety and efficacy of our products.

So for them, it really is business as usual. Certainly, they find the laser to be an important tool within their toolbox of products to use to treat their patients. And to be honest with you, that is why we're seeing not any significant dip in sales at all. So, we still feel very confident and physicians are very confident in the product and in the Company.

Matt Dolan - Roth Capital

Okay. Great. That's very helpful. And second question, laser placements exceeded what we were expecting in the quarter, but even since September 30, really, into October here, we've heard a change of tone from some of the hospital purchasing employees that we have spoken with, in terms of the economy, and credit and ability to acquire capital equipment. How should we look at that tracking here into next year? Is that something where we might think about handicapping it because of the current economic environment or what specifically are you hearing relative to what we're getting from other companies?

Mike Vos

Yeah, Matt, this is Mike again. Certainly, as you look at the programs that we have in place, it is not just a complete acquisition of the product. We also have other programs that allow them to be able to have these devices placed within the hospital and still be able to use it going forward.

I can tell you that even our training physicians is still significantly on the increase. There is a lot of interest that is out there. And really, this is physician driven because they see this again as an important aspect of their treatment therapy for patients going forward.

So again, we're not hearing that on our end. We think there is still a lot of upside here and our forecast for laser placements, internally are still very strong.

Emile Geisenheimer

Let me answer that. This is Emile speaking. Some years ago, the Company sales revenues were significantly capital equipment sales, and we took a strategic decision at the board to transform the Company from being dependent upon capital equipment purchasing cycles in hospitals to becoming a single use disposable product business. To do that, we have structured a number of programs that take the capital acquisition part of the equation off the table, with respect to hospital decision making.

Matt Dolan - Roth Capital

Sure. Fair enough.

Jason Hein

Excuse me, Matt, this is Jason. I was just going to add that on the lead management side, we have been able to grow as well. And outside the financial issues going on in the greater economy, we have been able to add lasers and develop new accounts through these programs that Mike mentioned. So, a lot of the accounts don't have money budgeted for a laser. They might want to add something mid-year. So, that challenge has been out there even before the greater economic discussion.

Matt Dolan - Roth Capital

Sure. And I understand. We're just hearing beyond even capital equipment. I guess, I used the wrong terminology, but purchasing in general, whether it is capital equipment, or certainly sizable orders of disposables are now, especially in October, hearing some headaches. But fair enough. Appreciate the feedback.

And finally, just a follow-up on the sales force, you touched on it a bit here, in terms of turnover, any plans next year to expand the numbers in either business segment?

Emile Geisenheimer

Well. Emile, again. As Guy mentioned, we're about next week, in fact, to start intensive planning exercise for next year. So, we will have better insight on that after that process. But I would also say echo Guy's feelings. We put together a strategic plan some years ago when I was acting CEO, and the Company's been right on that plan that Guy and I worked on all that time ago. And about this point in time, you reach your level of critical mass, and you begin to see an opportunity to moderate the growth and direct people to increase the revenue per person and to drive towards a sustainable profitable business model that we've talked about and in my remarks that Guy has mentioned earlier.

So, I can't tell you the numbers. I will probably discuss that a bit maybe in our guidance call in February. But we're on that issue, and we will certainly be looking at that.

Matt Dolan - Roth Capital

Great. Thank you very much, guys.

Guy Childs

Thanks, Matt.

Operator

Your next question comes from the line of Jason Mills with Canaccord Adams.

Jason Mills - Canaccord Adams

Thanks for taking the question. Guy, I want to get into the number a little bit on the atherectomy side, specifically US atherectomy. Last year at this time in this time in the third quarter, you just launched TURBO-Booster, you hadn't had a chance to launch it fully and you have now got sort of a redesigned TURBO-Booster out there in field. But yet, volumes are flat year-over-year.

So, I'm just wondering if you -- and I know it is difficult to back out, but TURBO-Booster is incremental, as I understand it, to the laser catheter sale. In other words, you have to buy a laser catheter or use a laser catheter along with TURBO-Booster, and obviously in some cases, you don't use the TURBO-Booster if you don't need it for a smaller artery. So, I'm wondering, if you are able to give us some sense for really procedure growth within your business. If it is flat on a unit volume basis, it seems like it may be down a little bit on a procedure volume basis. Is that fair?

Guy Childs

Possibly, slightly, Jason. The is the TURBO-Booster is an important part of our product offering. We have been public in saying that it has not met our expectations to-date in driving ongoing growth above the knee. However, despite the tweaks we've made, and it has impacted ease of use, however, we do believe that we have opportunities to improve that product. I will let Mike speak to the plans there.

But the TURBO-Booster 2 is moving through the design phase, and we do believe that will be an important part of our product offering going forward. But we're just not where we need to be yet. And as with any new product launched, there are areas to improve it, and there are many areas that we believe we can improve and look forward to that with the TURBO-Booster 2.

Jason Mills - Canaccord Adams

Okay.

Mike Vos

Jason, this is Mike. Let me add to that. If you look at our sales in TURBO-Booster, certainly, we've placed a lot of emphasis and focus on that, since the launch. And we do see there is approximately a 30% growth over last year in our TURBO-Booster sales. But it is not nearly what we expected it to be. Certainly, the area that we're focusing on above the knee with the TURBO-Booster that is certainly where all the competition is as well, so it is a very competitive area.

We do know there are some areas to improve upon, ease of use being one of those. We actually did a physician evaluation of TURBO-Booster 1 just recently, so that we could utilize that data to have a direct influence on the design specs going forward for the TURBO-Booster 2.

So, we're utilizing that information, making sure we're getting all the correct market information and physician feedback because we feel that we have a very good solution for TURBO-Booster 2 that we expect to launch in the second half of 2009.

Jason Mills - Canaccord Adams

Second half of 2009 is the plan? Okay. That's helpful. And Emile, I wanted to get back to a comment you made to one of the first questions, about the investigation. You said that at the board level, you initiated an internal investigation. I think you said sometime in the late spring time frame. And I'm curious about that timing, given that the investigation from FDA and ICE came to light in, was it, August. Did you guys see something that you didn't feel comfortable with three or four months earlier than the actual investigation by FDA and ICE that resulted in this internal investigation? And does that have any implications for -- I guess if you did see some stuff, why wasn't that brought to light?

Emile Geisenheimer

Well, let me clarify that. I said in my remarks, let me repeat it, that we learned of an employee complaint, raising certain issues, and in response to that, the special committee of the board retained attorneys skilled in doing investigations on issues such as those raised, and that investigation is still ongoing. We certainly at the time, leading up to the visit by the federal authorities, had not completed an investigation, nor did we expect them to arrive that day. So, I believe that should have answered your question.

Jason Mills - Canaccord Adams

Okay. So, I'm sure you get employee complains more than once. Most companies do. So, I'm just -- I'm guessing here, but correct me if I'm wrong, my guess is that internally at the board level, you're not opening an internal investigation or hiring a reputable high-powered firm for every employee complaint. Am I right? And so, this one seemed, perhaps was somewhat unique but yet, it was three or four months between the opening of an internal investigation, based on what I am guessing is a more unique employee complaint, and the FDA investigation. I'm just trying to get a sense for why we didn't, I mean, am I right to I guess the first question is, am I right to assume that this employee complaint was a bit unique and perhaps a bit more disconcerting? It obviously is, right because --

Emile Geisenheimer

I really don’t -- I am not going to comment on that. I would like to, but when we have an ongoing investigation of this kind, it’s not appropriate for me to make any comment.

Jason Mills - Canaccord Adams

Okay. Last question on the business development front, it’s our understanding and I think you released it last week, that many of the folks in the business development area that were hired within the last 18 months or so are no longer with the company. I guess it seems prudent to kind of focus internally, but I’m wondering, does this have any implications for the future in terms of Spectranetics desire to get into other businesses that could help leverage its position in vascular intervention or lead management?

Emile Geisenheimer

I think the proper answer to that is stay tuned as our strategy may evolve with that. But, I can comment that I’m personally of the opinion that we have a very deep set of opportunities for internal development, which would always get in, in my mind first priority. As we explore the expansion of our business through products, we will first look inside, and I can tell you that, at the moment, M&A activities, external corporate development activities, are not our focus.

Jason Mills - Canaccord Adams

Okay. And then, I guess one just final question. On a positive front, lead management business continues to knock the cover off the ball and obviously Jason and his team are doing a fantastic job. To follow up on a question previously, are we seeing -- I know that Will has talked in the past about the size of that opportunity, the penetration rates of that opportunity. I think 100,000 leads is really a target market. Is there any way we could contemplate it being bigger than that, or is that still what you’re thinking, Will, in terms of the opportunity seemingly of what you’re 20%, 25% penetrated into at this point?

Will McQuire

Yes, I’ll let Jason take that.

Jason Mills - Canaccord Adams

Yes, okay. Hi, Jason.

Jason Hein

This is Jason. We spoke about this in the past. The market is truly there. And the growth potential is going up. I think at a high level, just to make everyone understand the opportunity with over 4 million leads in patients today, half have gone in the last five years and somewhere north of 800,000 new leads are going in every year. Patients are living longer, etcetera. That market is only growing. The early expectations of nearly 100,000 is the short range opportunity for the attraction business. I think that is still legitimate and the comment is it is still growing at those rates in the bigger market.

Jason Mills - Canaccord Adams

Thanks, guys.

Emile Geisenheimer

Thank you.

Operator

Your next question comes from the line of Brian Kennedy with Jefferies Group.

Brian Kennedy - Jefferies Group

Hi, guys. How are you?

Emile Geisenheimer

Doing well, Brian.

Brian Kennedy - Jeffries Group

Regarding the top-line guidance for 2008, the implied fourth quarter guidance looks pretty strong and I realize you won’t break down explicitly the atherectomy versus lead removal, but can you talk a bit about what you’re assuming in terms of stocking and trialing for competitive atherectomy devices?

Guy Childs

It’s tough to pinpoint. I’ll start and maybe Mike will add a comment here. We are pleased as Emile mentioned in the script that our VI -- that our business is up in October verses what it was in July. I will say that is the case in both VI and lead management. So we’re pleased with that. We’re right where we would expect to be. We do have a new dynamic with another new competitor entering the market. It is difficult to quantify that with specificity but we’re encouraged that we’re up at this early stage of the quarter in both segments of the business.

Mike Vos

And Brian, this is Mike. I’ll add too, that as Emile mentioned earlier, we know there are competitors on the market. Certainly there is going to be a trialing period. That is expected. We certainly are monitoring that very closely. We know where our competitors are. We know which accounts that they’re in. So we feel like we have a pretty good handle on that.

But, what is unique is at the end of the day, our physicians always come back to the laser so we feel there is a significant opportunity going forward. And also, you have to recognize the fact that we have made changes in Q3 from a management structure within the VI business and we’re putting together our strategy going forward, and we have an extremely strong sales management team in-place now. And internally, we’re focused on new product development. So again, I think we’re doing all the right things moving forward.

Brian Kennedy - Jefferies Group

Okay. And a lot of my questions have been answered at this point. I wanted to ask about the Kensey Nash revenue. Can you explain why it is selling well overseas, and maybe give some color on specifically what products? I assume that is largely QuickCat. But can you discuss that?

Guy Childs

Yes, I can provide some background there. It is largely QuickCat. However, the ThromCat is selling at a higher level in Europe than it is in the US, and that is primarily due to the fact that in Europe, the CE mark, the endovascular indication, it is a broader indication that exists for the ThromCat in the US which is for AV access grafts. We look forward to pursuing the opportunity to expand the indication of the ThromCat in the United States. But first, we look forward to the next generation ThromCat XT device and then we’re in the process of evaluating the regulatory strategy to expand the indications there. Once we achieve that, we will begin more aggressively marketing that product in the United States.

Emile Geisenheimer

Let me add color and clarity to that. We’re explicitly not promoting that product for vascular use, but it is being sold with the label that it has. And we’re not commissioning sales people for sales of the product. So, the sales in the US, until we have both the new version of the product and an expanded, it will be very small.

Brian Kennedy - Jefferies Group

Okay. And how much of Kensey sales are in the ‘08 guidance? And maybe if you could comment on just what you think the near-term sales opportunity is for those products. I recall that Kensey’s CEO pegged it somewhere between, I think $8 million and $10 million annually. Do you agree with that or do you see something more significant?

Guy Childs

I think there is a potential for that level and beyond. I think it is highly dependent on the next generation ThromCat with expanded indication. I think that is a key to going beyond that level and hitting that level in the short term. Relative to the fourth quarter, I would expect some growth on a sequential basis within that product line. Not in a position to quantify that, but would expect some sequential growth in Q4.

Brian Kennedy - Jefferies Group

Okay. And –

Mike Vos

And Brian, this is Mike. I’m going to add to that. With our focus right now with the Kensey Nash products, right now our primary focus is on the QuickCat aspiration catheters. We have seen quite a big step-up in our sales there. In fact, we are trending to be certainly above where Kensey Nash was for that product line. And as Guy has mentioned, we are really focused on the next generation of the ThromCat XT and also the Safe-Cross CTO device.

Brian Kennedy - Jefferies Group

Okay. And if I could get a last question in. Just quickly regarding the SALVAGE trial, has there been any interaction with the FDA since you submitted the bench testing findings?

Emile Geisenheimer

As you might expect, we’re in communication with the FDA with some frequency on a number of routine matters. With respect to the specifics of this, I don’t think so.

Brian Kennedy - Jefferies Group

Okay.

Mike Vos

But if I can add to that, if you want, Emile. The one thing we had done, when we did submit all of the safety data that he have, we did have a conversation call with them to walk them through the data. And they certainly felt very comfortable with that. But they needed their own R&D, or engineers, to come through that, and they are doing that at this time.

Brian Kennedy - Jefferies Group

Okay. I appreciate it. Thank you.

Emile Geisenheimer

Thanks, Brian.

Operator

Your next question comes from the line of Joshua Zable with Natixis.

Joshua Zable - Natixis Bleichroeder

Hi, guys. A lot of my questions have been answered. So, I just have a couple of follow-ups here. Thanks for holding the call. Just quickly, I know you talked about it a little bit as far as what you are seeing in September and October looked fine. I think someone asked about capital equipment earlier and you talked about -- I know you have cat free programs and whatnot. But can you talk about volume, just because obviously I think some of this is elective stuff coming in for people to go, especially the referral sources on the podiatrist side, sort of voluntarily going, and with the economy, it is what it is. But I guess can you just give us a little bit of color as just a volume perspective, if you’re seeing any slowdown at all, or any effect the economy is having?

Mike Vos

Sure, Joshua. I can take that. Well, this is Mike. We have seen – there has been, in certain cases we have physicians that talked about, we have seen in their practices, we said we saw a slight decrease where patients had not been scheduling. The reason for that, they had mentioned, there were several, but some of those were the fact that patients are saying that they were concerned about the cost of gas, they had to travel to the appointment, the reimbursement costs, potential time off of work those types of things that they were concerned about.

But it is unique, in fact, where when you talk to them, they see that it becomes more of a spike of activity, and then a lull, and then a spike of activity. I think if you leveled that out, you may see a slight decline, but I don’t think it is going to be anything drastic.

Joshua Zable - Natixis Bleichroeder

And so, I mean we talked about growth rates on the atherectomy side, specifically it’s like 10% to 15% in general, and that’s a pretty wide range. I mean, would you say we’re still in that range of growth? And again, obviously it’s a pretty wide range, given this sort of decline, if there is any?

Mike Vos

Well, I think if you look at what some of the third-party sources are, that are out there, like the Millennium Group, they are quoting for procedural data, you are looking at around 12% growth rate. And we feel that is probably pretty consistent.

Joshua Zable - Natixis Bleichroeder

Okay, cool. And then just a quick one for Emile. I know obviously coming in under rare circumstances, or interesting times, I guess, is there anything from a strategic standpoint that you’re going to look to do once you -- I know it’s in the early goings, but as far as stepping into the company now, and taking over the leadership, is there any sort of thing we should expect to see changing?

Emile Geisenheimer

Let me first comment that I’ve been intimately involved in the strategy formulation of this Company for a very long time. The existing strategy is something that I certainly feel I have some ownership of. Having said that, I am a different person and I have different emphasis here and there. I probably mentioned, I probably have a lesser appetite for M&A activity than has been expressed in the past.

I probably have more of a focus on economic models of the business and moving -- making decisions to balancing growth and growth in earnings. And so there will be some differences, but I don’t think you will see anything radically different.

Joshua Zable - Natixis Bleichroeder

Okay, great. Thanks very much for taking my questions, guys.

Mike Vos

Thanks, Josh.

Emile Geisenheimer

Thank you.

Operator

Your next question comes from the line of Charles Chon with Goldman Sachs.

Charles Chon - Goldman Sachs

Good morning, everyone. Thank you for taking the question.

Emile Geisenheimer

Good morning.

Charles Chon - Goldman Sachs

Just a couple of follow-ups. The first relates to the investigation. You gave us a fair amount of color around the investigation related to the laser stent interaction issues. Can you tell us where we stand with respect to some of the other components of the investigations, such as the post-market studies that were the subject of the inquiries in September?

Emile Geisenheimer

No, I’m afraid I can’t. I’m not going to comment on the ongoing investigation.

Charles Chon - Goldman Sachs

Okay. Is it fair to assume that the comments and how you guys isolated to just the laser stent interaction issue, that the investigation is being done piecemeal? I’m just trying to get a sense of what we could expect next, just because it would be nice to know, or at least set expectations on Wall Street, as to what we could expect.

Emile Geisenheimer

Charles, I would love to be able to help you, but I’m not going to comment on the investigation. I would like you to -- what I can say is that I believe that the management team and the organization, the people in place, our strong technology base, our great relationship with our customers, the wide and deep knowledge base in the company, all of our strategic assets that we continue to deploy, and the company will go forward and our day to day operations are not affected by this.

Part of my job is to insulate this operating team from any distractions from the ongoing investigation. We’re going to work very hard to grow this company and to demonstrate sustainable, profitable model of the business going forward, and I’m very pleased to be here, to be part of this team. It is a bunch of great people who really know their business and know what they’re doing. You have a deep, deep team, it is not shallow, there are lots of people here that are strong and this will be a great opportunity ahead of us.

Charles Chon - Goldman Sachs

Okay, great. Guy, just one housekeeping item. And then I’m sorry if I missed this on the call. But with respect to the $400,000 in legal and other costs associated with the investigation, did you disclose where that is located in the P&L?

Guy Childs

I did not. But it’s in the SG&A line.

Charles Chon - Goldman Sachs

Okay, great. Thanks. And my final question is for Will. Will, could you give us a quick status update on the manufacturing facility relocation?

Will McQuire

Sure, Charles. I think we announced on the last call we started shipping 510(k) product and that’s what we’re still doing now. So, we have moved two of our three Quick-Cross lines and three or four fiber atherectomy lines to federal and are shipping the 510(k) product. We have also submitted a site change package to TÜV, so that we can start shipping our CE-marked product at the new federal building as well. And we would hope to get a positive response back from TÜV sometime this quarter for sure. The next step would be then the submission of a site change notification to the FDA and that would be for PMA products. At this point, the exact timing of that submission has not been

Charles Chon - Goldman Sachs

Great. Thank you very much.

Will McQuire

Sure.

Operator

Your next question comes from the line of Spencer Nam with Summer Street Research.

Spencer Nam - Summer Street Research

I just have a couple of quick follow-up questions and then one final question for Emile. The quick follow-up questions are first, I think Emile mentioned that the cash position was $44 million. But the balance sheet only indicates $27 million. Where does the difference come from?

Guy Childs

We ascribe that, Spencer. We include our non-current investment securities as well. And that total is set forth. It’s a separate line on the balance sheet. So, we have $26.8 million in cash and current investment securities, and the remainder, non-current of $17.3 million, most of which is the auction rates that I referred to.

Spencer Nam – Summer Street Research

Okay. Appreciate that. And then in terms of sales force, overall number, do you guys have a number, what the net sales force number was between end of last quarter and then end of – I am sorry, end of quarter two and end of quarter three?

Mike Vos

Sure. We ended up quarter two at 110, and we ended up quarter three at a 111, and the growth was one person on the VI side.

Spencer Nam – Summer Street Research

Okay. Great. So final question I have for Emile is this. Emile, obviously, as we all know, the share price has been under significant pressure because of the overhang, which obviously for legal reasons and other reasons you cannot comment. So essentially, on the street, when the investors look at Spectranetics, we are looking toward you, because you are the only person who has really changed from the last quarter before this whole thing unfolded, the whole investigation unfolded. And you clearly are a long-term shareholder of the Company, intimately involved with much of the operations, but we are clearly still at the early stage to find out what kind of ability or the capabilities you bring to the Company to get the Company out of this situation, and then put it back on the path of growth. And I was just curious, what kind of long-term plan you have, with the Company. You were at one point Acting President and CEO, then you stepped back as a Chairman, and now you are back as Chief Executive Officer, do you plan to be as CEO indefinitely?

Do you plan to focus on this issue and then once the issue is resolved, you may address other topics? Could you just lay out, as we are really looking towards you, as we think about Spectranetics’ long-term value, it is you that who potentially could make a big difference here. We just want to get some better color from you on what exactly your role is going to be here, and how you are going to influence your ability to ride the ship, if you will?

Emile Geisenheimer

That is a really great question; I am happy that you asked it. First of all, to cut to the chase, the circumstances of the Company and my circumstances, last time I was acting CEO, are quite different than they are now. At that time, I was in the middle of the investment phase of private equity fund, and really could not offer myself as available to be full-time permanent CEO. So what I undertook to do was to stabilize the Company, deal with its immediate problems, put in-place a strategic plan and recruit a CEO. All of that was accomplished in about nine months, and moved forward. The Company has had a lot of success in the interim. This time, it is quite a different situation. Firstly, and frankly, so is the Company we have a very deep team of strong people here as I have mentioned, and I think there is just a really great opportunity ahead of us. And I will talk a little bit more about that in a second.

I personally -- that fund that I was in an investment phase of six years ago, is now a fully matured fund. It only has one Company left in it that I am on the board of. We are liquidating that and that will be completely gone in a few months. So, I have the time to do this and I intend to do it indefinitely. I have no -- it is not a short-term plan. My wife was out here the last week with me, looking at real estate. We will have a residence in Colorado. We will also maintain a residence in Connecticut that we have now, but I will be working 24/7, 365 for Spectranetics wherever I happen to be at the moment. This is a job that requires extensive travel and interaction with a lot of people, customers and others around the world. So, wherever I happen to be at any particular moment in time, I will be working for this Company.

I hope that answers your question. I am here with no end-date planned. I think the Company is at a stage where it needs to be developed. It is about to be a 100 million plus Company, and we that have some thought processes that look at taking it to the next level. The complexity of a business, it is a multi-national business, it is a multi-product line business and it has the potential to be a multi $100 million business. So my charter will be to develop the plans and programs to put in place the infrastructure and the systems and procedures which will be much more formal than a Company going from $25 million to $100 million. So that is a challenge for me.

The other thing that I bring to the party is I am experienced and skilled at sorting through extremely complex litigation situations. I have had that experience in the past in multiple environments and I have some sense for how to do it, how to set the priorities, how to manage the multiple legal teams and get their conflicts between them sorted through, and how to insulate organizations from being distracted by that mess. So that is another big part of my challenge, and I think I bring the skills to it.

So, I hope I am addressing your question. I have intimate knowledge of this business. I have had a list of customers that I asked the team, give me a list of doctors I should call, and I looked through the list and was pleased to note that I personally know about 60% of them. So this is a field in which I have maintained those relationships over the years and enjoy a pretty strong personal relationship with a lot of our customers. And I will continue to maintain those contacts and relationships which I think are important. At the same time, we have, as you witnessed today, some really strong people running these business units and our VP of International who is not on this call, but he is equally strong guy. And I am more of a delegator, I think, on those kinds of things. So, while I want to maintain those relationships, I don't want to be driving that. I want our leadership to do that, because they know how to do it, and there will be some differences there.

Spencer Nam – Summer Street Research

That is really helpful. Thank you very much for the comments. That really helps me out. Thanks.

Emile Geisenheimer

My pleasure.

Operator

Management has time for one final question. Your next question comes from the line of Charlie Jones with Barrington Research.

Charley Jones – Barrington Research

Just one. Hi, Guy.

Guy Childs

Hi, Charley.

Charley Jones – Barrington Research

I want to preface this without being too long-winded, but obviously the FDA has looked at your nitinol benchtop testing, and we haven't seen them pull any products or change anything. So, I hope you will take that to heart while you answer this question. But have you had any failures in your benchtop testing for nitinol stents and if so, how is your benchtop testing different than the way physicians use the product?

Emile Geisenheimer

Maybe I should handle that one. This is Emile speaking. You may or may not recall that we did extensive benchtop testing, life testing of stainless steel stents in the coronaries some years ago.

Charley Jones – Barrington Research

Right.

Emile Geisenheimer

And those tests were also submitted to the FDA. And that was to get an indication for use in-stent restenosis in conjunction with brachytherapy in which we succeeded in receiving. The nitinol stent testing is fundamentally similar to that. It is a bench model in which the stent is exposed to LASER energy at a prescribed angle of bend in the tubular material that you use in a bottle, and it is exposed at fairly high energy and rep rates. And then when those stents are so exposed, go through a life test, where the stent is flexed through a number of cycles that are intended to simulate, I believe, it is 10 years lifecycle, life. Then we look for -- and the same thing is done to a set of controlled stents that are not exposed to the LASER energy, and we look for any difference in the fracture rate or damage rate or failure rate of the stent. It turns out there was not only no difference, there were no failures, period. So the tests were very successful for the LASER, and we are very pleased by the results.

Charley Jones – Barrington Research

Great. That's what I wanted to hear. Have you tested all of your LASER generators in the field for your compliance with your manufacturing standards, and have there been any issues with the LASER compliance for any compliance issues there? Have you found any issues out in the field?

Will McQuire

We don't know of any issues in the field related to LASER compliance, and there has not been anything that would tell us we need to go test our lasers. I mean, they are serviced at regular intervals and the field service group services them and tests them and makes sure that they are within the prescribed energy levels and everything else. So no issues there that we know of.

Charley Jones – Barrington Research

Thank you. I appreciate that. How many physicians will you train in 2008? And if you could separate VI and lead management and compare that to last year, Will?

Mike Vos

Yes, Charlie, this is Mike. I can give you kind of an update on where we are year-to-date on the VI side. If you look currently right now, we have about 192 physicians go through our Summit training, and we had a total of about 238 went through our regional training. So, year-to-date, we are looking at approximately 430 physicians that have been trained. And certainly, we look to continue that trend going forward. So it is about 120 for Q3 and we expect to do something similar to that in Q4 on the VI side.

Jason Hein

This is Jason. For the lead management side, we are tracking to probably about 125, 135, in that range for the year. Probably a third of those were through large summits we did at the beginning of the year, and the rest would be some of the smaller one-on-one traditional training. Keep in mind, some of those physicians train, a good number were actually second and third physicians within the account. So they wouldn't correlate directly to new business as far as accounts but, of course, increased users.

Charley Jones – Barrington Research

Last question, thanks for all of the answers. Can you discuss, Will, your ongoing conversations with HRS and just whether or not you feel they are moving forward with the potential change in the consensus statement? Any conversations or anything that has developed over the last two months? Thanks, guys.

Will McQuire

Charlie, this is Will. We will let Jason answer that question.

Jason Hein

As far as the HRS meeting, that was in May. The commitment that the committee made there was to re-write the extraction guidelines. If you know, back about 10 years ago when that was done the first time, the guidelines first came out, it took roughly two years for the final version to hit the street. Their commitment out of the HRS meeting in May was to have that revision done within a year. So when we go to the next HRS meeting in Boston in May, that that will be on the street. Right now, I am under the impression that they are sticking to their timeline. Their goal is to have a draft ready by the end of the year and have that open for members of the Society to review. And that seems to be on track and that review will occur in Q1.

Charley Jones – Barrington Research

Let me refine that. Do they have all of the data they need to do that or are they are continuing to ask you for data or physicians that have data to be able to make a decision?

Jason Hein

All of the data that is published, of course, at their disposable, there is new data coming and we obviously will be adding to that next year. But they have everything -- they need and the guidelines aren’t heavily weighted on day-to-day course. There is a body of data that is out there, but they are not looking for any additional data to complete that write-up.

Charley Jones – Barrington Research

Thanks again.

Jason Hein

Thank you.

Operator

That is all the time we have today for questions. Please proceed with your presentation or any closing remarks.

Emile Geisenheimer

Well, I would like to thank everyone for joining the call. I am very enthusiastic about Spectranetics and very proud to be part of this leadership team. I look forward to our next call and hope to speak with you all at that time. Thank you very much.

Operator

Ladies and gentlemen, that concludes your conference call for today. We thank you for your participation and ask that you please disconnect your lines.

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Source: The Spectranetics Corporation, Q3 2008 Earnings Call Transcript
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