Micrus Endovascular Corporation Q3 2009 Earnings Call Transcript

Micrus Endovascular Corporation (MEND)

Q3 2009 Earnings Call

February 5, 2009 10:30 am ET

Executives

John Kilcoyne – Chairman, CEO

Gordon Sangster – Chief Financial Officer

Robert Stern – President, COO

Analysts

Brooks West – Craig-Hallum Capital

David Turkaly – SIG

[Erica Selen – Stanford Group]

Amit Hazan – Oppenheimer

Suraj Kalia – Sanders Morris

Thomas Kouchoukos – Stifel Nicolaus

Spencer Nam – Summer Street Research

Ed Shenkin – Needham & Company

Presentation

Operator

Welcome to the Micrus Endovascular third quarter conference call. (Operator Instructions) I would not like to turn the conference over to Jody Cain.

Jody Kane

This is Jody Cain with Lippert Hielshorn & Associates. Thank you for participating on today's call. Joining me from Micrus Endovascular are John Kilcoyne, Chairman and Chief Executive Officer, Bob Stern, the company's President and Chief Operating Officer and Gordon Sangster, Chief Financial Officer.

This morning, Micrus released financial results for the fiscal 2009 third quarter. If you've not received this news release or if you'd like to be added to the company's distribution list, please call 310-691-7100 and speak with Amy Higgins. This call is also being broadcast live over the internet at www.micruscorp.com and a replay of the call will be available on the investor relations section of the company's website for the next 30 days.

Before we begin, I would like to caution listeners that comments made by management during this conference call will include forward-looking statements within the meaning of Federal Securities laws. These forward-looking statements involve material risks and uncertainties. For a discussion of risk factors I encourage you to review Micrus Endovascular's annual report on Form 10-K for the fiscal year ended March 31, 2008 as well as subsequent filings made with the Securities and Exchange Commission.

Furthermore, the content of this conference call contains time sensitive information that is accurate only as of the date of the live broadcast, February 4, 2009. The company undertakes no obligation to revise or update any statements to reflect events or circumstances after the date of this conference call.

We ask that during the Q&A portion of today's call you limit yourself to one question plus a follow up before we turn into the queue. This will provide the opportunity for as many listeners as possible to ask questions within the one hour allotted for this call. With that said, I'd like to turn the call over to John Kilcoyne.

John Kilcoyne

Thank you for everybody joining us this morning. Today we're reporting third quarter revenues of $18.3 million which is in line with the comparable quarter last year. Excluding sales to Japan, revenues are up 10% over the prior year and total world wide revenues are up 16% over the year and the first nine months.

In the quarter, we were able to narrow our net loss through appropriate expense monitoring and controls. We will continue to work towards becoming profitable exclusive of non routine charges and anticipate reaching this goal by the end of the current quarter.

In reviewing the third quarter geographically, total revenues were unchanged at $18.3 million. Notably, last year's third quarter included an initial $3 million shipment of stretch resistant coils distributed in Japan. Worldwide revenues increased 10% excluding sales to Japan in both periods.

Revenues from the America's increased 19% versus last year's third quarter including a 25% increase in revenues from the U.S. Revenues from Europe decreased by 7% but were up 2% in constant currencies. We also reported sales of $1.9 million in Asia Pacific of which $1.5 million was to our distributor in Japan.

We continue to improve our procedural penetration in Japan, setting a record this quarter for the number of coils implanted using our expanded range of stretch resistant Cerecyte coils. Product development and product enhancements continue to be an important component of our growth. In the third quarter, 26% of our revenues came from products we introduced in the past 24 months.

Among these are our Cashmere line of softer microcoils which continues to be a strong contributor to approximately 15% of our total revenues for the quarter. We are very encouraged by the initial acceptance of our proprietary DeltaPaq microcoil system. While just launching this coil in September, DeltaPaq represented 8% of our total third quarter revenues.

We are clearly gaining access to long time competitive accounts with DeltaPaq and in North America we have an approximate 50% re-order rate. We believe that we are taking share from our competitors with this coil.

We continue to see Neuropath reorder rates in the 30% range. New products such as DeltaPaq, Neuropath and Ascent balloon catheters are important to our business as these products open up opportunities for Micrus to access new accounts and procedures as well as add to our share of procedural dollars in existing accounts.

Our new EnPower detachment system continues to demonstrate our technological and clinical commitment to rapid and reliable detachment. An example of EnPower's impact can be appreciated by the recent quote of physician's who traditionally use competitive coils, and was using Micrus coils for the first time in years. After attaching the first coil with the EnPower cable, the doctor and his staff said, "Now that's how a good detachment systems works."

And we've said on numerous occasions, our goal is to increase our non coil revenues. This quarter, our non embolic or non coil products, represent 7% of our total revenues.

In reviewing the competitive landscape, Boston Scientific, [True Microvention] and EV3 are all conducting coil related clinical trials as is Micrus. These clinical trials and incremental product improvements by competitors contribute to a more competitive environment as it relates to procedural access and revenues. We expect each to produce new products over the coming months. We do not believe any will significantly alter our ability to continue to gain share.

Coil diversion and covered stent technologies are beginning to add to the competitive landscape while early the initial reports appear encouraging for some specific clinical indications. As mentioned on previous calls, we are actively engaged on both internal development and external assessment of these types of devices. Bob will discuss our evaluation of these technologies later in the call.

And finally, in the fourth quarter, we'll continue to aggressively drive revenues in competitive accounts with the DeltaPaq, Neuropath and Ascent platforms.

I would like to remind everyone that we guide annually, but in advance of your questions in the Q&A as to why we did not achieve the street's expectation of $20.1 million in the third quarter, let me offer the following. One, we were adversely impacted approximately $1 million in foreign currency exchange rate fluctuations.

Two, we recognized an opportunity to improve our Ascent balloon during its data evaluation. We made a decision to stop the initial beta evaluation and rework the device which we believe cost us approximately $500,000 in lost revenues.

Three, the month of November was slower than expected. We believe that these three events negatively impacted out Q3 revenues by approximately $2 million. With those comments, I'd like to turn the call over to Gord Sangster for a financial review.

Gordon Sangster

I'd like to review our fiscal 2009 third quarter results and discuss our fiscal 2009 financial guidance. As John mentioned, we reported revenues of $18.3 million for the third quarter of fiscal 2009 which is in line with the revenues for the third quarter of fiscal 2008.

Revenues from the America's increased 19% to $10.8 million and revenues from Europe decreased 7% to $5.7 million, both compared with the third quarter of fiscal year 2008. However, revenues from Europe were impacted by foreign currency exchange rates, particularly the weakening of the British Pound versus the U.S. dollar. On a constant currency basis, European revenues increased by 2%. We anticipate that this exchange rate will continue to have an impact on our U.K. results in the coming quarter.

Revenues from Asia Pacific decreased to $1.9 million from $3.2 million in the comparable quarter of the prior year due to lower sales to our distributor in Japan. As John mentioned, the third quarter of the prior year included an initial order for our stretch resistant coils following their approval. Overall, our sales increased by 10% excluding sales to Japan in both periods.

For the quarter, gross margin was 74% which compares with 72% in the prior year third quarter. The increase was primarily due to increased sales of high margin products and lower levels of distributor sales. We expect our gross margin to fluctuate in future periods based on the mix of our product sales and the level of distributor sales.

Expansion development expense for the third quarter fiscal quarter 2009 were $2.9 million, versus $5.6 million for the third quarter of fiscal 2008. The decrease was due mainly to a $3 million charge for in process R&D in connection with the acquisition of ReVasc Technologies in the third quarter of fiscal 2008.

We expect R&D expense to fluctuate as we continue to work on product improvements, expand product lines and explore new product opportunities and technologies in both the hemorrhagic and ischemic markets.

Sales and marketing expense for the quarter decreased to $6.9 million from $7.5 million last year. The decrease was mainly due to a decrease in consulting fees, lower incentive compensation and a decrease in stock based compensation.

In terms of our field sales force and clinical team, we currently have a North American direct sales force of 38, a European direct force of 18, and an Asia Pacific direct force of 4. We will continue to monitor our field sales force levels and will staff appropriately. In particular, we may add to our clinical and sales support personnel at both the direct and distributor level in Europe and Asia to ensure a high level of global physician support for all Micrus products.

For example, we recently hired our first sales person in China in anticipation of obtaining approvals for several of our products in the coming year.

G&A expense for the third quarter fiscal 2009 was $5.9 million, down from $6.1 million in the third quarter fiscal 2008. The decrease is primarily due to lower legal fees.

We reported other expense of $1 million for the three months ended December 31, 2008 due to primarily to losses arising from the re-measurement of foreign currency transactions which resulted in a negative swing of approximately $1.1 million from other income of $67,000 in the prior year.

Looking at our bottom line, the net loss for the third quarter was $2.3 million or $0.15 per share on 15.7 million weighted average shares outstanding which includes $1.2 million in stock based compensation expense or $0.08 per share. This compares with the third quarter of fiscal 2008 net loss of $5.7 million or $0.37 per share on 15.5 million weighted average shares outstanding which includes $1.3 million in stock based compensation expense or $0.09 per share.

Reviewing our financial results for the first nine months of fiscal 2009, revenues increased 16% to $57.4 million from $49.5 million in the comparable prior year period. Gross margin for the nine months ended December 31, 2008 was 75% compared with 76% in the comparable prior year period and total operating expenses for the first nine months of fiscal 2009 were $53.1 million compared to $49.3 million in the first nine months of fiscal 2008.

The increase is primarily due to the settlement costs of approximately $1.7 million in connection with a patent litigation with Boston Scientific an higher personnel costs of approximately $4.4 million related to additional head count and increased stock based compensation expense partially offset by a decrease of $3 million due to a charge for in process research and development in connection with the acquisition of ReVasc Technologies in the third quarter fiscal 2008.

We reported other expense net of $1.7 million for the nine months ended December 31, 2008 which was due primarily to losses arising from the re-measurement of foreign currency transactions. This represents a negative $2.1 million swing from other income net for the first nine months of the prior fiscal year of $427,000.

For the first nine months of 2009, we reported a net loss of $11.6 million or $0.74 per share on 15.7 million weighted average shares outstanding which included stock based compensation charges of $4.3 million or $0.27 per share. This compares with a net loss for the first nine months of fiscal 2008 of $10.1 million or $0.66 per share on 15.4 million weighted average shares outstanding including $3.5 million or $0.23 per share in stock based compensation charges.

Turning to our balance sheet as of December 31, 2008 we had cash and cash equivalents of $42.1 million. Working capital was $21.6 million and stockholders equity at quarter end was $42.3 million.

In November, we entered into a $15 million revolving line of credit with Wells Fargo Bank from which we drew down $2.5 million in December.

And lastly, we are revising our fiscal 2009 revenue guidance due to strengthening of the U.S. dollar versus foreign currencies and the uncertainty caused by certain current economic conditions. We now expect revenue for fiscal 2009 to be between $76 million and $79 million compared with prior guidance of $78 million to $85 million. This revised guidance represents growth of 11% to 14% versus our fiscal 2008 results.

I'd now like to turn the call over to Bob Stern.

Robert Stern

Good morning everyone. Revenue for Micrus in the hemorrhagic market segment has two main drivers; geographic expansion and new product introductions. We believe we have momentum in each of these areas.

In terms of geographic expansion, fiscal year 2010 will have a distinctly Asian focus. Based on our most recent discussions, we are encouraged about our progress with the FDA in China and hope to have an approval for our Cerecyte microcoils, catheters, stents and accessory products within our next fiscal year.

This approval will open a growth opportunity for us and therefore we are currently hiring staff, conducting training and taking other steps that will support our entry in China upon receiving FDA approval.

In Japan, usage of our microcoil products as John suggested, continues to increase. In December, 16% more Micrus microcoils were used in procedures than in our prior record month which was June of 2008.

New product introductions are the second component of our growth strategy. As John mentioned, products introduced in the past 24 months represented 26% of revenues for the third quarter. Our softer Cashmere microcoil continues to be well received and comprised 15% of third quarter revenues.

I'm highly encouraged by the strong acceptance of our DeltaPaq microcoil system and see this as a future growth driver. DeltaPaq is a proprietary advanced coil design with the potential to improve Pac condensity compared to existing coils due to its innovative winding technology. We believe that greater pack condensity may reduce recantilization[ph] rates and therefore retrievement.

We also believe that DeltaPaq materially improves our competitive position in the ceiling market and that over time, DeltaPaq could become our front line leading microcoil family with future products based on this technology platform to be launched in the coming months.

Our non-embolic sales during the third quarter represented in excess of 7% of revenues compared to 6% in the third quarter. This is important as our revenues in the past have been mainly due to the sales of our microcoil products. We believe that our non-embolic products are critical to future market penetration.

We plan to launch additional products in the coming months. In the first of this calendar year we expect to introduce the full family of the Ascent balloon catheters which represents our entering into a new Micrus product category in the treatment of hemorrhagic stroke. The Ascent balloon is designed to help and intervention to place coils in wide neck gainers. Physician feed back so far in the beta valuations is providing strong evidence that our Ascent balloon duralumin 14 guide wire compatible catheter is providing enhanced tracking stability compared to the competitive product.

Both our recently launched Neuropath and the Ascent lines provide us 100% incremental revenue opportunity and offer advantages in each of these as they only have one competitor. We also plan to broaden our line of guide wires for the introduction of a family of high performance direct toque wires as well as expand our Courier micro catheter line later this calendar year.

With the introduction of new products we have now reached a long standing goal at Micrus of being able to provide 100% hemorrhagic procedure coverage. We have now seen cases that have been performed totally with Micrus guide catheters, wire, micro catheters, coils and balloon products. We're very proud to have achieved these milestones.

As John said earlier, we've been evaluating flow diversion technology while developing a covered stent platform. These technologies appear to have clinical relevance for cases which may be difficult to treat with coils such as [fused form] and giant aneurisms. We would expect some time in fiscal 2010 to finish our evaluation and determine an appropriate path.

We are continuing to work on our collaboration with Commence Medical Products to joining develop liquid embolic products to nerve vascular indications. We're using Commence's sine-alkoloid technology development capabilities and intellectual property. Micrus is responsible in this partnership for overseeing the regulatory and clinical process of these neurovascular products and we will be the exclusive world wide distributor for products that come from this collaborate agreement.

We are also developing a broad range of products for the treatment of ischemic stroke. As we stated before, stroke is a leading cause of disability in the world and 80% of all strokes are caused by an ischemic event.

The Visa Trial is an IED study designed to compare clinical outcomes between patients treated with our Vitesse balloon external stent and current medical best practices. This is the first global industry sponsored prospective randomized clinical trial to evaluate the safety and effectiveness of this significant medical condition.

The Vitesse enable intracranial delivery and deployment of a stent in a single step eliminating the need for pre-dilation of the stenost[ph] artery. The Vitesse also incorporates the proprietary coding that we believe may reduce the need for retreatment due to retinosis. We will enroll up to 250 patients who demonstrate ischemic symptoms at a total of 30 sites in the U.S., Europe and China.

I'm pleased to announce that tomorrow may be the first enrollment of a patient in the worldwide study.

Following our Vitesse will be our ReVasc flow revascularization and our Genesis technology platform. ReVasc and Genesis are designed to restore flow and/or to remove intra-arterial clots in a patient stricken with acute ischemic stroke.

Our investments in ischemic technologies represent an important growth opportunity for Micrus and we look forward to delivering a variety of traumectemy and/or revascularization systems and reporting to you on these roll outs in the future quarters.

We're also announcing progress in our clinical trials. We have completed enrollment in our landmark Cerecyte coil trial, a 500 patient, prospective randomized trial led by the University of Oxford Interventional Neurologist Dr. Andrew J. Molyneux. We anticipate a submission of clinical study results from this trial to a peer review journal in 2010.

We've completed enrollment in our 250 patient Cerecyte microcoil registry Multi Center clinical trial designed to document the clinical and angiographic outcomes of the intracranial aneurisms treated with our Cerecyte microcoils.

We've recently initiated our 200 patient multi center Presidio Cerecyte Pak study which will assess the performance of our Presidio and Cerecyte coils in large and giant aneurisms.

Lastly, we continue to improve manufacturing cost absorption at our facility in Florida. We are already implementing manufacturing processes that are allowing us to reduce manufacturing costs of our coils as well as our Ascent products.

As we move forward, we anticipate even greater efficiencies that should improve our margins as we ramp up production. We anticipate that during the remainder of the current fiscal year, and into fiscal 2010, we should begin to gain margins and support from the implementation of this manufacturing program.

We will continue to invest in our Florida operation which should allow us further cost advantages over the long run. With those comments, I'll turn the call back over to John.

John Kilcoyne

We're delighted that we're now able to sell products that will capture 100% of hemorrhagic procedure revenue dollars. This is a goal we have long strived for at Micrus and it gives us multiple access points to our customers.

Additionally, our new products such as the DeltaPaq, EnPower and Neuropath are already opening up doors for our sales force in key accounts and for pull through of sales of other products.

Before taking your questions, let me summarize why we are well positioned to drive revenue growth. Our new product introductions are critical to our continued to our success will not slow down over the next fiscal year. At a minimum, you'll see more guide catheters, guide wires, micro catheters, coils and balloons.

With the combination of DeltaPaq and positive Cerecyte results, we continue to push the coil envelope, distancing ourselves from the competition. We are pursuing technologies such as liquid embolic's, covered stents and flow diverters that we believe will be part of the neuro-diventionalist armaterium with aneurism treatment in the years to come.

We are developing products in ReVasc and Genesis which will provide our physicians with a variety of tools to treat acute ischemic stoke and we're poised to enter a sizable market in China in the coming quarters.

In conclusion, we have driven material growth in key geographies in the first nine months compared to the prior fiscal year. We're up 16% world wide despite having approximately 30% of our revenues coming from Europe where we have experienced adverse affects due to exchange rate fluctuations.

We are up 52% in Japan. We're up 8% in Continental Europe and in the U.S., the most competitive market in the world, we're up 19% in the first nine months of this fiscal year. Yet, we're focusing on revenue growth. We have not lost sight of our profitability which we expect to achieve net of non routine charges in this quarter.

We remain the only company 100% focused on the treatment of hemorrhagic and ischemic stroke, and I believe that uniquely positions us to become the premier neuro-interventional company in the world.

Thank you for your attention. At this time we will open the call for questions.

Question-and-Answer Session

Operator

(Operator Instructions)

John Kilcoyne

While we're waiting for the first question, I'd like to inform you that we'll be presenting at the Cowan and Company 29th Annual Heath Conference being held on March 16 through 19 in Boston. We will announce presentation dates and times in the coming weeks. Please come see us in person should you be attending. A webcast of these presentations will be available on our website at www.micruscorp.com.

Operator

Your first call comes from Brooks West – Craig-Hallum Capital.

Brooks West – Craig-Hallum Capital

I wanted to zero in a little bit on the distribution channel and kind of trying to figure our how much of the shortfall might be coming from lumpiness in distributor orders, and then as a follow on to that, you have consignment inventory in your U.S. hospitals, how much of the OUS hospitals are consignment inventory and if it's not, might you be seeing some bubbling up of an inventory correction OUS?

Gordon Sangster

First of all, the lumpiness from distributors I think primarily this quarter we were affected by the fact that we got the approval for stretch resistant coils in Japan in the third quarter of last year and they took initial shipments of $3 million. This quarter we saw a return to more normal levels of $1.5 million. So that certainly affected our current growth quarter over quarter and excluding that approval and the shipments resulting from it, we still grew by 10%.

So certainly we are still susceptible to lumpiness from distributor orders but I think this quarter in particular, we saw the effects of the approval in Japan from Q3 last year.

And certainly we do have consignment in inventory in the U.S. That's one of the reasons we took down $2.5 million. We regularly turn over that consignment inventory in the U.S. and in Europe so we don't anticipate any problems with that.

Brooks West – Craig-Hallum Capital

But are you on consignment inventory then OUS or is that straight inventory with the distributors in the hospital?

Gordon Sangster

Direct. We also have consignment inventory for example in the U.K.

Brooks West – Craig-Hallum Capital

Given the strength you're seeing in the Japan market in particular, and I'm trying to balance this against the contractual obligations that these distributors have which I think your guys in Japan have already ordered their contractual minimum for the year, how might that affect Asian orders outside of China going forward here? Is that a calendar thing and does that reset in January?

Gordon Sangster

It will reset April 1 and so far we've shipped $6.3 million to Japan out of their contractual minimum of $7 million for this year. So there's still $700,000 to go plus we have to wait and see if they actually exceed their minimums.

John Kilcoyne

I think that just on the Japanese question, historically I have to say over our history with Goodman they have shown a propensity to exceed their annual minimums and at this point, we're probably pretty encouraged as we're fairly close to that right now, that they will exceed as well this year.

Operator

Your next question is from David Turkaly – SIG.

David Turkaly – SIG

On the FX impact here, I'm just curious as to the comments about the economy you made in the release. Certainly the U.S. and North America look pretty good in the quarter. I'm just curious, what have you seen so far that would lead you to make those comments? Have you seen any hospitals scaling back at all? I would assume that your products are somewhat resistant to that, but what do you expect? Should we be reading into that that the domestic market could have a negative impact in the near term?

Robert Stern

I don't really think that the economic conditions in the U.S. as well as world wide, we're seeing since July to December about two million people in the U.S. lose their job here in the U.S., and where we see that adversely impacting potentially our business, is that those people as the come off Cobra or come off health care insurance, who struggle to make their deductible payment, our sense is that they are probably not going to seek medical care as quickly as they would have normally.

I've had conversations with presidents of health care organizations and hospital chains and they have confirmed that the number of elective procedures has been adversely impacted. Now our elective case load in the U.S. is about 40%. 60% of the cases that are treated are emergency ruptured aneurisms, 40% are unruptured and the patients may be exhibiting some minor symptoms.

They may not be exhibiting symptoms at all other than maybe some blurred vision, and where we think that the impact would be is in instead of going to the optometrist or the ophthalmologist to maybe check on that blurred vision, where that physician can then refer them to CT work where an aneurism may be picked up, they're withholding and staying home as opposed to seeking care.

So it is a situation we do believe is going to impact us adversely. The level at which it will impact us we don't have real clarity on. I don't think that the elective procedures will take as much of an impact in our area as it would maybe in knees, hips, joints and cosmetic surgery, but nonetheless, in conversations with physicians, in conversations with administrators of hospitals, they have shared with me that they have seen a reduction in the number of elective procedures that are being performed.

So that gives you some framework as to the current situation and how it may adversely impact the treatment of aneurisms. Certainly ruptured aneurisms or emergency aneurisms are going to continue to pull through and we're going to continue to see those, but those patients that are unruptured and have symptoms, they may not seek care as quickly as they would have with economic times being stronger.

David Turkaly – SIG

I'm encouraged at least initially by the comments on China. The two dates that you talked about in 2010, the potential for China would be fantastic and then the publication, the data, given either of those two, is there any way to narrow it down at all? I assume you're talking about fiscal 2010. I imagine the data could be out earlier but given whatever you've heard from China, is that as narrow as you can draw down today?

John Kilcoyne

I think whenever you try to forecast regulatory approvals you get yourself in trouble and so we're hesitant to do that. I will say that based on as Bob mentioned, based on the line of questions we're getting, based upon the interaction we're having with the SFDA, we believe we're getting close.

We have no questions, and I've said this on previous calls, we've had real difficulty answering. It's a normal process, the normal questions you'd expect from a regulatory body. We know that we're working through the process. The timing of it, I can't be more specific.

We do believe it will be fiscal 2010, so we hope that it will be in the mid part of that fiscal year. As we get better clarification and we can speak to it with more specificity, we'll clearly share with you that information.

Robert Stern

Coils will be one, stents will be another. There's really a horserace now to see when these products will be approved on the timeline and as things are approved and as things change in China, we'll certainly make sure everybody is aware.

David Turkaly – SIG

That first look at CCT, could that be first half of 2010?

Robert Stern

We're finished the final enrollment. The 500 patients which Dr. Molyneau informed us of that last week, a great milestone for Micrus in this landmark trial. The first timeline will be six months from that so we're looking at sometime the last patient follow up of six months will be in the summer, pull the data set together, lock and load, we hope for submission before the end of the calendar year.

Likely it will be pushed over into the beginning part of fiscal '10 and then it's just a question of how quickly the paper gets accepted for publication.

If you look at our single center studies, we have had recent single center studies published in the spring. Dr. Cherigah and Ventrus all have data that suggests that Cerecyte is showing an advantage over bare platinum in these single center studies and our hope and expectation obviously is that the CCT trial will also demonstrate that.

Operator

Your next question comes from [Erica Selen – Stanford Group]

[Erica Selen – Stanford Group]

I was hoping that we could get the split for the U.K. and the rest of Europe. I know that 30% this quarter, has that been pretty constant over time so that we can look at the foreign exchange differences?

Gordon Sangster

The U.K. revenues for the quarter were $1.7 million and Europe excluding the U.K. was about $4 million.

[Erica Selen – Stanford Group]

Has that been a rather constant ratio over the last few quarters? Is that something to look at going forward?

Gordon Sangster

It's constant only to the extent that the U.K. suffers from the weakening of the pound, so I would expect the U.K. to have slightly higher share in previous quarters.

John Kilcoyne

Just to drill down on your question, in the prior quarters, we really have seen no major Forex issues. The pound, really and we've hedged somewhat the Euro, so we're very balanced there, but the pound really moved aggressively. It's difficult to hedge a singular currency.

Gordon Sangster

I guess that's a good point. In terms of our guidance, when we originally set guidance for this fiscal year, the pound was at such a rate that we expected to be able to achieve that obviously, but of the year to date shortfall due to FX rates, about 90% to 95% of that arose in this third quarter, so we're just predicting that will likely happen again in the fourth quarter.

In terms of the range, about $2 million we're attributing to foreign exchange rates, primarily the pound.

[Erica Selen – Stanford Group]

I had a question as to these patients that are delaying the elective procedures. With that, is there any change in how the patients present when they finally do rupture. If they let themselves go longer is there any reason why they'd be more likely to go for clipping versus coiling or any change with insurers or lack of insurers?

John Kilcoyne

I think on patients when they rupture, the pathway will have, I don't think there's any adverse impact with ruptures. When a patient ruptures, they need ER immediately. There are serious and tragic consequences so they get to ER. It's the unruptured patient that we think there will be an actual delay on or hesitation from the patient themselves possibly, to seek care due to some minor symptoms.

The other part, we talked about this on previous calls, about 20% to 25% of aneurisms that were detected unruptured are through incidental observation; meaning poor vision, you go to the optometrist, the ophthalmologist and they can't find anything wrong with your eyes so they refer you to a CT and they have an aneurism.

Headaches if they perceive are migraine, ER or family care practitioners perceive are migraine but they want to have it checked just to make sure so they have a CT and they find out there is aneurism. So there's an incidental observation of aneurisms in that elective group as well that accounts for about 20% to 25% of the cases that are treated. From a ruptured hemorrhage, we don't see any economic consequence there.

Robert Stern

They're still going to go to the ER and that's the common denominator there, and I think John's point is, they may just not go the ER with a headache anymore or they may not go to their doctor with a headache anymore.

[Erica Selen – Stanford Group]

With that, with the 75% to 80% of patients who aren't found by chance, that they have some reason why they think that it's an aneurism, is that something more serious than just a headache or are those also at risk.

John Kilcoyne

I'm sorry, I didn't hear the first part of your question.

[Erica Selen – Stanford Group]

I understand that 20% to 25% are found just by chance. The other ones, how serious are these symptoms that they're experiencing?

John Kilcoyne

If it's a ruptured aneurism, 25% to 30% don't make it to the back of the paramedic ambulance. [audio break] within the first month or so after the aneurism has been detected or ruptured. So in a hemorrhagic or ruptured aneurism, 50% of the patients that have a rupture expire with the first three months.

On the unruptured it really varies; either blurred vision, headaches. Typically the leading symptoms that you hear is the worst headache of my life, and a lot of times that is unfortunately inaccurately diagnosed as a migraine.

[Erica Selen – Stanford Group]

So it's just a matter of them being persistent enough to go through enough doctors to get to that diagnosis.

John Kilcoyne

I don't think for those patients that are going to respond to this, I don't think will see an adverse consequence. It's those who, two million people since July have lost their jobs. That patient group, what we're suggesting is that that patient group may be less likely to see earlier intervention or care for what they perceive as a headache or migraines which are misdiagnosed, or their glasses might, I need to get those glasses checked.

[Erica Selen – Stanford Group]

So mostly a delay in those people who have lost jobs earlier in the sector. That is very helpful. Thank you very much.

Operator

Your next question comes from Amit Hazan – Oppenheimer.

Amit Hazan – Oppenheimer

I wanted to drill down a little bit into the U.S. market. I'm just looking here at the last four quarters. It's been pretty inconsistent and now it's down sequentially to the December quarter from the September quarter, and I'm trying to reconcile what might be going on there this quarter, and also in terms at the same time of your new product contribution which seems to be great but at the same time, it's doesn't appear to be driving growth or revenue per procedure because otherwise I would imagine your growth would be greater. So I'm wondering is it, I imagine there's some cannibalization going on with the new products of the old products as well but I'm just trying to figure out and work that out. Can you give me some color on the U.S. in particular as it relates to new products or competition or whatever you can say to reconcile that?

Gordon Sangster

Certainly we have to compare quarters in the U.S., but as a rule, the U.S. seems to be growing. We're up 25% for this quarter. And looking at North America of $10.3 million of the Americas of $10.8 million and almost $10 million for the U.S. alone.

I think as a rule, being up 25%, and I think 19% to 20% year to year, I'm not sure that I see there's lumpiness there or weakening.

Amit Hazan – Oppenheimer

I think that's based on an easy comp but if you look at your last four quarters, really it's been all over the place. You're over $10 million in the September quarter.

John Kilcoyne

This year, year to date, we're up 19% in the United States.

Gordon Sangster

I think you're point about competitive pressure, we're targeting competitive accounts with our new products, especially the DeltaPaq, and we are seeing success there. So there may be some cannibalization of our own products but the goal is to go after competitive accounts and win business over. That's the target for the new products.

John Kilcoyne

If you look at Neuropath, if you look at the balloon, obviously we don't have any, we haven't had any products in that arena. We're only competing against one competitor and frankly, I think that's one of the reasons that we have been growing so well in the United States, and I think that you'll see follow on growth in Europe because we're targeting very specific – we have a green field if you will. We can garner revenues from anyone and it's incremental.

Amit Hazan – Oppenheimer

I'm just trying to think through the March quarter and how confident you are that you can reach profitability. If we look at operating profit here in this December quarter at about a loss of $1.7 million, that's a lot to make up in just one quarter's time even with cost reductions. Is there anything you can guide us to in terms of what you're thinking about, whether it's gross margin or sales and marketing? Where are you going to make that up to get to that break even level?

Gordon Sangster

We have put expense controls in place as of the last several months so I think in terms of our guidance, if we're 76% to 79%, we expect to be about mid point of that range, would be the goal of the upper half which would give us sales of about $20 million.

You need to look at the fact that we are down by $2.5 million from the second quarter in terms of revenues but we still managed to reduce our net loss by $400,000, so I think with the efficiencies and the cost controls that we've put into place, we can make up that difference in the fourth quarter, and certainly that's the goal of the whole company and all the managers and V.P.'s here.

Amit Hazan – Oppenheimer

Can you provide us any color? Is it the sales and marketing line that we should be reducing expense or where should we be reducing the expense to get to that break even?

Gordon Sangster

I think certainly the G&A overhead, legal fees in particular. We're not affecting any of the cost centers that drive revenues so it's really across the board.

John Kilcoyne

There were some legal fees. There were some tails that will go away which would have taken our loss probably in the $1.7 million to $1.8 million range. So we're a little bit ahead of the $2 million plus loss. We're a little ahead of that because of some tails that we have. But really, we're driving revenue. That's the bottom line and we're pretty comfortable with that.

Operator

Your next question comes from Suraj Kalia – Sanders Morris.

Suraj Kalia – Sanders Morris

When you look at Europe and when the enrollment of the Cerecyte trial is over, moving forward how do you look at sales through commercial sales in Europe? How would you advise we look at that?

John Kilcoyne

Clarify what you're asking.

Suraj Kalia – Sanders Morris

They were products sold on the clinical trial, in the Cerecyte trial that the U.K. if I heard Gordon right, the revenues were $1.7 million. I guess the thing that I'm asking is, how much is that completely trial related revenues? How much of it was just commercial revenues and how should we look on it let's say just for the U.K. moving forward

John Kilcoyne

The question is will the end of the Cerecyte trial adversely impact our revenue opportunity due to the Cerecyte cases being done at the trial. My response to that is that I don't believe we'll see any material fall off due to the cessation of the trial. I think the accounts that we have are Cerecyte trial are Micrus accounts.

They like Micrus technology. They like our system. They like the way that our coils spring. They like the way that our coils perform. Cerecyte is the additional benefit to that. I don't perceive and I don't anticipate any material change in our revenues in Europe or the U.S. for that matter due to the Cerecyte trial coming to its conclusion.

I think that's probably the specific answer to your question.

Suraj Kalia – Sanders Morris

Let me rephrase Amid's question. You'll have new products and I think you've consistently God knows over the past how many quarters said, "Look we are going to introduce new products and that will be sort of a new engine for this industry." But what are the fundamental dynamics? At least North America, it's sort of better than the specific trend line and the sub part to that question is, is there a stable group of products, and I'm talking really North America, is there a stable group of products that day in and day out, every quarter, you can rely on and say, "You know, what we're going to get $2 million or $3 million from these every quarter. Now, we've got to make it up with new products and this is where we're going to compete with EB3 or whomever."

John Kilcoyne

Clearly we have our stable group of customers, there's no doubt, and there's a core group that we can count on pretty regularly across the board, domestically as well as international. We said on the call that the Boston's, the Microvention, the EV3's are also conducting clinical trials. They are trying to grab procedures from Micrus.

We are the number two coil company in the world, so we feel that when they reach out an initiate a clinical trial. So there is some of that dynamic that goes along with the fluctuations in North America. That being said, we continue to push back with new technologies such as DeltaPaq. You'll see a new Delta coil for us in the coming months.

So we continue to push back and with the Pac trial, we're also initiative additional trials around the world to demonstrate clinical superiority. I think we do have a stable group. We continue to develop new products that will move that bar again. We are conducting our own clinical trials.

And if you look through the first nine months, we are up 16% world wide. Our biggest competitor, reported down 2% for the year. So we're more than holding our own and I would suggest that we are gaining share. We are taking it from somebody.

So I think frames us pretty well in a challenging market, in a challenging economy. Micrus is up 16% for the first nine months. Our biggest competitor reported 12 months down 2%.

Operator

Your next question comes from Thomas Kouchoukos – Stifel Nicolaus.

Thomas Kouchoukos – Stifel Nicolaus

Looking at Europe, and I want to make sure I'm reading the release, but in the U.K. it looked like on a constant currency basis U.K. revenues were up about 2% and just looking, I know you've had lumpiness in the year for Q1 there was a big shortfall. You had a nice rebound last quarter. Is there anything else going on over there beside the economy or is there any other factor impacting what should be a pretty strong market for you?

John Kilcoyne

The one other dynamic that would play out was what I said on the call, was November was from a procedural standpoint, a softer month than what we had anticipated. That was no different in the U.K. From a market share perspective that is our top country in the world so they feel those procedure drops more dramatically than we may elsewhere in the world.

Thomas Kouchoukos – Stifel Nicolaus

Have you seen any of that rebound like you had in the first quarter?

John Kilcoyne

Yes.

Thomas Kouchoukos – Stifel Nicolaus

On the economic question, taking the patient deferral part of it out of the equation and looking at some of your distributors overseas, has there been any issue with them from the credit crunch being able to have the working capital to order as much inventory? Have there been limitations there?

John Kilcoyne

Great question and the answer there is no. We go through a fairly thorough background check with our distributors before we initiate and so we've not seen that play out as an adverse impact to us.

Operator

Your next question comes from Spencer Nam – Summer Street Research

Spencer Nam – Summer Street Research

The Q2, Q3 fiscal '09, the drop. I wasn't sure that I understood the explanation on that. Are you saying that the Q2 there was the extra stocking because of the new product roll out? Is that how you interpret this?

Gordon Sangster

No, the drop was from Q3 last year. We had a $3 million stocking order from Japan after the approval of the inspectors of some coils early December.

Spencer Nam – Summer Street Research

So the Q2, Q3 sequential drop, how would you explain that one?

Gordon Sangster

No reason other than it was a particularly good quarter in the second quarter and I think we started to see the FX rates cost us $.5 million to $1 million this quarter as well as the economics of the situation.

John Kilcoyne

We haven't seen the Forex issue really impact our business at all and if you just look at the U.K. alone, we're again doing pretty well against the Euro, but as Gordon suggested, it's $0.5 million to $1 million with that. Procedure volumes were low in November. That clearly impacted us. That's the nuts of it.

Gordon Sangster

At the same time, November seemed to be U.S. and Europe.

Robert Stern

And as John said, we've seen a rebound. We're at this juncture fairly appreciative of what happened in November and are seeing things come back.

Operator

Your next question is from Ed Shenkin – Needham & Company.

Ed Shenkin – Needham & Company

I have a question about, U.S. we know was up 25% but the rest of the America's, I guess I'm referring to Canada and Mexico and Latin America and such, that seems to be down sharply. Can you talk to that?

John Kilcoyne

We've got Gordon to grab the specifics.

Gordon Sangster

It was primarily Canada. Latin America was relatively flat. Canada was down $200,000 on this base, it made it look fairly worse than it was.

Ed Shenkin – Needham & Company

And the reasons for Canada to be down? Anything going on there?

John Kilcoyne

I don't think there's anything untoward in Canada. We did see as I said, a slowdown in November. We're not as well penetrated with coverage in Canada as we are in the geographies in the U.S. so that might have had some play on it as well, but I think overall we're healthy in Canada. We just saw a downturn in November along with the rest of the world.

Ed Shenkin – Needham & Company

Have the rest of the America's outside of U.S. and Canada, how did that perform?

Gordon Sangster

Latin America was relatively flat compared with the prior year third quarter.

Ed Shenkin – Needham & Company

And how was it on a sequential basis?

Gordon Sangster

About the same. That's a pretty steady geography for us.

Ed Shenkin – Needham & Company

Do you use distributors in Canada and the rest of America outside the U.S.?

John Kilcoyne

We use direct in Canada. In Latin America we use a distributor. I would suggest as well, there's been a rebound in both locals.

Operator

This concludes today's question and answer session. I will now turn the conference back over to management.

John Kilcoyne

I'd like to thank you all for your support and participation on the call today and we look forward to talking with you soon.

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