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The Spectranetics Corporation (SPNC)

Q4 2012 Earnings Conference Call

February 21, 2013 11:00 a.m.ET

Executives

Scott Drake – President & CEO

Scott Drake – CFO

Guy Childs – SVP Operations Business Development & International

Shahr Matin – SVP Commercial Operations

Analysts

Jason Mills – Canaccord Genuity

Brooks West – Piper Jaffray

Charles Haff – Craig-Hallum

Suraj Kalia – Northland Securities

Jim Sidoti – Sidoti & company

Operator

Good day, ladies and gentlemen, and welcome to the Spectranetics Corporation 2012 Fourth Quarter Financial Results Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. (Operator Instructions) As a reminder, this conference call is being recorded.

I would now like to introduce your host for today’s conference, Ms. Lynn Pieper. Ma’am you may begin.

Lynn Pieper

Thank you, Kate. This is Lynn Pieper with Westwicke Partners. Thank you all for participating in today’s call. Joining me from Spectranetics is President and Chief Executive Officer, Scott Drake; Chief Financial Officer, Guy Childs; as well as Senior Vice President Operations Business Development and International, Shahr Matin and Senior Vice President Commercial Operations, Jason Hein.

Earlier today, Spectranetics released financial results for the quarter-ended December 31, 2012. If you’ve not received this news release or you’d like to be added to the company’s distribution list, please call Westwicke Partners at 415-202-5678.

Before we begin, I’d like to remind you management will be making statements during this call that include forward-looking statements within the meaning of federal securities laws. These statements include 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, February 21, 2013.

I’ll now turn the call over to Scott Drake. Scott?

Scott Drake

Thanks, Lynn. Good morning, everyone, and thank you for joining us on our Q4 call. This quarter marks our fifth consecutive quarter of double-digit growth highlighted by our focus areas of Lead Management and U.S. peripheral atherectomy that grew 30% and 15% respectively on a constant currency basis.

This morning, I’ll break down my comments as follows; First, I’ll walk through the quarter’s financial performance for our Vascular, Lead Management and International businesses. I’ll then provide an update and highlight growth drivers for each segment. We’ll discuss the significant progress we’ve made with our clinical programs. Guy will go deeper into the financials and provide our outlook for 2013, and then we look forward to fielding your questions

On the business front, this quarter represents another step forward. 18 months ago, we set the goal to be a reliable, profitable, double-digit growth company, and in 2012, we’ve cleared this bar. As we look forward, we have many reasons to be optimistic about our prospects.

Both of our target markets are growing in the 10% range, and we’re taking share in each. Our Vascular Intervention business delivered $16.7 million, an increase of 6% on a constant currency basis.

Our U.S. initiatives to drive PAD awareness in the office-based opportunity fueled 15% growth in peripheral atherectomy. Lead Management just continues to deliver. The franchise achieved record revenues of $15.4 million, a 30% constant currency increase. This growth is characterized by solid underlying market dynamics, conversions to GlideLight and new lead extraction programs.

Our International team posted revenue of $5.9 million, 11% constant currency growth. Overall strength in Japan and Robust Lead Management sales in Europe highlight these results. Gross margins remained strong at 73.3%, and net income in the quarter was $673,000 or $0.02 a share. Adjusted for acquisition-related costs, net income was $984,000 or $0.03 per share.

Now, let’s turn our attention to growth drivers. Growth in our Vascular business is predicated upon three things, atherectomy penetration and share gains, expansion in to in-stent restenosis and adding to our product portfolio. This quarter we continued our faster than market growth rate in U.S. atherectomy driven by our PAD awareness in office-based lab initiatives. These programs are gaining momentum and we’re increasing investments. Benefits to patients include better access to care, improved outcomes and integrated treatment. Favorable reimbursement and lower overall costs are driving strong demand.

Future value creation in the Vascular space rests heavily on the development of compelling clinical data, especially in ISR, a disease state that we’re uniquely positioned to lead. We have meaningful progress to report on two fronts; number one, achieving the indication for ISR, improving clinical superiority and number two, demonstrating the value of laser atherectomy in the era of drug-coated balloons.

First EXCITE, we remain bullish on achieving the indication improving clinical superiority. Our constructive partnership with the FDA continues, but finalizing plans for the adjunct analysis has taken a bit longer than expected. Despite this delay, our mid-2014 timeframe to achieve success remains on track. We now have all 35 sites active and 131 patients enrolled.

In January, Professor Thomas Deller presented 12 month follow-up data on our patent feasibility study. Results indicated 82% and 52% freedom from TLR at 6 months and 12 months respectively. These data compared very favorably to balloon angioplasty, the current standard of care.

The TLR rates are in line with the study involving a leading competitor, but it’s very important to point out that the patent patient cohort was significantly more difficult. At 12 months, laser atherectomy had similar patency on lesions that were 50% longer and stent integrity remained intact. This performance along with our superior distal embolization safety profile clearly sets us apart for mechanical technology for use in ISR.

Great progress continues in PHOTOPAC. To-date, 39 patients have been enrolled and thought leaders remain confident that laser atherectomy combined with drug-coated balloons yields a meaningfully superior outcome than drug-coated balloons alone in ISR. Single-center registries point clearly to success. Dr. Gandini from Rome presented a study nearly identical to PHOTOPAC at RSNA. His trial included 49 patients where laser atherectomy, plus drug-coated balloon was compared to drug-coated balloon alone.

Many existing DCB studies enroll claudicants. The Gandini study enrolled CLI patients, a very sick patient population. (inaudible) in the laser plus drug-coated balloon ARM versus 62.5% in the drug-coated balloon only ARM. At 12 months, 67% in the laser ARM, 38% in the drug-coated balloon only ARM. Also at 12 months, amputation was 0% in the laser ARM and 50% in the drug-coated balloon only ARM, very compelling.

Dr. Jos Van Den Berg in Switzerland had similarly impressive results; he recognized after treating ISR exclusively with drug-coated balloons, additional intervention was required. He’s changed his standard of care to laser plus drug-coated balloons. Published data on his first ten patients shows 0% TLR and 0% evidence from restenosis out to a median of 19.5 months, some as far out as 32 months, again very compelling. These data read beautifully on the opportunity we have in in-stent restenosis.

The big picture is that we’ll be the only company with an ISR indication, proven clinical superiority in the era of drug-coated balloons and draft on the wheel of large companies that are spending hundreds of millions of dollars developing this market. In short, the future’s bright.

On the portfolio front, we launched TAPAS a drug-infusion system in the last quarter. Our growth has been gradual; we continue to gain clinical experience through increased utilization. At the ISET conference in January Dr. Eric Dippel presented early data on the use of TAPAS to deliver Paclitaxel. The patient subset was small, but results are encouraging and others are following in his footprints. We also announced last month the asset acquisition of Upstream Peripheral Technologies. These two unique products strengthen and expand our vascular portfolio.

The quick access needle holder and quick cross capture device were developed to minimize radiation exposure and decrease procedure times in chronic total occlusions. This acquisition is directly in line with our strategy to treat challenging patients and leverage current call points. Early response to these products has been strong. They were highlighted in seven live cases at the Link Conference resulting in several hundred leads. Full U.S. launch is underway and our European launch begins March 1. In summary, our Vascular business is gaining momentum on the commercial execution, clinical and portfolio fronts.

Let’s take a look at Lead Management. The over arching mission of our LM business is built upon providing great patient care, which is defined by HRS. Of primary importance, infected leads should be extracted, not capped. Today, our research reveals that over 60% of infected leads are capped; resulting in sub par patient care and in some cases death.

Great patient care also dictates that smart judgments are made on class II leads. Our world class training and education programs are designed to this end and proving their impact is underway. Our technology initiatives are also focused on optimizing patient outcomes, reducing technique variability and unlocking the enormous potential in this market.

Our growth rate in Lead Management increased to 30% constant currency in Q4. This was well balanced across GlideLight conversions, the opening of new lead extraction programs and robust unit volume growth from share gains and increased procedural penetration.

Our growth consisted approximately of 70% units and 30% price. The GlideLight launch is going well and we continue to receive very positive responses from customers. By mid-2013, we expect to have converted the vast majority of our business to GlideLight. A key growth driver in 2012 was the addition of new lead extraction programs. These accounts will have a positive effect in 2013 as we consistently see new programs grow even faster than our base business. We expect the trend to continue and have several new lead extraction programs in queue.

On the simulation validation front, substantial progress has been made. The pilot study has revealed that both procedural steps and complications are statistically significant in favor of the simulation ARM. The manuscript on the pilot study was accepted by the Journal of Cardiac Electrophysiology and will be presented at HRS. These findings, along with thought leader judgment, led to the full validation study which is currently enrolling. An abstract on the first 17 physicians has been submitted to HRS, but we don’t yet know if it will be accepted and presented at the meeting.

This early validation work reinforces the positive impact simulation has on accelerating the learning curve for new operators. In short, we are partnering with thought leaders, fellows, new and tenured extractors and implanters that exclusively cap to deliver the best possible patient care. Our vision is to manage every lead and momentum is building.

Internationally, we continue to drive growth by our focus in Europe and Japan. Highlighting our strength internationally are some recent accomplishments. First of November, we received NICE’s recommendation for our peripheral atherectomy technology in the UK. For the first time, NICE recommends endovascular procedures over amputation for CLI patients. We believe this will further accelerate our growth in the UK where we also continue to grow our Lead Management market share.

Second, in January, we received approval and reimbursement for our Quick-Cross products in Japan. We’ve initiated a limited launch with our distribution partner DVX, and we anticipate expanding our portfolio with the approval of Quick-Cross Extreme and select products later this year.

Finally, we’re continuing the registration process for our products in China and India. We anticipate entering these markets in 2014. Marginally offsetting the strength and momentum in our International business are pricing pressure and competition in coronary thrombectomy, which is not a focus area for us, as well as on building budget challenges in Italy.

Finally, on the International front, we continue to take share in Lead Management, and expect recent product approvals to bolster that growth. We look forward to ongoing strength in our existing markets, and expansion into new markets to support sustainable growth in the mid-teens internationally.

Finally, a few words on the pipeline; we define our vitality index as the percentage of revenue derived from products launched within the past 36 months. A year ago, this metric was very low at about 4%. We closed 2012 at about 13%, and expect to more than double that performance this year.

The team is doing excellent tech dev and new product development work. Our pipeline is more balanced across lower and higher risk projects. The portfolio of opportunities now spans programs from derivative products to breakthrough technologies, and across regions and businesses.

This organic work is complemented by our business development efforts as we strive to add meaningful products to our bag, solve significant problems for our customers, and gain leverage in the business.

In closing, we’re pleased with the balance and acceleration of our growth across all three segments and we’re excited by our product pipeline.

I’ll now turn the call over to Guy to provide more detail and our outlook for 2013.

Guy Childs

Thank you, Scott and good morning everyone. During my prepared remarks, I’ll review details of our financial performance for the fourth quarter and provide our outlook for 2013 along with guidance to consider for model updates.

Fourth quarter revenue of $36.8 million increased by 13%, both as reported and on a constant currency basis. Vascular Intervention revenue of $16.7 million increased 5%, 6% constant currency. U.S. peripheral atherectomy grew 15%. Crossing solutions revenue increased 2% continuing the trend of single-digit growth that we experienced in the third quarter.

Coronary revenue from atherectomy and thrombectomy product sales decreased 10%. The decrease in coronary revenue is relatively small in dollar terms and as we discussed in previous calls the coronary market is not a strategic priority. Drivers of VI revenue growth include our PAD awareness program and revenue from atherectomy product sales in an office-based lab setting.

Lead Management revenue grew 29%, 30% constant currency to $15.4 million. We are encouraged by the balance growth, mostly driven by unit volume increases. To round out our product line revenue discussion, laser system, service, and other revenue was essentially equal with last year at $4.7 million. It is worth mentioning that the 42 laser placements to new customers during the quarter was the highest level in over two years, which we believe is a leading indicator for growth.

On a geographic basis, revenue in the U.S. was $30.8 million, an increase of 14%. International revenue was $5.9 million, which represents growth of 8% or 11% constant currency. Our gross margin for the quarter was 73.3%, up 40 basis points from last year. We continue to expect improved gross margin of at least 50 basis points per year for the foreseeable future. This reflects improved pricing from GlideLight, our ongoing efforts aimed at manufacturing productivity and overhead leverage. Research, development and other technology expense was $4.7 million or 13% of revenue this quarter compared with $4.1 million or 13% of revenue in the prior year.

The dollar increase is primarily due to product development costs and EXCITE ISR clinical study costs, offset by lower royalties. The reduced royalty costs are a result of the previously disclosed license agreement termination. We continue to ramp up our product development activities and these costs will increase in the future.

SG&A costs of $21 million represented 57% of revenue compared with last year’s $17.8 million or 55% of revenue. The increase was led by our investment in PAD awareness and the office-based opportunity. We will continue to invest in these programs in addition to physician training and expansion of our field sales organization to drive future revenue growth.

Net income for the fourth quarter was $673,000 or $0.02 per diluted share compared with net income of $355,000 or $0.01 per diluted share last year. Excluding special items in both periods, non-GAAP adjusted net income was $984,000 or $0.03 per diluted share in the fourth quarter of 2012 compared with $1.3 million or $0.04 per diluted share in the year ago period. Special items are described under the heading reconciliation of non-GAAP financial measures in the press release.

Cash and cash equivalents totaled $37.8 million as of December 31, 2012. We generated total cash flow of $6.1 million during the fourth quarter. At $5.7 million, operating cash flow accounted for nearly all of the total.

We project that 2013 revenue will be in the range of $153 million to $155.5 million, an increase of 9% to 11% over 2012. Net income for 2013 is projected to be in the range of breakeven to $0.5 million or breakeven to $0.01 per diluted share including the impact of the medical device tax, which is estimated to be approximately $2.5 million for 2013. Projected net income also includes estimated non-cash amortization costs of approximately $1.6 million to $2 million associated with the recently announced acquisition of the Quick-Access and Quick-Cross Capture Devices.

Adjusted EBITDA is anticipated to be in the range of $13.5 million to $14.5 million in 2013, an improvement over $13.1 million in 2012. Adjusted EBITDA excludes special items, the medical device tax and acquisition-related amortization costs. This new metric provides for comparability between periods and represents an additional measure of the operating performance of the business. As a result of seasonal operating expenses that are higher in the first half of the year, investments in product development, acquisition related amortization costs and the impact of the medical device tax; a net loss of up to $2.5 million is anticipated in the first half of 2013, mostly in the first quarter.

I also wanted to share some additional background to assist in developing your financial models. For gross margin in 2013, we expect expansion of at least 50 basis points from current levels. Given the growth opportunities in front of us, we’ll continue to invest incremental gross margin back into the business in the form of product development, the EXCITE ISR trial, PAD awareness, the office-based procedure opportunity, physician training, and expansion of the field sales team.

Within the R&D line for 2013, we’ve begun expanding the team of engineers and have initiated multiple product development and technology development projects. These activities will increase R&D costs as a percentage of revenue to the range of 13% to 13.5%. For SG&A in 2013, excluding the medical device tax and acquisition related amortization costs; we expect to see some leverage with costs projected to be less than the 59% of revenue in 2012. We expect SG&A costs to be higher as a percentage of revenue in the first half of 2013 consistent with prior year trends.

In closing, we expect seasonal revenue trends in 2013 to be generally consistent with 2012. Specifically, the first and third quarters are the weakest compared with the proceeding sequential quarter. As a result, we anticipate Q1 2013 revenue to be in line to slightly less than Q4 2012 revenue. Scott has some final comments before we take your questions.

Scott Drake

Thanks Guy. Given our performance over the past six quarters, we believe we’ve earned the right to raise the bar on ourselves. Our 2012 growth drivers are continuing in 2013 and we expect them to further expand over the mid and long-term, as we feel the positive effects of the in-stent restenosis opportunity, our new product pipeline, market development, and global expansion efforts. This culminates in our goal to expand our growth rate from 9% to 11% in the near-term to 15% to 20% long-term. We’re striving to accelerate our growth rate, expand margins and achieve meaningful leverage over time.

We’ll now open the call up to questions. Kate.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from the line of Jason Mills with Canaccord Genuity. Your line is open.

Jason Mills – Canaccord Genuity

Good morning, Scott and Guy and congrats on a fantastic quarter.

Scott Drake

Thanks Jason. Good morning.

Jason Mills – Canaccord Genuity

Good morning. I have several questions. I’ll try to limit it to two. First, on the Vascular side and then on the Lead Management side, Scott, on the Vascular side, I think investors are highly focused, as you might expect, on the in-stent restenosis opportunity. And you gave us a nice update there, but I’m wondering if you could go a little bit further in giving us some color on your conversations with the FDA. Clearly, what we heard as it relates to EXCITE is that clinicians in that trial are seeing pretty positive results from the use of laser atherectomy, and therefore don’t want to not use it if you will. And that’s sort of delaying or stalling a bit the enrollment, can you characterize FDA’s interest level or willingness to use the strong patent results that you mentioned and whether or not there is any upside at this point to that mid-2014 expectation that I think is built in most people’s expectations, but of course you and us would like to see earlier?

Scott Drake

Yeah. Yeah. Got you, exactly Jason. I would say that, our partnership with the FDA continues in a very constructive and positive way. The delay that I’ve referenced here is not along pole either for the mid 2014 expectation or the possibility for improvement to that, I do think it’s prudent to keep models at the mid-2014 timeframe. I would hate to get out ahead of ourselves here as it relates to that, but you’re exactly right, part of the reason that the FDA has been so helpful here is that they recognize the need that this patient population has and I believe that they really see the safety profile and efficacy that we bring to the table here.

So, we’ll share with you as soon as we have more information on that front. The final point that I would make that is really important is that our investigators remain very engaged and excited, pardon the pun, about this study and the other studies that we’re doing to really help them solve the tricky problems associated with ISR patients.

Jason Mills – Canaccord Genuity

Fantastic, one follow-up on that and then my last question on Lead Management, with in-stent restenosis once the FDA does grant the indication, what does that due do you think in the ensuing 12 months to the growth profile or gross prospects for your entire vascular business with the understanding that you still have a crossing solutions business that probably doesn’t grow quite as fast as the thrombectomy business that you referenced, is not really a focus. Is that a business that with ISR in the 12 to 24 months following can be in that 12% to 15% range, or could you just characterize the dynamics of how quickly you could accelerate growth upon an ISR indication? And then just a Lead Management question and I’ll get off.

Scott Drake

Yeah, sure. No, thanks, Jason. The – as it relates to the impact of the indication, and concurrently proving clinical superiority, I would say that it really is a boon for our business. I don’t want to get too far out ahead of myself calling guidance for 2014 or 2015. But, I would characterize it in this way that our atherectomy business, U.S. in particular, has been steady now for the past four to five quarters, in the teens growth rate. And it’s fluctuated from mid to high-teens in that last four quarters period of time. This clearly would represent upside to that growth rate, and we’re very confident in that. I don’t want to go too far here and get ahead of ourselves, but there’s no doubt in our mind that this is going to very much move the needle in terms of clinical practice, and represent upside to our current growth rate in the atherectomy business.

Jason Mills – Canaccord Genuity

Fantastic. That’s helpful. On Lead Management, you’ve often said, we’re growing as fast as we want to or something like that, and not as fast as we can. This quarter was a quite an eye-opener. Notwithstanding the solid growth you’ve been putting up the last few quarters, anything in particular during the quarter besides GlideLight that you can point to that kept or drove these kinds of growth rates that we haven’t seen frankly for over two years, now withstanding against solid growth over the last two years.

And as you look at the landscape over the next two years, your symposiums in Lead Management that I’ve attended have been standing room only. So, it seems like there’s more interest and the limiting factor has been a supply constraint as opposed to a demand constraint. So, can you characterize the statement that you made in the past about growing as fast as you want to as opposed to as fast as you can, what does that means for your Lead Management business going forward?

Scott Drake

Yeah, so your memory is good, Jason. We say often that we grow this business as fast as we should, not as fast as we can. I would say the incremental growth rate that we experienced here in Q4 was primarily driven by opening up new programs. I think the GlideLight impact and the underlying strength of the market remain constant, and it was more the new programs that led to that incremental up tick in the growth rate that we saw.

As you break it down, it was about 70% was unit growth, 30% price. We listen to our customers and our team very closely as it relates to what we’re doing on the Lead Management front. We actually did more training programs in Q4. Again a request from customers and the field, and we’ve spent more time opening up new accounts than we did converting to GlideLight despite the fact that GlideLight conversions happen at a very nice steady pace. So our ears to the ground, we attempt to be very responsive to customers and we continue to really focus on training and education programs for our customers.

To your point on standing room only, we just did a symposium down in Miami, where actually we had to turn away some physicians given the demand there. And I think that is one of the big stories here that in no way is this business predicated upon as you know malfunctioning leads, that wasn’t the case in the 2007 timeframe, it’s not the case today, but those problems have shined a spotlight on the overall space in Lead Management and physicians recognize that to deliver the best possible patient care, they’ve got to be able to both cap and extract leads and we’re really trying to help them on that front.

Operator

Our next question comes from the line of Brooks West with Piper Jaffray. Your line is open.

Brooks West – Piper Jaffray

Good morning. Can you hear me?

Scott Drake

Hey Brooks, good morning.

Brooks West – Piper Jaffray

Hey Scott. Thanks for taking the questions. Let me follow-up on the ISR opportunity first. In your recent Investor Relations presentation, you lay out the stepped growth of near-term, mid-term, long-term – mid-term being growth of 12% to 15%, and I’ve kind of thought about that maybe you’ve publicly said that timeframe is maybe 18 to 24 months within that is in-stent restenosis. So as you look at a potential delay, not versus original expectations, but in terms of an acceleration, does that put this growth projection in jeopardy at all or is this growth projection that you’ve laid out predicated on a, call it, a mid-2014 label?

Scott Drake

Very comfortable with the projections, Brooks, regardless of what may happen, pulling ISR in or pushing it out a quarter or two. It is not predicated upon that, you see that we exited the year at 13% growth, which is in the range of that mid-term target that we set out there as you mentioned 18 to 24 months from now. So, given that we’ve achieved that growth rate already and we’re talking about a timeframe that’s out, 18 to 24 months we’re very comfortable with that. And I would point to other things that are going to drive our growth beyond ISR. Although ISR, we believe is a huge impact for us both in the mid and in the long-term. You’ve got the clinical work that we’ve done and pointed to on the call. You have the office-based opportunity, the upstream products, Japan specifically, internationally holds real potential for us in some new products that we haven’t talked about publicly, that are in the pipeline, and will be launched later in the year. So, we’re very comfortable with what we’ve laid out there and that incorporates any potential movement in or out slightly of ISR.

Again, I want to say, and I’m going to risk being redundant here, that this small delay that we’re talking about, we believe does not read on pushing out the ISR indication. We’re confident in what we’re doing and we don’t believe that what’s taking place right now was a long pole in the tent.

Brooks West – Piper Jaffray

Thanks for that. Let me may just follow-up on your comment there on upstream in Japan. You’ve said Upstream would be accretive to gross margins cash flow positive for the year. Can you give us a sense for revenue contribution, and then kind of same thought with Japan, can you kind of frame near term opportunity in Japan? Then I’ve got one follow-on.

Scott Drake

Yeah absolutely. So we have what I would call modest assumptions build into our guidance that we’ve laid out here for Japan, for Upstream, for new products that we’ll be launching later in the year. I do honestly believe there’s potentially some upside there, but as you know things can happen on the other side of the equation, so we’re comfortable with what we’ve laid out here. I think it’s a little bit early to call specifics in terms of what Upstream could be, maybe in the next couple of quarters we’ll be in a position to do that both on Upstream and Japan, but we like what we’re seeing so far there.

Brooks West – Piper Jaffray

And then last one from me just on the GlideLight launch, can you give us a sense of where you are in terms of account penetration, maybe as a percentage? And then if memory serves, you launched that at HRS last May, should we think about you anniversarying that launch and maybe having that 15% price headwind in the second half of 2013?

Scott Drake

Yeah, great questions and that gives us an opportunity to clarify something Brooks that I think is not well understand by the investor community. First the specifics, we’re in the 60% to 65% range of accounts converted to GlideLight. And so in terms of how much longer we’ll feel the impact of that price increase, if you take a look at just last quarter Q4, roughly speaking we were in the 50% to 55% range on a weighted average basis. So, you have more than a full year left off the price increase for GlideLight to continue to show up. So, as it stands right now, we’re in the 60% to 65% range. So, 12 months from now in Q1 of 2014, you’ll still be feeling the upside of GlideLight pricing. So, we’ve got another roughly 18 months or so to continue to feel the positive effect of GlideLight. And I don’t think that’s very well understood, given the conversations that we’ve had with the investors, so I appreciate the opportunity to clarify that.

Brooks West – Piper Jaffray

Great. Thanks, Scott. Thanks, Guy.

Scott Drake

Thanks, Brooks.

Guy Childs

Thanks.

Operator

Our next question comes from the line of Amit Bhalla with Citi. Your line is open.

Unidentified Analyst

Hi, good morning. This is Nick (inaudible) in for Amit today.

Scott Drake

Hi, Nick.

Unidentified Analyst

Hey. Quick question on your – the new lead extraction programs that you guys have talked about. Can you talk about going forward in 2013, what are the big drivers in that Lead Management, is it those new – these new programs you’re having, the GlideLight conversion, and continual market strength. What do you see as the big drivers to where growth comes in Lead Management?

Scott Drake

Yeah. Nick, a few things there and it’s really broad based. First and foremost, the team is performing extraordinarily well. The growth that we have driven here of late is 70%, 30% units to price. And you have a very nice balance in that units growth of both deeper penetration and new accounts. We expect that will continue, as we expect to continue to feel the benefits of GlideLight pricing as we go forward. I really want to highlight here evidence of how well the team is performing, the difficulty of selling a price increase like this in the marketplace. It really does signal the quality of sales organization and the value of the technology that we have.

So, I think going forward it’s that same balance. You’ve got very strong underlying market dynamics. You’ve got a team that’s performing very well. We’re creating and starting new programs with customers and continuing to drive GlideLight. And the only thing I would add to it, Nick, is when you look at the CRM product trends going forward that in and of itself represents another positive for us in the marketplace. You saw perhaps recently one of the large CRM companies receive FDA approval for their second generation MRI conditional product; that is an enormous potential growth driver for us going forward, it’s not contemplated fully at this point, I don’t believe in our guidance, but represents a nice tailwind for us.

And then obviously the market development opportunity given that over 60% of infected leads are capped and treated generally speaking with antibiotics, we’ve got to get about changing that for the benefit of patient care. So really, really broadly speaking, it just sets up very nicely for us going forward.

Unidentified Analyst

Okay, great. And then one other on the PAD front, can you talk a little bit more about your awareness program there and increased investment you’re having going forward, and then also the competitive landscape and dynamics there?

Scott Drake

Yeah, the overall business for us is strong. And the particular point of strength that we have is when we have a PAD awareness program and an office-based customer, where there’s overlap there, our business is the most strong and the pipeline looks excellent, in fact better than it has ever in the history of the program, evidenced by the fact that we placed more lasers in Q4 than in any quarter proceeding as it relates to the office-based opportunity.

So the pipeline is increasing. We continue to win at about a 2 times our share rate in the marketplace and we hear very consistently why we win. Number one, that our technology treats the broadest range of morphologies. Number two, the safety profile of our device specifically as it relates to distal embolization and the value proposition that we represent to customers, both clinically and economically. So, we feel really good about that business. We are increasing investment, to your point, we’re not specifically calling out how many head count at this point, but overall as Guy said, SG&A as a percent of revenue this year will be down versus 2012.

Unidentified Analyst

Okay, great. That’s helpful.

Scott Drake

Thanks, Nick.

Unidentified Analyst

Yep.

Operator

Our next question comes from the line of Charles Haff of Craig-Hallum. Your line is open.

Charles Haff – Craig-Hallum

Hi, thanks for taking my questions and congratulations on a great quarter.

Scott Drake

Thanks, Charles.

Guy Childs

Thanks, Charles.

Charles Haff – Craig-Hallum

My first question is regarding a press release that you put out on January 24, talking about the patent results. The one thing that caught my attention was you mentioned that patent showed freedom from TLR rates that exceeded the targeted rate for the EXCITE ISR study. And I was wondering if you could kind of talk about that a little bit and perhaps share what that targeted rate is?

Scott Drake

Yeah, we’ve not shared publicly, Charles, what the – what the rate is for the EXCITE study, but what I would say here is full-throw is that we are very confident that given the results that we achieved with patent, that we will be effective and successful getting the indication and proving clinical superiority in line with what the FDA is requiring for the ISR indication. So, we just continue to be very confident and very comfortable. And what the FDA is looking for is a six-month endpoint there, and we exceeded that comfortably with the patent results.

Charles Haff – Craig-Hallum

Great. And then you mentioned last quarter that enrollment in the EXCITE ISR study was a little challenging with patient consent and other reasons, any reason to think – I know you gave the update here on how many patients were enrolled, but any reason to think that that pace would change over the next couple of quarters?

Scott Drake

Yeah, I’m an optimist by nature, Charles, so I’ll qualify it with that opening. A couple of things make me feel like we should continue to improve the enrollment rate; number one, we have now 35 sites that are active; we have a great deal of interest from our physician investigators; we do have the challenge of consent, as it relates to the study, and that to our question earlier is in part why we believe the FDA is being such a great partner in this process with us. So, we feel cautiously optimistic here. We will share when we land the plane on this adjunct analysis. And when we have that data, we’ll I’m sure we’d be sending out a press release, and we’re excited to share that with everyone.

Charles Haff – Craig-Hallum

Great. And then on the PHOTOPAC study, you gave an update here on the number of patients enrolled, when should we hear another update on PHOTOPAC?

Scott Drake

Yeah. I think like we’ve been saying now for gosh the better part of the year that we would have PHOTOPAC fully enrolled towards the end of this quarter, maybe the beginning of Q2. So I would imagine sometime there in Q2, we’ll be sharing a meaningful update there on PHOTOPAC.

Charles Haff – Craig-Hallum

Great. And my last question is regarding the 42 laser placements that you had this quarter, it sounds like the majority of those went to the VI space, but do you have any breakdown between VI and Lead Management or combo that you’d be willing to share?

Guy Childs

Thanks, Charles. This is Guy. I would say that it was not dominated by placements into VI exclusively it was well balanced between LM, in fact I believe we set a record for LM placements in to new programs in the quarter in addition to a record in office-based placements in VI. So, it did tend to be higher in the U.S., but well balanced between the two businesses.

Operator

(Operator Instructions) Our next question comes from the line of Suraj Kalia with Northland Securities. Your line is open.

Suraj Kalia – Northland Securities

Good morning, Scott and Guy. Congrats on the nice quarter.

Scott Drake

Hey, thanks Suraj. Good morning.

Guy Childs

Hi, Suraj.

Suraj Kalia – Northland Securities

Scott, forgive me, I joined a few minutes late. So again, forgive this question, so the delay in ISR, is that because of the adjunct analysis or I heard bits and pieces here and there and again forgive me, I didn’t hear the complete part.

Scott Drake

No, this is one of our favorite topics. So we’re happy to talk about it again here Suraj. Please don’t read anything we’ve said as a delay. We are encouraging everyone to keep their models at a mid-2014 event. The delay is simply in our ability and timing around sharing what will happen with the adjunct analysis. We were hoping that we’d be able to announce on this call exactly what that looks like, but we’re still in the midst of some final negotiations there with the FDA on what we need to do with that analysis. It is not a long pole in the tent either for success in mid-2014 or the opportunity to pull that in a bit, so there’s no impact there. We were just hoping to be able to share more on this call than we’re able to at this time.

Suraj Kalia – Northland Securities

And that was specifically related to the adjunct analysis?

Scott Drake

That’s correct.

Suraj Kalia – Northland Securities

Scott, is there a possibility, following up on Craig’s question earlier in terms of patent and EXCITE ISR differences in techniques, timing period, when you look at TLR rates or patency that the FDA could have different interpretations or a combined analysis would be – they would be okay with that?

Scott Drake

You know what Suraj, I’m going to have Shar, take a cut at answering this question. Shar?

Shar Matin

Hi Suraj. Just to answer your question on broad base, those are the discussions we’re having with the FDA to see, can we leverage some of the data that’s out there. We’re going through the details with them or negotiating. We don’t have the plan finalized yet, but we’re very hopeful that that if we get to where we want to be that’s where our plans could potentially accelerate our indication timeframe.

Suraj Kalia – Northland Securities

Okay. Scott, and one other things especially on lead removal, obviously having the laser in HRS guidelines has been a big boost, issues with CRM companies have been positive in the field for Spectranetics. That having said, when we go out in the field, one of the common complaints we get, the University Centers seem to be doing a lot of procedures, but it’s the community centers or the hospitals around the peripheries, that potentially that are not willing to let go of the patients, either because of training in the laser or they’re just surgically removing it or capping it. I guess, is there a difference, a change in marketing message that is needed or how would you propose getting into some of these centers at least at the periphery, while not losing your overall volume gains that you all have seen over the last two years? Thanks for taking my question.

Scott Drake

Yeah. Our pleasure, Suraj, thank you for the questions. As it relates to the major academic centers versus more of the community hospitals, we have a number of examples, some of them very recent of community hospitals, that have excellent extraction programs, and they’re delivering great patient care, and that’s what’s in our mind’s eye as it relates to some of this market development work that we’re talking about.

Some of these programs in hospitals went from exclusively capping leads and treating patients with antibiotics to now making very smart choices between extracting and capping leads, and we very much see it as our calling to broaden that as we go forward here in the back half of 2013. What’s required and it’s a very big undertaking, its having the right backup team associated with adverse events, surgical backup. And so developing a program, those are easy words to say, it’s a harder thing to do, but the team has I believe created some capacity to do that very well in 2012, and we’re looking to increase that capacity here in 2013.

Operator

Our next question comes from the line of Jim Sidoti with Sidoti & Company. Your line is open.

Jim Sidoti – Sidoti & company

Good morning. Can you hear me?

Scott Drake

We can, Jim.

Guy Childs

Yes, we can.

Jim Sidoti – Sidoti & company

Great, thank you. So if we listen to your guidance, it sounds like there’ll be some expenses primarily acquisition related in the first half of the year, but then you should see some nice earnings growth in the back half of the year, something better than that $2.5 million or so of loss, that you expect in the first half of the year. As we go forward, is there any reason to think they’ll be additional expenses after that or will you continue on that trend going forward?

Scott Drake

Yeah, I would say Jim, and Guy you may want to chime in here, when you look at the big picture, let’s start with data, EBTIDA normalized for med devices and deal costs goes up in 2013 from 2012 from about $13 million to $13.5 million to $14.5 million. We have talked about leverage emerging in the midterm and really driving it in the long-term. I think and hope we’ve been very clear that our near-term priority is top-line growth and our model sets up very, very nicely for leverage over time and you can clearly see even today that we are not a brute force marketing model by any means. We’re driving accelerated revenue growth and being very responsible with the overall P&L.

So, I think your way of looking at it is accurate. It is not uncommon for us to have a better second half as it relates to profitability than the first half. The front half of the year is heavily weighted with our global sales meetings, with bonus payouts, other conventions that we attend and then the back half of the year tends to be better on that front and we expect 2013 to be consistent with that. And the distorting effect of the medical device tax is very notable as it relates to our profitability picture. Guy, anything?

Guy Childs

I have none to add to that Scott, it covers it.

Scott Drake

Great. Thanks.

Jim Sidoti – Sidoti & company

Okay. And then just a quick follow-up. You mentioned the mid-2014 date, now is that a date for the approval, or for launch or for both or how we should think of that date?

Scott Drake

I would think of mid-2014 as being the time when we’ll be able to market on label for in-stent restenosis.

Jim Sidoti – Sidoti & company

Okay. So, and I assume that you have the capacity to ramp up ahead of that, so that you know there wouldn’t be any supply issues at that point?

Scott Drake

Absolutely. Yeah. We can, just in the current footprint that we have, and you see it showing up in the gross margin line, we can about double our volume with the current manufacturing footprint. So, it reads well both on our ability to your point to have world-class fill rates which indeed we do and achieve nice margin expansion over time.

Jim Sidoti – Sidoti & company

And do you anticipate further expansion to the sales force at that point or do you think you’ll be all set by then?

Scott Drake

You know it’s early to call that Jim. In this year, we anticipate that we’ll be adding between 5 and 10 sales reps, but SG&A as a percent of revenue will be down versus 2012 slightly I would say, and then we will – we’ll continue to contemplate what to do with the sales organization as we go forward as that opportunity gets closer and closer to us we will be assessing how we can maximize that opportunity both for the good of patients and our customers, and for the good of our shareholders.

Jim Sidoti – Sidoti & company

All right. Thank you.

Scott Drake

Thanks, Jim.

Operator

And I’m not showing any further questions at this time. I’d now like to turn the call back over to management for closing remarks.

Scott Drake

Thanks, Kate and thanks everyone for joining our call this morning. We appreciate your time and interest in our company and look forw Scott Drake, President, Chief Executive Officer & Directorard to reporting again in 90 days. Hope you all have a great day.

Operator

Ladies and gentlemen, thank you for participating in today’s conference. This does conclude the program, and you may all disconnect. Everyone have a great day.

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