Volcano Management Discusses Q4 2012 Results - Earnings Call Transcript

Feb.21.13 | About: Volcano Corporation (VOLC)

Volcano (NASDAQ:VOLC)

Q4 2012 Earnings Call

February 21, 2013 5:00 pm ET

Executives

John T. Dahldorf - Chief Finance Officer and Principal Accounting Officer

R. Scott Huennekens - Chief Executive Officer, President and Director

Analysts

Christopher T. Pasquale - JP Morgan Chase & Co, Research Division

David H. Roman - Goldman Sachs Group Inc., Research Division

Brooks E. West - Piper Jaffray Companies, Research Division

Matthew Dolan - Roth Capital Partners, LLC, Research Division

Raj Denhoy - Jefferies & Company, Inc., Research Division

Danielle Antalffy - Leerink Swann LLC, Research Division

Bruce M. Nudell - Crédit Suisse AG, Research Division

Michael Rich

Jason R. Mills - Canaccord Genuity, Research Division

Ben C. Haynor - Feltl and Company, Inc., Research Division

Operator

Good afternoon, and welcome to Volcano Corporation's Fourth Quarter 2012 Earnings Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded Thursday, February 21. A replay of the call will be available through February 28, by dialing (404) 537-3406, passcode 90659548 or via the company's website at www.volcanocorp.com. I would now like to introduce Mr. John Dahldorf, Volcano's Chief Financial Officer. Please go ahead, sir.

John T. Dahldorf

Thank you, and good afternoon, everyone. With me today is Scott Huennekens, Volcano's President and Chief Executive Officer. Scott will provide a brief review of operational highlights during the quarter and 2012 and address the key elements of our growth strategy for 2013 and beyond. I will follow with a review of our financial results for the quarter and full year and a discussion of our guidance for 2013. Before turning the call over to Scott, let me remind you that today's discussion will contain forward-looking statements that involve risks and uncertainties that could cause our actual results to differ materially from those discussed in today's call. These risks and uncertainties are outlined in today's press release and in our filings with the Securities and Exchange Commission, including our most recent prospectus supplement and in our 10-K to be filed next week. We caution you not to place undue reliance on our forward-looking statements, and we disclaim any obligation to update these statements. Scott?

R. Scott Huennekens

Thank you, John, and good afternoon, everyone. The past year has been one of many important accomplishments for Volcano, as we continue to advance our vision of providing precision guided therapy solutions for today's health care environment and further strengthen our position as a leading platform company, guiding and optimizing minimally invasive therapies, utilizing visualization, physiology and future technologies.

Our fourth quarter revenues of $102.5 million represented a record revenue quarter for the company, and we generated annual year-over-year revenue growth of 12% on a constant currency basis in 2012, a year in which many in our sector struggled to achieve top line growth. We continued to our long track record of market share gains in all geographies, in all product lines as our growth outpaced that of our overall markets. We also continued to be an innovation leader, introducing enhanced versions of our key disposables and realizing important milestones in our product pipeline, while also strengthening our distribution and market development initiatives and the infrastructure of the company. We've set the stage for achieving exciting growth in 2013 and beyond with our winning strategy that is comprised of 3 components: First, our base business; second, our pipeline and internal development efforts; and third, expansion through M&A and the in-licensing of technologies and partnerships with other industry leaders and strategic investments in emerging technologies.

The addressable markets we serve today represent $2.5 billion and can provide us annual revenue growth of 11% to 13% for the 5-year horizon. The markets we target through our pipeline and business development programs will more than double the size of our addressable markets to more than $5 billion, enable us to generate annual revenue growth of 13% to 15% over a 5-year horizon. We will speak to these key elements of our growth strategy today and expand upon them during our Analyst Day on March 7 in New York.

But first, a brief review of 2012. Our success in 2012 occurred despite some formidable challenges, beginning with the macro environment in which the U.S. PCI volumes continued to decline, especially in stable coronary PCI, resource constraints plagued Europe and the telecom industry experienced a dramatic slowdown. In addition, our decision to escalate our transition from a distributor to direct sales effort in Spain impacted our IVUS business in Europe, but that is now behind us.

Finally, our IVUS disposables business in Japan was impacted negatively by the roughly 10% cut in reimbursement that became effective at the beginning of the second quarter of 2012. However, we continue to leverage the key trends impacting our customers, including the need for evidence of appropriateness to stent and for validating outcomes amidst growing scrutiny of health care costs, stricter reimbursement criteria and litigation related to over-stenting.

As we have discussed with you in the past, we have been able to augment what was always a strong clinical story to clinicians, with a risk management, cost effectiveness and quality improvement message to hospital administrators. This has become particularly important as private practices are increasingly being acquired by hospitals and as hospitals implement new mandates to control cost and address the new CMS program that penalizes hospitals for above average 30-day readmit rates.

Our 2012 growth story begins with the continued dynamic expansion of our FFR disposables business, which grew 45% on a constant currency basis during the year. This growth was driven by our continued technology innovation, the broad portfolio of products, and the continued release of favorable data supporting FFR. In addition, while still in its infancy, we saw good growth of our FFR business in Japan, driven by new and reimbursement during the year for its use during diagnostic angiography. While the macroeconomic factors I mentioned a minute ago had a dampening effect on the growth rate of our imaging business, we continue to make inroads into the market. The market is now more broadly defined as coronary and peripheral.

For the coronary, the growth occurred particularly in more complex cases such as bifurcations in left main disease. In the peripherals, growth was driven by utilization in AAA, venous and SFA applications. We ended 2012 with roughly 2/3 of the U.S. imaging market, having captured 93% of newly-installed systems in the U.S. versus Boston Scientific over the past 2 years. We also experienced positive clinical response to the result of the IVUS sub-study of the ADAPT trial, which were released at TCT in October. This largest study of its kind showed that stent procedures guided by IVUS resulted in better patient outcomes and fewer complications at 30 days and 1 year versus procedures without IVUS, and were safe. There's more data to come from this set during 2013.

We also continued our track record of leading innovation during 2012. We launched our fourth new FFR pressure wire in the past 4 years, the Prestige PLUS with AccuSense, which delivers improved sensor accuracy for longer procedures. On the imaging side, we introduced the PV .035 catheter for use in peripheral and a new Eagle Eye Platinum Short Tip catheter, which has potential applications for bifurcations and highly stenosed and complex lesions and provides near-field visualization and improved deliverability. We also continued to enhance our platform technology to increase its speed and ease of use.

Finally, we made 2 important acquisitions and implemented programs to further improve our operating leverage and drive profitability, including the opening of our Costa Rica facility and going direct in Spain and Poland. As we begin 2013, we are well-positioned with our growth strategy, beginning with our core businesses, FFR and intravascular imaging. We believe FFR can be an addressable market of $2 billion within the next 5 years, and we continue to gain market share in all of our geographies. We believe our share of the U.S. FFR market now is approximately 55% and approaching 50% in both Europe and Japan. We believe the global FFR market will grow in excess of 15% annually over the next 5 years, and that the growth of our FFR business will continue to exceed the rate of growth of the market. We believe the growth catalyst of our physiology business will be our iFR or Instant Wave-Free Ratio, adenosine-free FFR technology. Data from early studies such as ADVISE have demonstrated a strong correlation of iFR to FFR, and we have now other important physiology studies underway to further support iFR.

We think the health care environment today portends a great deal of growth opportunity for FFR going forward and for its use in treating an expanded patient population driven by favorable data, as well as the potential for both the use of FFR being elevated in guidelines of the major cardiology associations and for its mandated use in coverage decisions.

With respect to our coronary imaging business. As mentioned earlier, we have experienced pressure from increased FFR use and the continued softness in PCI volumes in the coronary sector, which continue to decline in the mid-single digits in the U.S., that is PCI volumes, stable coronary PCI volumes. While there was solid growth in Japan, where our IVUS disposable unit grew in the high-single digits during the year. European PCI activity continued to decline in most countries, with Germany, France and the U.K. being among the exceptions. We expect these trends in the U.S. and Europe coronary PCI activity to continue in 2013.

Despite this near-term softness in PCI volume, we believe the intravascular imaging market, including peripherals, can grow approximately 5% to 6% on a compounded annual basis over the next 5 years, with peripherals outpacing coronary. And then our imaging business, overall, will exceed the growth of the market.

In the near term, we will benefit from having completed our transition to a direct sales effort in Japan, and we will begin to anniversary the reimbursement reduction in Japan starting in the second quarter. Equally important, we have a number of initiatives within our imaging business that will begin to positively impact revenues as we go through 2013 and enter '14.

We will continue to expand into more complex cases, as well as the peripherals. As we discussed in our last call, we have established a dedicated business unit for the peripheral market and added a pilot U.S. sales force to support this initiative. Today, peripherals account for approximately 10% to 15% of our imaging revenues, but we see significant opportunity for growth in the coming years.

Potential indications for imaging and the peripherals include endovascular aortic aneurysm repair, stenting in the superficial femoral, artery and below the knee arteries, atherectomy, IVC filter placement, venous compression disease, deep vein thrombosis, dialysis graft and fistulas, carotid and neuro intervention. Our newly introduced PV .035 catheter should facilitate our efforts in the peripherals, and we will be undertaking a number of clinical studies in this sector as well.

In addition, we are pleased with the progress of FACT or Focal Acoustic Computed Tomography, our next-generation IVUS technology, which combines the near-field capabilities of OCT with the far-field view of IVUS. FACT does not require flushing of the artery as is the case of OCT, resulting in a better image through a higher level of ultrasound resolution and faster pullback. We believe that when commercialized, FACT will represent the new standard for intravascular imaging. We plan to initiate first-in-man cases towards the end of this year.

Another important element of our pipeline is the Axsun Medical, where we are gaining increasing traction in ophthalmology and at the beginning stages of developing other markets such as dental. You'll hear more about Axsun Medical programs in 2 weeks at our Analyst Day. But we are now designed in nearly all of the major ophthalmic OCT cameras and believe we will gain significant share of this market over the next several years.

In total, through our pipeline and internal development efforts, we currently have 15 applications underway that will address 8 or more vertical markets. These programs include in addition to iFR, FACT and Axsun Medical, Flow, Forward Looking IVUS, OCT, Crux IVC filter, Sync-Rx, Image Co-Registration, Forward-Looking Intra-Cardiac Echo and we'll cover them in depth at our Analyst Day. However, as I mentioned during our JPMorgan Conference presentation, we anticipate we will have FDA approval for FLIVUS, Forward Looking IVUS, in the first half of this year, and we continue to enroll patients in market development clinical trials in the U.S. and Europe.

With respect to FL.ICE, Forward-Looking Intra-Cardiac Echo, we continue to make progress towards anticipated commercialization in 2014 outside the U.S. and in the U.S. during 2015. The final leg of our growth platform is expansion through business development with initiatives such as M&A and in-licensing our technology. An example of this latter strategy is our agreement with Covidien, which is incorporating our IVUS technology into their SeeHawk offering, and we would expect to complete more of these types of deals in the future.

With respect to M&A, we realized 2 important milestones with our Sync-Rx and Crux Biomedical transactions in the fourth quarter of 2012. We'll discuss the potential of these products in more detail again at our Analyst Day. But as a quick review, Sync-Rx is an Israeli company that develops advanced software applications that optimize and facilitate transcatheter cardiovascular interventions using automated online image processing. This technology represents a major advancement for our multi-modality platform and our initial focus will be angiography and coronary catheterization and development of IVUS in intravascular imaging co-registration with angiography.

Future applications could include co-registration for FFR, structural heart and peripheral. We're also excited about the opportunities with Crux, the acquisition of which was completed in December. This company was founded by Dr. Tom Fogarty. Crux's product portfolio includes a novel inferior vena cava or IVC filter used to prevent pulmonary embolisms, an IVC filter retrieval kit and a structural heart embolic protection device. The IVC filter has regulatory clearance in both the U.S. and Europe. It has a novel self-centering design, eliminating the problem of tilt that is common with other filters in the market, allowing for bi-directional retrieval through either the jugular or the femoral vein. The Crux IVC filter has demonstrated excellent results in clinical trials and is emblematic of our strategy to move beyond intravascular imaging to a wide variety of diagnostic and therapeutic solutions, as well as diversify beyond coronary applications and increase penetration of the peripheral market with our imaging technology. We're in the process of building out manufacturing for the device and expect to initiate a commercial launch in early 2014.

The next milestone in this program will be achieving regulatory approval of guided IVC filter placement at the bedside followed by development of a combo device, both of which should result in significant cost savings for the hospital.

With respect to M&A going forward, we'll speak to our vision again in more detail, March 7. But as I outlined then at JPMorgan, we're focused on acquisitions in 4 areas: the coronary, peripheral, structural heart and CTO markets, in both coronaries and peripherals. We have defined criteria in these 4 market segments, including projected addressable market of $500 million in sales, a projected #1 or 2 position in the market, the opportunity to generate 20% growth, limited dilution and a strong team and culture.

Further, we have included that our plan is not to do earlier-stage acquisitions requiring major R&D investment. Instead, pursuing opportunities where there is limited regulatory, technical and clinical risk and growth available through geographic commercialization and clinical indication expansion where we can leverage our manufacturing, clinical and distribution capabilities.

We believe these criteria will lead us to 2 types of acquisitions, those companies beginning commercialization and those ramping commercialization. Crux and Sync are examples of beginning commercialization opportunities where both products have regulatory approval and clinical data that require limited technical development.

In closing, we are very pleased with the progress we've made over the past year and with how we are positioned for success in the years ahead. We have a proven strategy of delivering diagnostic and therapeutic solutions that result in improved patient outcomes and the quality of care at lower cost. As we have discussed today, these attributes are even more important now in an environment where the payer and provider share risk, and where we can provide value with our precision guided therapy strategy. At Volcano, we are creating a formidable medical device company that can leverage a very important asset, our install base of more than 7,700 multi-modality platforms and positions us at the center of the cath lab, thereby enabling us to generate increasing cash flow and profitability in the years ahead.

Thank you, again, for joining us today. And I'll now turn the call over to John.

John T. Dahldorf

Thank you, Scott. Revenues for the fourth quarter of 2012 on a reported basis were $102.5 million, a record quarter in revenues for the company and a 10% increase over revenues of $92.7 million in the same period a year ago. On a constant currency basis, revenues increased 12% versus a year ago. Revenues for all of 2012 were $381.9 million, an 11% increase over revenues of $343.5 million in 2011 and a 12% increase on a constant currency basis.

Medical segment revenues, which includes primarily systems, FFR and IVUS disposables and Axsun Medical, increased 10% on a reported basis and 12% on a constant currency basis in the quarter year-over-year, including an 11% increase in disposable revenues on a constant currency basis.

During the quarter, we completed working through our distributor inventory in Spain, as we initiate our direct sales effort there. Axsun Medical revenues were $2.7 million versus $2.6 million a year ago, while revenues from Axsun Industrial were $2.5 million versus $1.5 million a year ago.

Consolidated sales of multi-modality systems and related equipment in the quarter were $12.2 million versus $11.5 million a year ago. Total console

placements in the quarter were 247 versus 236 a year ago, including 109 in the U.S. versus 146 last year. In Japan, we had 43 placements versus 22, while in Europe, we had 54 placements versus 50 last year. We placed 41 consoles in the rest of world versus 18 a year ago.

As Scott mentioned earlier, we now have approximately 7,700 consoles placed worldwide. We have provided a breakout of revenues in today's press release, but a couple of notable items include, FFR disposable sales in the fourth quarter increased 45% year-over-year on a constant currency basis, including 34% in the U.S. and 232% in Japan.

For the full year of 2012, FFR disposables increased 45% on a constant currency basis, with increases of 40% and 187% in the U.S. and Japan, respectively.

With respect to our IVUS disposable business, revenues for the year on a constant currency basis increased 4% in the U.S., as well as 4% in Japan despite the reimbursement reduction of approximately 10% that became effective in Japan on April 1.

Gross margins in the fourth quarter were 66.7% versus 67.3% in the fourth quarter a year ago. Factors contributing to the lower gross profit performance include product mix and FX, slightly offset by lower manufacturing costs. Gross margins for the total year were 66.2% versus prior year of 66.7%. I would note gross margins of 66.2% compared to our guidance for the year of 64% to 65%. That actually was our original guidance for the year. We exceeded this guidance because we haven't rationalized the Rancho Cordova facility as of yet due to demand for FFR guide wires and minor delays of receiving some regulatory approvals for Costa Rica, all of which are now on schedule. In addition, the Rancho Cordova facility ran at capacity and achieved record yields during 2012. We will begin and complete the plant rationalization process during the current year.

Operating expenses in the fourth quarter were $63.3 million versus $53.7 million in the fourth quarter a year ago and $54.4 million in the prior quarter. Factors impacting the fourth quarter expenses versus prior year included increased sales and promotional costs, litigation expenses, timing of R&D and clinical programs, R&D expenses related to Sync-Rx and Crux and acquisition-related items. The change in spending between the fourth and third quarters is primarily attributable to increased sales costs, trade show expenses, litigation, acquisition-related costs, timing of R&D programs and the additional R&D expenses from Sync-Rx and Crux.

Operating expenses for the year were $233.4 million versus $203.6 million a year ago. Items of note after operating income included a $1.8 million increase in interest expense for the quarter versus a year ago, primarily due to the convertible debt issued in December, and a loss of $5 million attributable to the retirement of approximately $90 million of earlier debt. We also recorded a gain of $2.8 million in connection with a long-term investment.

Tax expense for the quarter was $2.6 million benefit versus a $21.7 million benefit a year ago. The current quarter tax expense included the benefit of $4.9 million related to the release of the valuation allowance on foreign deferred tax assets versus a $22 million benefit booked in the fourth quarter last year related to the release of the valuation allowance in federal and certain state deferred income tax assets.

For the fourth quarter of 2012, we reported net income of $2.5 million or $0.04 per diluted share versus net income of $29.4 million or $0.54 per diluted share in the fourth quarter a year ago. Weighted average shares on a diluted basis at the end of the quarter were 55.4 million versus 54.5 million a year ago.

For all of 2012, we recorded net income of $8 million or $0.15 per diluted share versus $38.1 million or $0.70 per diluted share in 2011. Weighted average shares on a diluted basis at the end of the year were 55.2 million versus 54.6 million a year ago.

Finally, with respect to the balance sheet. We ended 2012 with $516 million in cash, cash equivalents and available-for-sale investments compared to $259 million at the end of the prior quarter and $250 million at the end of fiscal 2011. The increase in cash reflects the net proceeds from our convertible debt offering during the quarter, minus approximately $105 million related to retirement of debt and $54 million related to acquisitions.

With respect to guidance for 2013, due to the volatility of the FX market and the fact that approximately 32% of our revenues are in Japanese yen and 14% are in euro, we will be providing guidance on a constant currency basis. I also want to remind you that for every $1 impact of FX at the revenue line, approximately 90% drops down to the gross margin line and 65% down to the operating margin line.

With respect -- we expect revenues will be in the range of $422 million to $428 million, including approximately $7 million from our Axsun Industrial segment. Our expectations for total revenues in 2013 represent an increase of approximately 11% to 12%. While we don't provide quarterly guidance, we expect our quarterly revenues as a percent of total year revenues in 2013 to track similarly to previous years, with our lowest quarter in the first and highest quarter in the fourth.

Gross margins will be in the 65% to 66% range, which will include a 200 to 300 basis point dip in the middle of the year as we rationalize our excess capacity, as I referenced earlier.

Operating expenses will be in the range of 61% to 62% of revenues. Included in operating expenses will be incremental expenses of approximately $3 million related to the medical device tax and approximately $4.6 million related to acquisition accounting for Sync-Rx and Crux, as well as $3.3 million of amortization of intangibles.

Other factors in operating expenses include approximately $2 million related to our soon-to-be new relocated corporate offices in San Diego, and approximately $2 million from depreciation of our new ERP system, as well as approximately $1.5 million in restructuring expenses related to the Rancho Cordova facility.

I should note that we expect our SG&A expense to increase approximately 8.5% year-over-year, but R&D expenses will increase approximately 29% versus 2012 due to project development cost associated with the Sync-Rx and Crux programs, as well as a significant increase in clinical activities. Without R&D and acquisition-related expenses associated with Sync-Rx and Crux, our operating expenses will increase approximately 9.5% versus 2012.

Interest expense for the year will be approximately $27.7 million, of which approximately $19 million is noncash. Income tax expense will be a benefit of $1 million this year, with most of it being realized in the first quarter due to the 2012 R&D tax credit. We expect a net loss on a GAAP basis of $0.10 to $0.14 per basic share and non-GAAP net income of $0.16 to $0.20 per diluted share. Non-GAAP results exclude acquisition-related expenses, amortization of intangibles and the noncash interest expense. The company expects weighted average basic shares of 54.4 million shares and approximately 56.2 million weighted average diluted shares.

In closing, we want to remind you of our Analyst Day on Thursday, March 7, at the NASDAQ market site in New York. You should have received several mailings on this event. But please feel free to contact us if you have any questions. And we hope to see many of you in a couple of weeks. If you plan to attend, please let us know if you've not already done so. In addition, prior to our next quarterly conference call, we'll be appearing at the Barclays Healthcare Conference on Tuesday, March 12 and the Roth Growth Conference on Monday, March 18.

Thank you again for joining us today. And we'll now open the call to your questions. [Operator Instructions] Thank you.

Question-and-Answer Session

Operator

[Operator Instructions] So we'll start with our first question from Chris Pasquale from JPMorgan.

Christopher T. Pasquale - JP Morgan Chase & Co, Research Division

Let's start with the guidance commentary. John, understanding the volatility in the currency market, I think it will be helpful if you could at least ballpark for us what you estimate the FX headwind to be on the top line, assuming things stayed right where they are today.

John T. Dahldorf

Yes. So if you think about FX kind in the JPY 92 for the yen and USD 1.32 for the euro, we're probably looking at a headwind of approximately $60 million.

Christopher T. Pasquale - JP Morgan Chase & Co, Research Division

Okay. And in terms of the gross margin commentary as we move through the year, we should expect a dip in the middle part of the year as Rancho Cordova winds down and a recovery exiting the year, is that sort of the reverse bell shape?

John T. Dahldorf

Yes. You'll see most of that 200 to 300 basis point dip in Q3.

Christopher T. Pasquale - JP Morgan Chase & Co, Research Division

Okay, got it. And then maybe one for Scott. You talked about the intravascular imaging market growing 5% to 6% over the next few years. That's obviously a little bit higher than we saw in 2012, a number of headwinds, which you walked through the beginning of the call. But what drives your confidence that we'll see that re-acceleration. And what does that 5% to 6% assume for peripheral growth sort of lifting the overall versus coronary?

R. Scott Huennekens

Yes. Actually, Chris, the intravascular imaging market, we believe grew faster than that. We only participate in the IVUS portion of it, not the OCT portion of it. So overall, both of those segments, which we kind of call high-resolution imaging which will be our FACT and the OCT imaging, and then standard IVUS imaging, we see the combination of both of those growing at 5% to 6% over the period of time. And we would see the coronary portion of that probably growing in the 2% to 3%, and the peripheral portion growing more in the 9% to 10%, coronary being bigger than peripheral to begin with, and collectively 5% to 6%.

Operator

And we'll take our next question from David Roman from Goldman Sachs.

David H. Roman - Goldman Sachs Group Inc., Research Division

Scott, this is the first, I think, call you've had since you issued the convertible debt last December. And I was hoping you could just talk to us a little bit about just strategically how you're thinking about the business. So I think a lot of the decision to be refocused more on M&A, with the cut to the underlying growth expectation of the business was a little bit of a surprise. I'm just hoping that you could just walk us through how we should think about the business going forward and whether M&A is something on which you're going to become increasingly more dependent and why?

R. Scott Huennekens

Yes. You said something that we strongly disagree with, which is, I think you said something, David, like a focus on it -- or return to focus on it or something like that. A few things here. Our strategy hasn't changed at all. Our strategy is exactly the same as it's been for the last nearly 7 years as a public company. Grow our base business, number one. 3 legs of growth. Number two is build it out and deliver on our pipeline, and number three is in-licensing or M&A that's synergistic with the business. So it's really no different, the size of the company has gotten substantially bigger, from $80 million to the guidance we gave this year, over $400 million. So I think M&A changes where we would have bought smaller things in the past. And now we would look at larger things. But we feel very, very comfortable with our base business as I laid out at the JPMorgan Conference, growing at 11% to 13%. That being augmented, number two, by our pipeline, which will grow over 20%. So together, those will drive growth over 13%. And then we'll look at M&A opportunities that augment that or are synergistic to it based upon the criteria that I outlined in my words that I just spoke. I don't want to have to repeat them for anybody. But I mean, it's basically, I listed the criteria, and there's 2 kinds of deals. Those would be deals that are beginning commercialization or are already commercializing. If something's earlier, those would be things that we'd invest in. And in the past year, we've invested in CVI, drug-eluting balloon, and we invested in Vessix and the renal denervation space. Both of those exited with acquisitions, and we didn't participate in the acquisition because they didn't meet our criteria. We benefited by significant returns on our investment. So we'll continue to have that discipline, and as I shared with investors in San Francisco, it may be that we don't buy anything. So I wouldn't say, look for something to happen this year or next year. We did our last convert and it took, John, a couple of years before we did Sync-Rx and Crux in order to use that capital. So this is a refresh to position ourselves. It's the third leg of our growth. It's third in priority to the first two. If we didn't buy anything, what would the cost be to us? I think, John has told me it's $25 million to $30 million after...

John T. Dahldorf

Cash cost.

R. Scott Huennekens

Cash cost, after tax. So to have a $25 million 5-year marker for looking at M&A to augment our business made a lot of sense of us.

David H. Roman - Goldman Sachs Group Inc., Research Division

That's very helpful perspective, Scott. And then for John, I think in the past you've talked about operating margins potentially getting into the double-digit range. You're making -- there is some changes here on the way looking at interest expense sort of below the operating line. But how are you thinking about profitability? Obviously, 2013 looks a little bit like a transition year. But where do you think -- are we still on track to get to those type of operating margins or has anything changed?

John T. Dahldorf

Nothing has changed. I mean, obviously, we are going to incur a little bit of dilution this year related to the Crux and Sync, just from their R&D alone, between the two of them, it's probably about $8.5 million. And then obviously, you've got some of this lovely fair market value accounting that's based on contingent liabilities of about $4.6 million that's kind of embedded into the guidance. But I think that the revenue growth story is still there, the gross margin expansion is still there and the operating leverage as we kind of exit 2013 and go on to 2016 and 2017 are there. And so our goal is still to be 20% operating margins by 2016, 2017, and I don't see anything right now that would prohibit us from getting there.

David H. Roman - Goldman Sachs Group Inc., Research Division

And I'm sorry, a real quick clarification, the 61% to 62% on OpEx in the guidance, that's GAAP or non-GAAP?

John T. Dahldorf

No, That is GAAP.

David H. Roman - Goldman Sachs Group Inc., Research Division

That's GAAP, okay. Got it.

R. Scott Huennekens

And the thing I would -- I think I would add is, relative to the M&A or things like Crux and Sync, these are the things that will continue to decrease our dependency on stable coronary PCI, which is a market that we see that will continue to be challenged for growth procedure-wise in Western economies. The growth is obviously in places like China and India, and we see opportunities 3 to 4 to 5 years from now in those markets more for our technologies as those economies are going to have to look at those procedures and challenge their utility and their cost.

Operator

And we'll take our next question from Brooks West from Piper Jaffray.

Brooks E. West - Piper Jaffray Companies, Research Division

Scott, I want to start with you. Appreciate your market commentary in the opening or in your prepared remarks. But I wonder if I could get you to comment specifically on Medtronic's commentary around a slower than usual start in Europe in January. And if we might actually be in store for even more of a downturn over there.

R. Scott Huennekens

We don't see it. We've been out -- we were off to a great start.

Brooks E. West - Piper Jaffray Companies, Research Division

Okay, fair enough. Then a follow-up on peripheral, to Chris's earlier question. Can you talk about over the next couple of years where you see that as a percentage of your overall imaging revenue? And then are you seeing traction in -- greater traction in one specific therapy, be it FFA, stenting or AAA? Any color there would be appreciated.

R. Scott Huennekens

We will have that level of information, Brooks, and detail on March 7 at our Analyst Day. And I'd rather go into it at that point in time. But definitely, today, we see more growth happening in the EVAR/TEVAR space and the venous space.

Operator

And our next question is from Matt Dolan from Roth Capital Partners.

Matthew Dolan - Roth Capital Partners, LLC, Research Division

So the first question was just looking at the growth guidance for the year, you mentioned OCT in the prepared remarks. Can you tell us how both OCT and FFR are impacting the growth share for IVUS that you're seeing out there given the number you gave us today?

R. Scott Huennekens

Yes, OCT, not much, definitely FFR is having budgetary impact in accounts. And so I don't know if that's 95%, 96%, 97%. If you said there is some level of impact, but I say most of it's from FFR.

Matthew Dolan - Roth Capital Partners, LLC, Research Division

Okay. And then John, just to clarify, was that $7 million your forecasting for Axsun for 2013 and why so low?

John T. Dahldorf

Yes, that's Axsun Industrial, and we just continue to see pretty extreme volatility in that market. And so -- we -- it's just becoming a much, much smaller focus of ours as the medical business starts to ramp as Scott mentioned in his comments.

R. Scott Huennekens

Yes. We indicated to you guys strategically that, that would be our objective over time. That this business would transition to a medical business. We weren't really particularly interested in being a telecom company, and you're seeing that happen and if that number is 0 in 2, 3, 4 years, we're not going to lose any sleep over that.

Matthew Dolan - Roth Capital Partners, LLC, Research Division

Sure, I just wanted to clarify because it makes the medical grow faster obviously. And then finally...

R. Scott Huennekens

And that's where the focus of R&D is R&D-wise, and that's where the success is happening and really great success, especially in the ophthalmology space.

Matthew Dolan - Roth Capital Partners, LLC, Research Division

Okay. And then last one I will ask, I know you'll touch on this in a couple of weeks, but FLIVUS and FL.ICE, you've got some dates that are now within, let's call it, the near term in terms of a launch. Can you just give a little commentary on how that layers into your growth over the next, call it, 1 to 2 years?

R. Scott Huennekens

Yes, so I'll come in on the market side of things. I mean, we'll be launching in Europe the peripheral market, specifically the SFA is not a substantial market in Europe, so it's pretty de minimis, Matt, for the next tiers we launch in the U.S., the beginning part of next year, but it's the beginning of a launch, so it's really the second half of '14 before it starts becoming significant. And I think it's really our Gen2 devices steering, that's more of a market driver for revenue which would be the second half of '14.

John T. Dahldorf

And we also caution you, Matt, as we've kind of discussed in the past that as we introduce these new technologies, we always are very conservative in terms of the runway adoption that you have. And so to the extent that they're introduced, again, I would give them 12 to 18 months at least before they start contributing in any way to our revenue growth.

Operator

And our next question is from Raj Denhoy from Jefferies.

Raj Denhoy - Jefferies & Company, Inc., Research Division

I wonder if I could ask a bit about the revenue guidance. Back on the third quarter, I think it was, you gave revenue guidance for fiscal -- for calendar '13 -- fiscal '13 of 11% to 13%. And at that time, you were on track to grow about 12% this year, which is what you did. You've now lowered it 11% to 12%, and even at that time, there were some questions about why it would be sort of flattish on '12 given that you're anniversarying the Japanese price cuts, you're anniversarying what happened in Spain this year? Are you seeing something in a marketplace that's causing you to be still more conservative in your outlook?

John T. Dahldorf

Yes, we are. I mean, we're seeing the same things. so I mean, we're seeing this volatility in the telecom and so that contributes a couple million dollars probably in terms of our initial thinking there. Probably, the impact is probably $4 million or $5 million. We're thinking about the fact that we don't see any significant recovery in Europe, and again, we continue to be very conservative on our outlook in PCIs in the U.S. based on what we saw towards the end -- through the end of the fourth quarter and beginning of this year. And so we just wanted to take a step back and make sure that weren't out over our ski tips like we were -- like we seemed to be last year, especially at this time of the year.

Raj Denhoy - Jefferies & Company, Inc., Research Division

Okay. And then just, maybe I could ask on pricing. What are you seeing in terms of catheter pricing, both on the IVUS side and on FFR? I know it's a complex question given the geographies, but have you seen really any major changes in terms of the direction there?

John T. Dahldorf

We have not.

Operator

And our next question is from Danielle Antalffy from Leerink Swann.

Danielle Antalffy - Leerink Swann LLC, Research Division

Just a quick question on FFR. Growth decelerated again this quarter in the U.S. after decelerating last quarter. I'm just -- we're hoping to get some color on whether this is a trend of deceleration, is there something special in the fourth quarter that I might have missed and where you see FFR growth going in 2013 and beyond?

John T. Dahldorf

Yes, so I think what you're running into Danielle is that we have a bigger denominator that we're having to kind of overcome, and we kind of anticipated this, and I don't think any of us expected us to continue to grow at a 45% clip. And so we think that we're going to have solid, mid-30s growth at least in the FFR across all of our geographies including the U.S. as we go through 2013. So that's -- I mean, we feel fairly confident about that.

R. Scott Huennekens

So Danielle, this is Scott. I would add that our biggest competitor still remains non-use with 88% non-use in the market. And as it relates to the U.S., substantially higher number in Japan and a higher number also when you look at pan-Europe. And the data just supports a much higher level, so we see continued growth. It's an exciting market. It's an expanding market based upon technology to eliminate friction of use, additional clinical data, reimbursement changes, all of those things are just going to continue to help drive this FFR market forward.

Danielle Antalffy - Leerink Swann LLC, Research Division

Okay, great. And then actually following up on the clinical data front, is there anything in the pipeline from a clinical data perspective coming over the next sort of 12-or-so months that can further expand the FFR market, sort of a FAME II type situation?

R. Scott Huennekens

No, there's not a FAME III ischemia. A number of these other things are out beyond that period of time.

Operator

And our next question is from Bruce Nudell from Crédit Suisse.

Bruce M. Nudell - Crédit Suisse AG, Research Division

Scott, did you -- I thought I heard in the prepared remarks, you said the FFR market could grow at a 15% CAGR for the next 5 years. And given $2 billion market potential and a $200 million market today, I mean, that sounds kind of low. And what are the pushes and pulls that could kind of make it grow faster or did I just simply mishear you?

R. Scott Huennekens

No, that's our conservative internal market model for the next 5 years, is for the market to grow at 15-plus percent. And for us to grow faster than that, we'll be doing that things relative to technology, clinical data, as well as reimbursement programs and the like to support it growing much faster, and the potential exists for it to grow much faster. So I think the biggest thing is reimbursement in Europe, the U.S. and that is that we get a coverage decision by CMS that would say -- and other major payers, we're not going to pay for stenting unless there's proof of ischemia, and I think we'll get there. The question is just when. I mean, the pressure is mounting. The data is mounting on the societies to change their guidelines in the U.S. to be the same as they are outside the U.S., to reduce the ridiculous over-stenting of patients that occurs in this country because of the perverse incentives for hospitals and physicians to put them in when they're unnecessary, and they create injuries to patients, and you're seeing lawsuits relative to that, and you're seeing payers now reacting to that data. And I think the United States government needs to react to that, and we will continue to do things from a marketing and a pressuring standpoint to get all of that information to the appropriate people to have more appropriate action in patient care be given in this country. We feel very passionate about it.

Bruce M. Nudell - Crédit Suisse AG, Research Division

But just pushing on it, I mean, 15% is roughly around a $400 million market in 5 years or thereabouts. It probably should be at least double that. So that must be a pretty conservative estimate on your part, I'm assuming.

R. Scott Huennekens

We feel very comfortable with our ability to grow the FFR market at those numbers.

Bruce M. Nudell - Crédit Suisse AG, Research Division

All right. And then the second thing is, I think you have $500 million or so available cash, I mean, are we -- is it unlikely that we're going to see something in 2013? And in terms of the character of the things you might buy, is there a necessary link to imaging or could you just be better able to take care of -- capitalize on your footprint as oppose to have like technology linkages per se.

R. Scott Huennekens

Yes, great question. So number one is, there are no guarantees that we will do anything this year. There's no guarantees that we'll do anything at all. We are very disciplined in our approach. We're not going to overpay. We're not going to do something just to do something. As I said, we feel very good about our ability over a 5-year period to grow 13% to 15% with our base business and our pipeline. You just challenge the fact that you think FFR can grow much faster than the base, and we know we have a very nice pipeline. So like I said, if push comes to shove and something doesn't make sense, we'll pay the $500 million back and incur a $25 million cash effective cost over a 5-year period relative to the convert. We're not afraid to have to do that. So relative to your second question, it doesn't have to be related to imaging. It can take advantage of our footprint relative to peripheral, coronary, Europe, Japan, manufacturing footprint. So you take a company that's maybe selling a product only in the U.S. and only in peripheral and it helps us to expand our peripheral footprint. We can sell more IVUS and FFR and Crux and FLIVUS as we build out a peripheral portfolio, that's great. Maybe their technology also has a coronary application, but they don't have a coronary sales force. That's great, and now we can leverage it in the coronary. And also if they don't have Europe and Japan footprints for sales, we do. If they manufacture the product in a high-cost environment, we can manufacture it in Costa Rica cheaply. That's the kind of situation that's ideal.

Operator

And we'll take our next question from Jayson Bedford from Raymond James.

Michael Rich

This is Michael Rich calling in for Jayson today. Just to start, with regards to the guidance, I caught your comments about the 5-year CAGR for imaging, I think you said 5% to 6%. But do you have a more near-term view for the U.S. IVUS growth expectations? Is that more -- is that 5% to 6% more back-end loaded or I guess what are your expectations for this?

John T. Dahldorf

Yes, the 5% to 6%, again, just as I mentioned to Chris from JPMorgan, is all imaging. So that is coronary and peripheral, and it's IVUS and OCT, all right? So if you want to talk just the U.S., and you want to talk just IVUS, it's probably more of a 1% to 2% growth in this year, with us growing faster than the market.

Michael Rich

Okay, great. That helps.

John T. Dahldorf

And that's driven partially -- the way the market grows is procedure growth, which we're forecasting PCI volumes down, pricing, which we're forecasting relatively flat and market penetration of procedures, which we do see increased use in left main bifurcation peripherals.

Michael Rich

Okay, great. And then just as a follow-up, I know you mentioned that the transition to direct in Spain shouldn't be an impact in 2013, but do you have any other markets that you might also look to transition either in 2013 or in the near future?

John T. Dahldorf

Not that are as material as Spain was.

Operator

And our next question is from Jason Mills from Canaccord.

Jason R. Mills - Canaccord Genuity, Research Division

John, I want to go back to Chris's first question. Just to make sure that I heard. So the revenue guidance for the year of $422 million to $427 million is the reported revenue guidance, and you're suggesting that $16 million is the headwind to that guidance, is that correct? And then could also give us the FX impact for 2012 for the full year?

John T. Dahldorf

Yes. 2012 for the full year was a little over $4 million, and that was primarily euro-driven. The yen for the full year was -- there's a benefit in the first half and there was a headwind in the second half. And so yes, so the $16 million -- and again, it depends on what FX is today. But that's approximately $16 million impact, primarily all yen-driven.

Jason R. Mills - Canaccord Genuity, Research Division

And the guidance, $422 million to $427 million is reported revenue guidance, correct?

John T. Dahldorf

No, no, that's the constant currency.

Jason R. Mills - Canaccord Genuity, Research Division

Okay. So the actual growth guidance reported year-over-year is around 7%?

John T. Dahldorf

Yes, probably 7% to 8%, yes.

R. Scott Huennekens

At today's FX.

Jason R. Mills - Canaccord Genuity, Research Division

Okay, got it. And then, I'm sorry, I missed it, just another housekeeping question. The pro forma earnings guidance, John, what does that exclude again?

John T. Dahldorf

It excludes the acquisition-related cost that we have and so basically most of that is the accretion of the contingent liability related to Crux. That total is about $4.6 million. It excludes amortization of intangibles. That's about $3.3 million and it excludes the noncash interest expense which is about $19 million.

Jason R. Mills - Canaccord Genuity, Research Division

Got it, okay. Last question for me. In Japan, could you give us a sense, Scott, for your IVUS business, what you grew on the unit perspective, so getting rid of the pricing headwinds that you saw? What on the unit perspective did you see in the fourth quarter? How does that trend throughout the year? And what do you expect from a unit perspective in your IVUS business in Japan this year?

John T. Dahldorf

Yes. So we saw a 9% growth in the fourth quarter on a unit basis. And a year-to-date basis, we saw somewhere between 9% and 10% in total. So it was pretty consistent quarter-to-quarter. And we expect high single-digit growth on a unit basis in Japan in 2013, as well.

Operator

And we'll take our next question from Ben Haynor from Feltl and Company.

Ben C. Haynor - Feltl and Company, Inc., Research Division

Just with regard to the SeeHawk, is there any information that you can provide on what the timeline might look like there? Is that something that we could expect to see in 2013 perhaps?

R. Scott Huennekens

And I believe Covidien has talked about 2014, but it's more for them to tell you.

John T. Dahldorf

It's their development program, not ours.

Operator

I would now like to turn the conference back to Mr. Huennekens for any closing remarks.

R. Scott Huennekens

My only closing remarks are thank you for your time and look forward to seeing a number of you March 7 in New York City. Have a great rest of the day.

John T. Dahldorf

Thank you, everybody.

Operator

Ladies and gentlemen, this does conclude your conference. You may now disconnect, and have a great day.

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