ev3 Inc. Q4 2008 Earnings Call Transcript

Feb.24.09 | About: ev3, Inc. (EVVV)

ev3 Inc. (EVVV) Q4 2008 Earnings Call February 24, 2009 8:30 AM ET

Executives

Bob Palmisano - President & Chief Executive Officer

Shawn McCormick - Chief Financial Officer

Julie Tracy - Chief Communications Officer

Analysts

Raj Denhoy - Thomas Weisel Partners

David Lewis - Morgan Stanley

Thomas Gunderson - Piper Jaffray

Chris Pasquale - J.P. Morgan

Joshua Zable - ev3

Jim Morris Mayo - Canaccord Adams

Brian Kennedy - Jefferies Group

Christopher Warren - Caris & company

Thomas Kouchoukos - Stifel Nicolaus

Operator

Good day, ladies and gentlemen, and welcome to the fourth quarter 2008 ev3 Incorporated Conference Call. My name is Noelia and I will be your coordinator for today. At this time, all participants are in a listen-only mode. We will be facilitating a question-and-answer session towards the end of this conference. (Operator Instructions)

I would now like to turn the presentation over to your host for today’s call Ms. Julie Tracy. Please proceed.

Julie Tracy

Thank you and good morning, everyone. Welcome to ev3’s fourth quarter 2008 conference call. We appreciate you joining us. I am Julie Tracy, ev3’s Chief Communications Officer. With me on the call today are Bob Palmisano, ev3’s President and Chief Executive Officer, and Shawn McCormick, ev3’s Chief Financial Officer.

We issued a press release this morning regarding our fourth quarter and full-year 2008 results and guidance for 2009. A copy of that press release along with an investor presentation summarizing our fourth quarter and full year 2008 results is available on our website at www.ev3.net.

The agenda for this call will include a business update from Bob, a review of our fourth-quarter and full-year financial results and 2009 financial guidance from Shawn, followed by a question-and-answer session and closing comments from Bob. Before we begin, would like to remind you that during the course of this conference call, we will make forward-looking statements regarding our future financial and operating results in our business plan, objectives and expectations.

These forward-looking statements are covered under the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995 and ev3 desires to avail itself of the protections of the Safe Harbor for these statements. Please be advised that actual results could differ materially from those stated or implied by our forward-looking statements due to certain risks and uncertainties including those described in our most recent annual report on Form 10-K and our subsequent quarterly reports on Form 10-Q.

We suggest that you read these reports and other future filings that we may make with the Securities and Exchange Commission. Ev3 disclaims any duty to update or revise our forward-looking statements. On this call today, we will also disclose certain non-GAAP financial measures. We use non-GAAP financial measures as supplemental measures of performance and believe these measures provide useful information to investors in evaluating our operations period-over-period.

For each non-GAAP financial measure that we use on this call, we have posted a reconciliation of the non-GAAP financial measure to the most directly comparable GAAP financial measure on our corporate website at www.ev3.net under the subsection entitled “Non-GAAP Measures” under the Investor Relations section. Please note that non-GAAP financial measures have limitations and analytical tools and should not be considered in isolation or as a substitute for our financial results prepared in accordance with GAAP.

And with that I will now turn the call over to Bob for a business update. Bob?

Bob Palmisano

Thanks, Julie and welcome to everyone who has joined us on the call today. This morning, we reported net sales for the fourth quarter of $106.1 million and non-GAAP adjusted net earnings per share of $0.08, which was $0.02 per share better than the high-end of our guidance that we gave last October.

Total product sales for the quarter were $105.6 million in line with our previous fourth-quarter guidance. For the year ended December 31, 2008, we reported net sales of $422.1 million and non-GAAP adjusted net earnings per share of $0.09. Notably, fourth quarter revenues from our Neurovascular segment and International Business grew 32% and 41%, respectively, versus the prior quarter.

The growth primarily reflects the positive progress we continue to make on our global launch activities for our Axium Progressive Coil System and further penetration of our Onyx liquid embolic and neuro access and delivery products. In addition, core peripheral vascular product sales excluding atherectomy revenue increased 29% versus the prior year quarter.

As expected, atherectomy sales were relatively stable compared to Q3, but we understand we faced continuing challenges from competition as sales force turnover that occurred earlier in 2008. I will talk more about our efforts relating to atherectomy shortly. Following the third quarter’s significant progress, we again made strong progress towards profitability and improving our cash position during the fourth quarter.

Our cash and cash equivalents balance increased by $13.7 million as of the end of the fourth quarter 2008 compared to the end of the third quarter 2008. I would like to note that we were essentially break-even in the fourth quarter 2008 and if you exclude the asset impairment charges and net foreign currency translation.

In summary, I believe that our fourth quarter of 2008 results reflect the important actions we have taken to penetrate important neurovascular and peripheral vascular markets, improved performance in our atherectomy business, and worked towards our goal of achieving sustainable profitability and cash generation.

In that regard, we see real opportunity to drive significant improvement in our margins and our cost structure in 2009. For example, with the launch of our own manufacturing line of PTA balloons, we expect significant improved margins that are approximately 50% higher than our previous distributor margins.

In addition, we expect to see significant improvement in U.S. sales force productivity in 2009, as we benefit from the restructuring activities but now largely behind us and move towards average annualized revenue goal of $2 million per territory from the current level of $1.5 million per territory.

On the cost structure side, we continue to focus on the vital three projects and implementing systems and processes to improve execution. We are confident that we can build a business that can produce substantial amounts of cash and generate substantial profits. As a matter of fact, SG&A expenses were reduced from 60% of revenues in the first half of ‘08 to 50% of revenues in the second half of ‘08.

Turning now to our neurovascular business performance. As I summarized earlier, our neurovascular business turned in an excellent fourth-quarter performance delivering 32% sales growth versus prior year quarter and a 30% growth sequentially from Q3 ‘08. A major contributor to this growth has been our detachable coil product line, which grew at a substantially faster rate than the overall neurovascular business in the fourth quarter.

Most encouraging is the central role that our innovative Axium coil product line played in driving 33% year-over-year growth in our embolic products including embolic coils and Onyx. In the U.S, the number of accounts generating Axium revenue doubled in 2008 versus the prior year.

We also saw strong sales of Axium coils internationally, both in our European direct markets and in our distributor markets, which benefited from market penetration in existing markets as well as launches into new geographic markets. Based on our progress, we believe the Axium coil will continue to be a primary growth engine for our neurovascular business segment in 2009.

Building on the success we have had to-date with our Axium coils, we are preparing to launch our Axium PGLA and Axium Nylon microfilament coils in the first half of 2009. We believe that these coils will be particularly appealing to neurovascular specialists who prefer a coil that combines the handling and long-term implant stability of a bare metal coil with a microfilament technology that will accelerate acute and long-term healing and increase packing volume within the aneurysm.

We believe that ev3 has the broadest product line of any company in the neurovascular market and we are committed to maintaining or even enhancing our market leading position. Early results in our innovative Solitaire stent platform looked promising. At an important neurovascular conference held in Val d’Isere, France, early last month our Solitaire stent was featured in five separate physician presentations including the treatment of wide neck aneurysms and also the treatment of ischemic stroke by facilitating clot removal and flow restoration.

These cases demonstrate the Solitaire’s capability to navigate complex lesions and facilitate secure coil placement, as well as its unique ability to be repositioned and be retrieved prior to detachment.

We will be investigating the use of Solitaire stent platform to immediately restore flow and assist in the removal of clot burden in ischemic stroke patients and are planning the Solitaire with immediate flow restoration, or SWIFT, U.S. IDE study to investigate this application in the second half of 2009.

Turning to our access and delivery products, we have developed a new delivery catheter for the Onyx Embolic called Apollo that is expected to be available in the second half of 2009. In addition, we are planning to launch several new Access products throughout 2009 including product upgrades and line extensions for our neuro balloons and guide wires.

Looking towards the future, we are very encouraged about the prospects for our Solitaire stent platform in ischemic stroke and are exploring new modalities in the treatment of aneurysms.

In summary, I believe our Neurovascular business is prepared to build upon its number two worldwide revenue share position during the year ahead driven by continued penetration of our Axium coils, new product introductions, expanded geographical presence, and improved pricing.

Now turning to our Peripheral Vascular business, we continue to make good progress in our core peripheral vascular business during the fourth quarter. Our stent business grew at rates of 39% and 25% in the fourth quarter and full-year 2008, respectively. We are committed to support our stent business with the clinical trawls necessary to expand our U.S. indication to include treatment of peripheral vascular disease.

In this regard, we are continuing to enroll patients in our Durability II study with the objective of expanding our EverFlex stents U.S. indication to include treatment of peripheral artery disease.

During the fourth quarter, patient enrollments for this trial doubled versus Q3 of ‘08, following the implementation of protocol changes to increase enrollment. We also remain committed to the PTA balloon market. Following U.S. 510(k) clearance of our EverCross 0.35 and NanoCross 0.14 peripheral angioplasty balloons last December, we initiated global launch activities in January of this year.

Initial physician response to these products has been very favorable and we believe that the EverCross and NanoCross balloons can provide enhanced performance to our customers with significantly better margins to us than our previous distributed product. We are launching our PTA balloon products in international markets that were previously unavailable to us under our distribution agreement with Invotec.

Later in 2009 we expect to launch the 0.18 version of both EverCross and NanoCross balloons, which will give us a full complement of balloon product sizes. As previously reported, our peripheral vascular sales organization was affected by new competitive entrants that resulted in increased turnover and loss of focus on SilverHawk atherectomy products throughout 2008.

During Q4, we saw the continued effect of competition. We believe the turnover is now behind us and I believe we can do much better from a sales execution standpoint that we did in 2008. With this in mind, we have made a number of proactive changes that I would like to share with you.

First, we have consolidated and aligned our U.S. commercial and strategic peripheral vascular operations under a single President, Stacy Enxing Seng. This alignment allowed a very thorough and disciplined review of our sales practices with the goal of identifying breakthrough ideas and processes to increase productivity and focus our organization to leverage what we believe to be the broadest array of technologies for the peripheral vascular interventionalist.

Second, I am pleased to announce that Kevin Cordell has rejoined the ev3 team as Vice President of U.S. Peripheral Vascular Sales reporting to Stacy. Kevin previously was the Vice President of Global Sales for FoxHollow at the time of our acquisition and rejoined ev3 with a clear understanding and passion for the success of the SilverHawk technology. Under Kevin’s leadership the sales team has been given the clear mandate to reinvigorate the SilverHawk while continuing to leverage the power of our core peripheral vascular portfolio.

Third, we had modified the structure of our U.S. peripheral vascular sales organization to significantly enhance the level of field-based coverage that is required for SilverHawk cases. Throughout the first quarter of this year, we will be adding 30 newly created SilverHawk specialist positions to drive focused selling and clinical case support for our atherectomy business. These new Hawk specialists replace 25 territory manager positions and all 10 of our referral marketing manager positions. We are pleased that several of our previous territory and referral managers have transitioned to new roles as Hawk specialists.

In January, we also consolidated some smaller territories to optimize coverage and ensure that they are capable of profitably supporting a dedicated sales rep. This consolidation resulted in a net headcount reduction of 10 territory managers. It is important to note that these changes will provide broad customer support with the added benefit of substantially increased level of case coverage that is necessary to advance our SilverHawk business.

We believe that this new structure will optimize territory managers’ selling time and significantly enhance the level of SilverHawk case support as we move toward our average annualized revenue goal of $2 million of sales per territory from the current $1.5 million per territory.

Fourth, we have revised our peripheral vascular sales compensation plan to align our sales efforts with the company’s focus on selling the entire ev3 product line and delivering profitable revenue growth. Specific sales quotas have been established to support the expansion of our atherectomy customer base and approved product mix margins. In addition, also now we have non-compete agreements in place with 100% of our U.S. peripheral vascular sales team.

Fifth, we are taking a fresh perspective in our field sales training program. We have promoted a new Training Director from our Field Sales Organization who will lead the implementation of an advanced development program that will require certification of our entire field-based sales organization and peripheral vascular executive management team.

This program will include intensive product and conceptual selling training for the SilverHawk system. In addition, case planning and lab support tools and physician partnership programs. We believe that this program will ensure best-in-class selling skills required to differentiate the SilverHawk’s performance in those cases where we expect to win, including the superficial femoral artery behind the knee and in patients with critical limb ischemia.

Finally, we are continuing to leverage our corporate accounts agreements including our existing signature supply agreement with Novation, which resulted in peripheral vascular sales growth in Novation accounts in 2008 that was more than twice the growth in non-Novation accounts.

We are also very pleased to announce that we were awarded a new purchasing agreement in January for our entire peripheral balloon and self-expanding stent lines from Premier Purchasing Partners. Premier operates, a leading healthcare purchasing network that serves approximately 2,000 US hospitals and ev3 was one of only three manufacturers to be awarded a one-year stent agreement.

Just for every use of the SilverHawk plaque excision system, we are continuing to roll our Definitive Calcium U.S. Clinical Study. The study is evaluating RockHawk plaque excision when used in conjunction with the SpiderFX embolic protection device in the endovascular treatment of moderate and heavily calcified peripheral artery lesions.

Our Definitive LE or lower extremity studies planned as a global multi-center, single-arm study that is intended to collect additional clinical data to confirm the value of plaque excision in both above and below the knee endovascular procedures with the SilverHawk system. We currently expect to begin enrolling patients in this study in the first half of 2009.

We are enthusiastic about the Definitive series and believe that the additional data will provide us with the clinical bridge to help improve treatment outcomes, facilitate broader procedure adoption, and establish SilverHawk atherectomy as a front-line therapy. In addition, we remain optimistic about the outlook for our atherectomy business. We are confident that with the changes we have made, we have the right alignment and strategic programs in place to support further increases in productivity and position us for future success.

I now want to take the opportunity to welcome John Miclot to the ev3 Board of Directors. As we previously announced, John joined the ev3 Board in December and we are delighted to have someone with John’s leadership skills and broad management experiences on our Board. I look forward to working with John and the rest of the ev3 Board as we work towards building a premier endovascular company serving the neurovascular and peripheral vascular markets.

I also formally want to welcome our new Chief Financial Officer, Shawn McCormick, to ev3. During Shawn’s previous tenure with Medtronic, he served in several key corporate and divisional financial leadership roles including Vice President of Corporate Development and Vice President of Finance for Medtronic’s spinal and biologics business. Shawn’s proven track record in financial management and business development will add tremendous value as we continue to build our business and we were thrilled that he has joined our team.

Shawn will now take us through a discussion of the fourth quarter and the fiscal 2008 financial results and 2009 guidance. Shawn?

Shawn McCormick

Thank you, Bob, and good morning, everyone. First, let me say how thrilled I am to have joined ev3 at such an exciting time. I was attracted to this opportunity, because I believe ev3 has the right combination of leadership, innovative products serving attractive markets, and talented people committed to delivering results.

Although I have only been on the job a little over a month, I am convinced that I have joined a company that is uniquely positioned to achieve its objectives and build a compelling business over the long-term.

Now turning to our consolidated fourth-quarter net sales results, consolidated sales increased 15% to $106.1 million in the fourth quarter of 2008 compared to $92.2 million for the fourth quarter of 2007.

Total product sales of $105.6 million in the quarter were up 22% versus the prior year quarter. Fourth-quarter sales included $469,000 of research collaboration revenue in 2008 compared to $6.0 million of research collaboration revenue in the same quarter of 2007. On a geographic basis, US sales increased to $66.7 million in Q4 of ‘08.

Excluding research collaboration revenues from Merck from both Q4 ‘08 and Q4 ‘07, US product revenues increased 14% driven mainly by continued market penetration of our EverFlex family of stents and our Axium embolic coils.

Our international sales grew to $39.4 million, up 41% in the quarter and up 50% excluding the impact of currency exchange rates. This growth was primarily due to our Q4 ‘07 launch of our Axium coil, continued market penetration of the EverFlex family of stents, and the introduction of our atherectomy products into international markets.

Changes in foreign currency exchange rate had a negative impact of approximately $2.7 million on fourth quarter 2008 net sales compared to Q4 of ‘07 and a negative impact of approximately $3.4 million compared to Q3 of ‘08. On a business segment basis, net sales of peripheral vascular products increased 18% to $68.1 million for Q4 of ‘08.

Net sales included $20.2 million of FoxHollow products in Q4 ‘08 compared to $20.9 million for Q4 of ‘07. Stent sales lead the growth in our peripheral vascular business increasing 39% to $29.2 million in Q4 ‘08, primarily due to the EverFlex family of stents. In the neurovascular business segment, net sales of neurovascular products increased 32% to $37.5 million for Q4 of ‘08. Embolic product sales increased 36% to $21.2 million, driven primarily by our Axium coil.

Sales of neuro access and delivery products also showed strong growth increasing 28% to $16.3 million in the quarter. In Q4 of ‘08 we achieved an overall consolidated gross margin of 67.2%, an improvement of 5.2 percentage points over Q4 of 2007 and 3.0 percentage points over Q3 of 2008.

As we realized manufacturing efficiencies in connection with consolidation of our Redwood City manufacturing operations into our Irvine employment facilities. You will also recall that we anticipate approximately $8 million to $10 million of savings in our cost of goods during 2009 related to the consolidation of the FoxHollow manufacturing facility.

Operating expenses in the fourth quarter of 2008 included $288.8 million of non-cash impairment charges to reduce the carrying values of goodwill and certain other intangible assets to their estimated fair values. Operating expenses in the fourth quarter of 2007 included $70.7 million of in-process research and development expense recorded in connection with our acquisition of FoxHollow.

Excluding these charges, operating expenses in the fourth quarter of ‘08 decreased by $25.4 million compared to Q4 ‘07. As discussed in previous calls, the fourth quarter of 2007 SG&A included approximately $10.3 million of integration-related expenses. Net of this adjustment, SG&A expenses as a percent of net sales declined by approximately 15 percentage points to 50% of sales in Q4 of ‘08.

Our research and development expenses declined to 10% of sales in the fourth quarter of ‘08 compared to 21% in the fourth quarter of ‘07. ev3’s net loss for the fourth quarter 2008 increased to $291.1 million or a loss of $2.78 per common share, compared to a net loss of $107.9 million or $1.06 per common share for the fourth quarter of 2007.

On a non-GAAP basis, ev3’s adjusted net income was $7.9 million for the fourth quarter of ‘08 compared to an adjusted net loss of $25.0 million for the fourth quarter of ‘07.

Non-GAAP adjusted net earnings per share was a positive $0.08 per diluted share which exceeded the previous range of guidance of $0.04 to $0.06 per diluted share. Our cash balance as of December 31, 2008, was $59.7 million reflecting an increase of $13.7 million from our balance as of September 28, 2008. This increase was the result of cash provided by operating activities including a $7 million reduction in inventory compared to the end of the third quarter of 2008.

For the full-year 2008, our net sales increased 49% to $422.1 million. Geographically, our U.S. sales increased 55% to $275.4 million in 2008 and our international net sales increased 37% to $146.7 million. Within our reporting segments, full-year peripheral vascular net product sales increased 55% to $269.9 million. Atherectomy sales were $88.8 million for the full-year 2008 compared to $20.9 million in 2007.

Excluding atherectomy, peripheral vascular net product sales were $181.1 million during 2008, an increase of 18% versus 2007 primarily due to continued market penetration of the EverFlex family of stents as stent product sales increased 25% to $107.1 million. Net product sales in our neurovascular segment increased 27% to $132.3 million in 2008 over 2007 full-year sales of $104.4 million, primarily due to our global launch activities for Axium coil and further penetration of our Onyx liquid embolic system.

Our overall gross margin increased to 66.1% for the full-year 2008 as compared to 64.5% in 2007. Operating expenses in fiscal year 2008 included $299.3 million of non-cash impairment charges to reduce the carrying values of goodwill and certain intangible assets to their estimated fair value and the termination of ev3’s former collaboration and license agreement with Merck.

Operating expenses in 2007 included $70.7 million of in-process research and development acquired in connection with our acquisition of FoxHollow in Q4 of ‘07 and a one-time special charge of $19.1 million incurred in Q3 of ‘07 related to agreements to settle certain patent infringement and other litigation. On a non-GAAP basis ev3’s adjusted net income was $9.9 million for the full-year 2008 compared to an adjusted net loss of $63.6 million for the full-year 2007. Non-GAAP adjusted net earnings per share was $0.09 per diluted share, which exceeded the previous guidance range of $0.06 to $0.08 per diluted share.

Let me now turn to the financial targets for the full-year 2009. As detailed in this morning’s press release, we issued financial guidance for the full-year and first quarter of 2009. We expect our full-year 2009 net sales to be in the range of $415 million to $430 million compared to $402.2 million of product sales in 2008.

Our guidance represents full-year product net sales growth of 7% to 10% on a constant currency basis. We expect foreign currency exchange rate fluctuations to have a negative impact of 3 to 4 percentage points on revenue growth.

Our earnings per share guidance is per $0.04 to $0.10 on a GAAP basis and $0.38 to $0.44 on an as adjusted basis before amortization and stock-based compensation. Our guidance is consistent with our previously stated goal to grow revenue at or slightly above market growth rates while achieving profitability and generating cash.

For the first quarter of 2009, we expect net sales to be in the range of $95 million to $99 million compared to $95.1 million of product sales in the first quarter of 2008. We expect foreign currency exchange rates to have a negative impact of $3 million to $4 million compared to Q1 of ‘08.

For Q1 of 2009, we expect non-GAAP adjusted net earnings per share to be in the range of a negative $0.03 to $0.00 per diluted share. On a quarterly basis, non-GAAP adjusted net earnings per share excludes estimates for amortization expense of approximately $5.9 million and non-cash stock-based compensation of approximately $3.3 million. With that update, we would now like to open up the call to take questions.

Question-and-Answer Session

Operator

Your first question comes from Raj Denhoy - Thomas Weisel Partners.

Raj Denhoy - Thomas Weisel Partners

I was wondering if I could start a little bit on the neuro side. I mean it was very strong results again in the fourth quarter and I am curious what your outlook is for that business as we move through 2009. I know you are not giving individual product lines or product area guidance, but is there any reason to think that those strong results won’t continue as we move through this year?

Bob Palmisano

I think that the neuro business is well-positioned to continue growing very nicely in 2009. If you think the market has going to grow at about a 15% per year, we think that for sure we will surpass that. And this is a very healthy business; we still have some opportunities ahead of us in geographical expansion of our Axium products we plan to launch, I think, in China in the second quarter. So, there is still opportunity out there. It’s a healthy business. It’s a very good, high-margin business and we think that we are going to continue to grow that business at above market rates.

Raj Denhoy - Thomas Weisel Partners

You mentioned that you are seeing some improved pricing in that. Can you maybe comment around what that is?

Bob Palmisano

Yes, I think that we have tried to take an action to really study our products compared to our competitor products and price them appropriately. I think that as we look back is that we were probably pricing our products a little bit too low in the past. We have taken some adjustments and we will continue to do that, particularly where we have premier products.

We should be pricing them in a premier way. That is both on the peripheral vascular side as well as the neurovascular side, quite frankly. I think that we have opportunities in pricing on both sides of the business.

Raj Denhoy - Thomas Weisel Partners

So then of the growth you saw in the fourth quarter. Can you break out how much of that was price increases that you saw?

Bob Palmisano

No, I don’t know that off the top of my head. I think it was some effect, but I don’t think it was the majority of that. The majority of that was increased sales.

Raj Denhoy - Thomas Weisel Partners

And then just one broader question, you guys are coming off a very strong quarter here. If our model is correct, it was something like 25% in organic constant currency growth and yet your guidance for 2009, even for the first quarter and for the full year if you back out currency something in the mid-single digits. And I guess I am struggling with where should we see the slowing? Which of the lines is really exposed here?

Bob Palmisano

Quite frankly, we have built a lot of conservatism into our guidance. It just seems like it’s a very difficult world out there and a difficult world to forecast in any way. So what we did is we looked at and took a good strong look at all the risks that might happen and tried to adjust for those. Hopefully, we will be at the high-end of our guidance, but I feel certainly confident that we will certainly be within our guidance, but there is a lot of unknowns that we are faced with.

The things that we can control I think are in pretty good shape. I would also say is that for the first half of the year, we do see particularly in our atherectomy business, I think is going to happen to our atherectomy business is basically it’s going to be flat for the year year-over-year . But I think in the first half of the year is that, that might continue to erode slightly, until we get all these programs that we talked about really in effect.

Getting our new sales organization up and running, getting our training right, getting the comp plan really taking hold. Secondly, we don’t currently have a full line in the peripheral vascular business, a full line of balloons. Our 0.18 product, which is maybe 20% of the market, will be later this year. And I think that once that is launched that will help us get back on, pick up some erosion, some sales.

There is the effect in the first quarter I think again of some disruption in our sales organization that as we go through this restructuring that we have talked about of adding a lot more case support and reducing somewhat the size of some territories and combining them, that there is some possibility of some erosion.

So what we tried to do was really take a very conservative look at our guidance. I feel very confident that we will be in it. Hopefully, we will be very much at the high-end of that, but it’s just a very conservative look given the unknowns that is out there.

Raj Denhoy - Thomas Weisel Partners

The one area I did want to ask about though is you didn’t mention any potential impacts of the economy and procedures slowing. Have you baked into that into your guidance and are there parts of your business that you think are maybe more exposed than others?

Bob Palmisano

In some respects, it’s really hard to say whether there has been a direct effect on procedures. Anecdotally, we have heard that there might be, but that is just anecdotally, but where it has had an effect, quite frankly is in our distributor markets, particularly in the Far East, Russia where we sell in dollars and the distributor has to sell in local currency. And, therefore, has the effect of, the negative effect of currency.

In distributor markets, a lot of our distributors have notified us that they will be carrying lower inventory levels, particularly in the first part of ‘09. So we have built that into our forecast as well.

Raj Denhoy - Thomas Weisel Partners

But just as far as procedure slowdowns, I mean, patients that are delaying procedures and I know most of what you do is not really elective in nature, but could you see some slowing around the margin in neuro for instance?

Bob Palmisano

I mean I think if you have an aneurysm you have to have it treated fairly quickly. Maybe in the peripheral side you could put that off somewhat. I will tell you though, one good thing for ev3 as it relates to some competitors is that we don’t have a piece of capital equipment. And I think that is a big issue with hospitals in terms of investing in capital equipment as some of our competitors have.

Operator

Your next question comes from David Lewis - Morgan Stanley.

David Lewis - Morgan Stanley

So 2009 is sort of a different year. We have got a lot of things heading in different directions. I wonder if you could just provide a baseline for some financial measurements here. So, Bob, is it safe to assume that this $53 million of SG&A we saw in the fourth quarter, is it sort of the new SG&A baseline for this business or are there more substantial cost-cutting initiatives that we could see play out in the first quarter?

Bob Palmisano

Well, I think through the year we will be taking action to further reduce SG&A and I think that there is some potential there to reduce that further. Everything takes a little bit of time, but I don’t think you will see anything as dramatic as we saw in ‘08 from the first half to the second half. But I do think there are still opportunities in front of us.

David Lewis - Morgan Stanley

Okay, but something between $50 million and $53 million, is that sort of a good quarterly run rate? Is it possible you could have an SG&A quarter in 2009 that is below $50 million?

Bob Palmisano

I would think that $50 million area is probably a good level. We are working hard in every way, but I think that is probably a good level to keep on your model.

David Lewis - Morgan Stanley

Okay. In terms of the clinical programs that you have ongoing, obviously, R&D came in a little lower in the fourth quarter, but you are still relatively committed to an R&D number that is something close to 9% to 10% of sales?

Bob Palmisano

Yes, yes. And of course that includes clinical. But, yes, we think that is the right number for us and we plan to continue with that rate.

David Lewis - Morgan Stanley

And then in terms of the profitability, obviously meaningful improvement in profitability for 2009, some of it looks a little back-half loaded. Can you just walk us through some of the changes in profitability? Perhaps this is sort of the cost synergies you are going to receive from shutting down FoxHollow on the COGS side, but maybe just walk us through why the profitability would be more back-half loaded?

Bob Palmisano

I think that as I said a little bit earlier, I think some of the things that on the revenue side that affect profitability will take a little while to flow through. We have the full line of balloons that, for example, that will take effect throughout the year with some geographical expansion in our neuro business. We think that our atherectomy business will be picking up in the last half of the year.

We also have continued opportunities on the margin side. I think that we had a steady run-up in gross margins in 2008 and we ended the year I think somewhere around 67% in the fourth quarter. We think that that should cross the 70% level as we end the year 2009.

So, I think between the leverage of our cost structure as well as increasing our margins that are playing throughout the year is that we see a healthy increase in profitability on an adjusted basis for sure as we go throughout the year.

David Lewis - Morgan Stanley

And, Bob, just two strategic questions and I will jump back in queue. The first of which is a significant increase in the percentage of international business in 2008. Obviously, currency will have an impact on that in 2009, but as you look out through the next three years, what percent do you think of this business is going to be overseas? And the second question will be tied to growth rates. This 7% to 10% growth rate, obviously, neuro is growing very quickly but peripheral is not. Is ev3 now over a three-year basis a 7%, 8%, 9% grower or do you see an eventuality in the next three years where double-digit growth rates are possible?

Bob Palmisano

Yes. I think that we should be in a double-digit growth rate down the road. Currently, I think international is about 60% of our business. Excuse me, I was just corrected, domestic is about 65% of our business and international is about 35% of our business. Given the trajectory we see, it’s probably going to get closer to 60-40 and as we have a lot of opportunities.

By the way, our neuro business is quite a bit larger outside the U.S. than it is inside the US. We have the opportunities on the US side, to increase that. We have made a lot of improvement this year on the U.S. side. We changed management, really got focused on that, and I think that should continue growing also, but I would think that we would look at an international to domestic business as probably 60% domestic and 40% international as we go out.

Operator

Your next question comes from Thomas Gunderson - Piper Jaffray.

Thomas Gunderson - Piper Jaffray

Bob, on the sales restructuring side, you went through a lot of numbers. Net-net what happens to the U.S. sales force and peripheral vascular from ‘08 to ‘09?

Bob Palmisano

Yes, the net-net is about a 10 headcount reduction ‘09 to ‘08. We will have 10 less folks in the U.S. peripheral vascular sales organization in ‘09 than we did in ‘08.

Thomas Gunderson - Piper Jaffray

And then there is a lot of movement, Kevin being let go, Kevin coming back, some switching around in various jobs, and you mentioned this when you answered one of Raj’s questions. But could you give us a little more of your view of when do you think your sales force is settled down and can focus exclusively on their goals for the quarter, their goals for the year and some of this turnover and disruption has become a thing of the past?

Bob Palmisano

Yes, I think that the turnover issue will be more normalized, certainly in ‘09. We had a large turnover rate in our U.S. peripheral vascular sales organization in ‘08 due to pathway. Pathway to some extent but more CSI really targeting our sales reps. Our sales reps now, 100% of our sales organization now has non-competes, so that is kind of off the table, so we will see that normalized. I think it’s going to take certainly through the first quarter of this year to really get the organization really on its feet and humming. I think that Kevin is the right guy to do that.

We were thrilled to get Kevin back. He has the expertise and really the passion that is needed to help reinvigorate the SilverHawk product. And he is off to just a terrific start. But on that business is that there are two aspects of growing the business. One is, obviously, to get new accounts, which is always something that is critical.

Convince physicians that don’t use atherectomy that it’s a good therapy for them to consider and to use in certain patients. The second part of that is the in-depth penetration of accounts. What we have lost more than anything it seems to me in ‘08 was the second part of that was the in-depth penetration.

Accounts still used SilverHawk, but they didn’t use it nearly as much as they used it in the past. Some of it was trialing competitive products and some of it was kind of a lack of interest that was maybe generated by not having somebody on-site like they were used to help them evaluate cases and help them through cases.

So I think those two things have been corrected. So I think that we are really on the right track, but I do think to answer your question specifically, it’s probably into the second quarter where we really to start to hit our stride back in the atherectomy business.

Thomas Gunderson - Piper Jaffray

And then my last question is more of a longer-term strategic question. You are coming up on your one-year anniversary. You have made some changes. You have got a transitional 2009 with a slower growth but higher profits. Right now you are at a $400 million give or take revenue base. You have got products that can get good margins. When do you see this playing out as to having an operating income of more normalized for a medical device company, something like that?

Bob Palmisano

I think it’s in the two to three-year horizon we should be at, what I have said in the past in terms of operating margins in the high teens. I think we made a tremendous amount of progress in ‘08. We will make a lot of progress in ‘09, so I feel very confident about that. Don’t forget, we are operating this company with three basic premises.

We want to grow the business and when we say grow the business; we want to grow the business at or above market rates. But we want to produce profits at that. So it’s not a company that is growing revenues at any cost, it’s going to be profitable revenue growth. And thirdly, is we want to be very focused on generating cash and I think we are well on our way. We have made tremendous progress. The team has done a great job and I think we are in a great position to reach that goal of high-teens operating margins in the two-three-year period.

Operator

Your next question comes from Mike Weinstein – J.P. Morgan.

Chris Pasquale - J.P. Morgan

This is Chris Pasquale here for Mike. Just to start off with a few more questions on SilverHawk. You talked on the last call about how you thought that the competitive inroads there were largely physician trialing. The sequential declines this quarter slowed a bit, but it’s still down from the third quarter, which should have been the seasonally weaker of the two. Can you talk a little bit about what the picture is on the ground today? Do you still feel like those share losses are temporary and what gives you the confidence around that?

Bob Palmisano

I think that it’s slightly down, relatively flat Q4 to Q3. But I think that the competitive inroads have hurt us in two really significant ways. One is on the sales force disruption; that has really been an issue as you have it. We exited a year I think with 11 empty territories that people that had left us and really gone to a competitor. And that plays a role.

As you have a vacant territory, you try to fill it with other people but it’s very, very difficult. And so I think that has hurt us. Secondly, is the trialing has continued. And I also think that our competitors, if you look at the CSI technology, that is really geared towards calcium calcified lesions. I guess it’s the old axiom, ‘if you are a hammer, everything looks like a nail.’ And so I think that when they go into a case everything kind of looks like calcium.

We have had reports from the physician community that they are trying to overreach with that technology to some extent. And I think that will come back, particularly as we have our sales territories filled, we have case support that we need, and we have all the training and everything else that we need to drive that business though. So, I think that as we get into ‘09 I think that we will be in a position to really reverse the trend and gain back the market share that was eroded in ‘08.

Chris Pasquale - J.P. Morgan

How much of your expectation for an acceleration in the back half of the year is based on market share reversal versus actually having a more detailed sales effort driving a resurgence in market growth, which also seems to have---?

Bob Palmisano

We are looking at the atherectomy business year-to-year to be basically flat, Chris, so it’s not really based upon gaining big gobs of share for sure. We are looking at that to be flat for the year.

Chris Pasquale - J.P. Morgan

Right, but you talked about it being weaker in the first half of the year. Then seeing some sort of recovery.

Bob Palmisano

I mean I think it’s not a big swing first half to second half. It’s a little bit of a swing, but it’s not a huge swing.

Chris Pasquale - J.P. Morgan

All right, so is it more a case of just stopping the bleeding with the now sales force that is intact?

Bob Palmisano

I guess you could phrase it that way. I wouldn’t phrase it that way. I think that in the first quarter of the year, I think that it’s likely that that will be slightly down. I think after that, we will stabilize and then we will go back up.

Chris Pasquale - J.P. Morgan

One last one on Axium, neuro has done very well for you guys this year. What percentage of your coil business does Axium represent now and how much of your growth in ‘08 was due to a mix shift within the business as opposed to share gains?

Bob Palmisano

We don’t break it out to that level of detail, Chris, but Axium is the majority for sure of our coil business, the great majority of it.

Chris Pasquale - J.P. Morgan

Were you getting a price premium for that product versus your legacy lines?

Bob Palmisano

We are now. I think that one of the problems was when the project was introduced in early ‘08 is that we were priced a little bit too low. So we did take some price increases on that in ‘08.

Operator

Your next question comes from Joshua Zable - ev3.

Joshua Zable - ev3

Most of my questions have been answered, just a couple of quickies here. First of all, I know you guys talked on the neuro business, a lot of people have been asking questions here, talked about sort of expanding accounts. And I know we talked about that $2 million per account number. I mean, on the neuro side is it kind of mostly expansion? I know a lot of that is international. Or have you guys have been kind further penetrating accounts as well?

Bob Palmisano

On the neuro side, we are currently over $2 million for territory. I think $2.1 million, $2.2 million in that area. I think that the Axium launch got off to a little bit of a rocky start in the U.S. market in ‘08 and I think that got corrected as we went through the year. So, we still say that we are gaining momentum and I think gaining market share in the U.S. market on Axium coil.

Axium oil was launched a little bit earlier and a little bit more efficiently in our international markets in ‘08, but there is still a lot of opportunity out there. I mentioned earlier that we have not launched Axium in China yet. We will, I think, our plans are to launch it in the second quarter. And that is a fairly significant market for us. So I think that we will continue to drive market share expansion; very optimistic about that in the US market, we have twice as many accounts, our Axium accounts move twice as fast in the U.S. in ‘08 than they did previously, so I think that we have a lot of opportunity. Our international market, our business is just going gangbusters on Axium and our total neuro line.

Joshua Zable - ev3

And then just quickly on the peripheral side, I know you guys have been having a step up from $1.5 million to $2 million in account, hopefully. It has been flat from Q2 to Q4. Obviously, a step up in Q4, part of that is the training I imagine; that is part A of the question. Then part B; on the peripheral side, I know you guys talked about sort of some challenges in the sales force, but obviously the stent and other stuff is doing pretty strong.

So are those sales trading program sort of strictly directed at atherectomy or could we see kind of continued improvement on this other stuff even though it is doing really well as well?

Bob Palmisano

I think that we are certainly not going to deteriorate our core peripheral vascular business. We see that continuing to grow. I think that we do have a lot of activities around atherectomy in training. I mentioned certification as well as increased training. I think that when FoxHollow was a standalone company, they spent a vast amount more in training of their sales reps on atherectomy than did ev3 after the acquisition in 2008.

So we are going to move that towards certainly more energy and more time and training in atherectomy and a full certification process that will include everyone in the field organization plus the executive management of the peripheral vascular business. So I think that will pay dividends. This is a technology that you really have to be confident about selling.

You have to be able to be confident about speaking to a physician as to when is the right time to use it, how to use it. If you are not really trained properly, you don’t have that confidence. And I think that we saw that in 2008 and we are set out to correct that in 2009.

Operator

Your next question comes from Jason Mills - Canaccord Adams.

Jim Morris Mayo - Canaccord Adams

Hi, this is [Jim Morris Mayo] for Jason. I have a quick question on the sales force. You mentioned the non-compete agreements, just wondering how or what type of incentives you gave to the reps to sign that agreement? Is it increased commissions or what is it?

Bob Palmisano

No, I mean I think that our sales force is well compensated. I think that as part of our normal process we give some stock options occasionally and, etc., but we did not in our 2009 planning include any increase in commission rate or base salary to the sales reps.

Jim Morris Mayo - Canaccord Adams

And going further in the PAD market, you talked about growing faster than market rates. What is your estimate for the overall PAD market and atherectomy in specific?

Bob Palmisano

Yes, it’s a little bit hard to have a definitive number on it. What we are thinking is about 6%, 7% growth in that market in 2009.

Jim Morris Mayo - Canaccord Adams

Then one quick one on Axium, what is the timeline for approval in Japan?

Bob Palmisano

That is tied up in the MHW in Japan. I just really can’t forecast that. I wish I had an answer for you. If I had an answer, I would give it to you. I just really don’t know.

Operator

Your next question comes from Brian Kennedy - Jefferies Group.

Brian Kennedy - Jefferies Group

Can you discuss your expectations for the peripheral stent market in 2009 and how you see some of the dynamics changing there, if at all?

Bob Palmisano

Well, we continue to see growth in there. We are not building into our guidance much change in usage of our products versus the past. We do understand and maybe your question is related to the approval that Bard got on their life stent. We don’t see much of an effect. I think doctors use what they like to use and are familiar with, and so we continue to look into ‘09 to grow that business at or above market rates.

Brian Kennedy - Jefferies Group

And you alluded to some efforts being made to speed the enrollment of Durability II. Do those change the clinical timeline you have for the trial at all?

Bob Palmisano

Not really, this is a long process, but we have expanded the number of clinical sites. We have shortened the follow-up period and we are offering access of our 200 millimeter lean stent to all study sites. So, we think that we will make progress, but it’s still going to take a couple of years, quite frankly, before this study is done, completed, and submitted to the FDA and hopefully get approved through the FDA.

Brian Kennedy - Jefferies Group

And just one more, we have heard a lot about changing inventory levels at hospitals in the fourth quarter. Do you have any anecdotal points to discuss there or to share with us?

Bob Palmisano

Remember that the vast majority of our core peripheral vascular products are consignment products, so there is really no effect there. On atherectomy, they don’t tend to inventory much of that anyway. That is why I mentioned earlier is that we don’t have a capital equipment component to our products, so I think that we are in pretty good position there. So no I don’t see that stuff has much of an effect.

Operator

Your next question comes from Christopher Warren - Caris & company.

Christopher Warren - Caris & company

Just wanted to ask about what your market growth assumptions were implicit in your ‘09 guidance for the peripheral stent franchise as well as for the peripheral balloon franchise?

Bob Palmisano

Well, I don’t think we break that down by product. That is a little bit to fine to get into. But I think that overall, as I said before, we are looking at the market growth in that segment of the business to be 6% or around that area.

Christopher Warren - Caris & company

And just as a follow-up, what incremental changes do you see competitively on the peripheral balloon side of the market, if any?

Bob Palmisano

Well, Invotec is in the U.S. market full force now, but I think that we will, and that hurts a little bit, perhaps in the beginning of the year until we actually have the full line of balloons. I think that the balloons that we designed knowing of course that distribution agreement was going to end, the physician community are more favorably inclined to them.

Secondly, is that on a worldwide basis, we didn’t have the ability to sell balloons before and now we do. So we see a big opportunity. If you look at the total PTA line is that we looked at it as a growth as you exit the year. It’s going to take us throughout the first half of the year and maybe a little longer until we have the full line. But I think that we would say that year-over-year we should be in pretty good shape there, although the first half of the year is going to hurt us a little bit.

Christopher Warren - Caris & company

And one question on sort of the Neuro Access competitive front, I hear there are a couple of small companies launching microcatheters there in the near-term. Did you build any competitive disruption into the ‘09 guidance associated with those launches?

Bob Palmisano

Not yet. I think that we have also done a lot of work in new products on access devices that I think is a response to desires of our customers. So, I think that that business keeps on moving ahead. You have to stay ahead of it and I think that we have done that and we have several new products in 2009.

Christopher Warren - Caris & company

Would those products be launching first half or second half or could you comment on that?

Bob Palmisano

Yes, mostly second half.

Operator

Your next question comes from Thomas Kouchoukos - Stifel Nicolaus.

Thomas Kouchoukos - Stifel Nicolaus

Just to follow upon Chris’s question with respect to the PTA balloons, in terms of M&A you get a couple of incremental bumps here. One is you do get to enter the international marketplace. Could you quantify what sort of incremental market opportunity you get out of that expansion there?

Bob Palmisano

You mean, how much larger the business will be because we are an international market?

Thomas Kouchoukos - Stifel Nicolaus

Yes, I am not asking you to give your growth rate, the opportunity expand to.

Bob Palmisano

I mean, generally speaking, you look at OUS as about equal to U.S. in your opportunities. So, I think that it’s not going to be immediate because we are doing some missionary work there to some extent, but eventually I think that the OUS balloon line should be as large as it is in the U.S.

Thomas Kouchoukos - Stifel Nicolaus

Okay. And that, I mean, it’s from a timing perspective, are you earlier there so would you realize more of that earlier part over there than you might in the U.S? Is your 0.18 already on the market?

Bob Palmisano

No, I think it’s going to take some time to develop, but when you have a superior mousetrap that usually wins.

Thomas Kouchoukos - Stifel Nicolaus

And then looking at the FoxHollow business, I think at your Analyst Meeting, you stressed that you still have kind of a core group of Hawkers that are still loyal to the product. Just wondering with the competitive entrance that we have seen and some of the disruption, how do you characterize that base of Hawkers today? Are they still similar in size and maybe characterize what their utilization might be?

Bob Palmisano

Quite frankly, I think that is what I mentioned previously is that it was the in-depth use of the product I think that suffered mostly in ‘08. So I think that physicians that were what we would call Hawkers, there were fewer of them in ‘08 than there was in ‘07. Our activity is initially geared to getting those physicians really back to be what we call Hawkers. That is using the SilverHawk as their product of choice and their first choice in terms of plaque excision. So there is no doubt that we also want to expand our business to non-Hawkers, but I think that in ‘08 there was certainly a deterioration of the in-depth use of the product by the core use of physicians.

Thomas Kouchoukos - Stifel Nicolaus

And then, finally, one last one on atherectomy as well. I think coming out of last year or over the early quarters in the year, you guys were pretty enthusiastic about going out with your referral partner to build out some of these podiatrist office clinics and referrals there. Is that something that your specialists will now take over or are you still working with a partner to --?

Bob Palmisano

We are still dealing with Biomedics that has this patented diagnostic device and our Hawker specialist will certainly continue that relationship and work with referring physicians and establishing that network and hopefully making it stronger. I think that is kind of the benefit of having what we call these Hawker specialists out there is that they will be able to work in cases, be case support as well as help referring physicians. So I think that is a big improvement for us.

Operator

This concludes the question-and-answer session. I would now like to turn the call over to Mr. Bob Palmisano for closing remarks.

Bob Palmisano

Thank you, operator. Let me close by reiterating our top priorities for 2009, will be to achieve sustained profitability, generate cash, and expand our global position in the neurovascular and peripheral vascular markets to deliver superior long-term value to our shareholders.

Given the progress that we made in 2008 and our clear roadmap for sustained profitability growth in 2009, I am confident in our ability to capitalize on the opportunities in front of us and build a leading global endovascular business. Finally, I want to thank the entire ev3 worldwide team for their efforts during the fourth quarter and they were terrific.

Your continued support and dedication throughout 2009 will be vital as we continue to drive our business forward and work towards fulfilling our vision to be the best at identifying and treating lower extremity arterial and neurovascular disease. I want to thank you for listening today and for your interest in ev3. I look forward to reporting our progress throughout the year. Thank you.

Operator

Thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect. Have a great day.

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