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The Spectranetics Corporation (NASDAQ:SPNC)

Q1 2009 Earnings Call

May 6, 2009 11:00 am ET

Executives

Don Markley - SVP, Lippert/Heilshorn & Associates

Emile Geisenheimer - Chairman, President and CEO

Guy Childs - CFO

Will McGuire - Chief Operating Office

Mike Voss - General Manager, Vascular Intervention

Jason Hein - General Manager, Lead Management

Shar Matin - VP and Managing Director, International

Analysts

Amit Bhalla - Citi

Suraj Kalia - SMH Capital

Joshua Zable - Natixis

Jason Mills - Canaccord Adams

Brian Kennedy - Jefferies

Shawn Fitz - Stephens Inc

Larry Haimovitch - HMTC

Operator

Welcome to the Spectranetics First Quarter 2009 Conference Call. At this time, all participants are in a listen-only mode. Following management's prepared remarks, we will hold a Q&A session. (Operator Instructions).

As a reminder, this conference is being recorded, today May 6, 2009. I would now like to turn the conference over to Don Markley. Please go ahead, sir.

Don Markley

Thank you. This is Don Markley with Lippert/Heilshorn & Associates. Thank you for participating in today’s call.

Joining me this morning from Spectranetics are Chairman, President and Chief Executive Officer Emile Geisenheimer; Chief Financial Officer, Guy Childs; Chief Operating Officer, Will McGuire, General Manager for Vascular Interventions, Mike Voss, General Manager for Lead Management, Jason Hein and Vice President and Managing Director International, Shar Matin.

Earlier today Spectranetics released financial results for the quarter ended March 31, 2009. If you have not received this news release or if you would like to be added to the company's distribution list, please call Lippert/Heilshorn in Los Angeles at 310-691-7100 and ask for Amy Higgins.

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

Spectranetics disclaims any intention or obligation to update or revise any financial projections or forward-looking statements, whether as a result of new information, future events, or otherwise. Furthermore, this conference call contains time-sensitive information, and is accurate only as of the date of the live broadcast, May 6, 2009.

I’ll now turn the call over to Emile Geisenheimer. Emile?

Emile Geisenheimer

Good morning. I would like to welcome everyone and thank you for joining us on the call today. First I will provide summary of the Spectranetics financial performance for the quarter and key initiatives of the company and each of its business units. Guy will conclude with prepared remarks with the review of financial results and discussion of the outlook for the remainder of the year. We'll then take your questions.

Let me say that I am pleased with Spectranetics' performance in the first quarter of this year. This morning, we reported first quarter revenue was $27.3 million, an increase of 15% over the first quarter of last year. Importantly, the growth in the quarter was driven by sale gains and Vascular Intervention, Lead Management both in the United States and internationally. I would now like to discuss performance of each of our business units starting with Vascular Intervention.

Our Vascular Intervention business increased 11% over last year and 6% on a sequential basis. We view our Vascular Intervention business, as three distinct product lines, atherectomy, crossing solutions and thrombectomy. Let me begin with the discussion of atherectomy.

Our atherectomy product line, which includes both coronary and peripheral products. Total atherectomy declined 12% compared with last year, but increased 2% over the fourth quarter of 2008. Coronary atherectomy, which represents approximately 15% of a total, is going rapidly of renewed physician interest in our products in the segment.

Despite competitive activity, which contributed to a 19% year-over-year decline in our peripheral atherectomy business, we are begun to see signs of stabilization. In fact, peripheral atherectomy revenue was essentially flat with the fourth quarter of last year.

We call that this business experienced sequentially quarterly declines beginning in the third quarter of last year, due to introduction of competitive products and ease of use challenges of our TURBO-Booster product. I am encouraged by the apparent stabilization in our peripheral atherectomy business and the continued growth of our coronary atherectomy business.

We look forward to reestablishing growth in atherectomy, in our atherectomy product line during the second half of the year due to by sales organization execution and the launch of the [TURBO-Tandem] product, the successor to the TURBO-Booster. The TURBO-Tandem product is targeted at the treatment of peripheral artery disease above the knee, which is the largest segment of leading market.

TURBO-Tandem product was designed in movies of which used challenges of the TURBO-Booster, while adding important features. I am pleased to announce that last week we submitted a 510(NYSE:K) application to FDA for clearance to market for Tandem in the United States. We also receive clearance in time with our global market launch in August.

Now little bit about TURBO-Tandem, the TURBO-Tandem is a catheter that integrates the TURBO-Booster functions with a 2.0 millimeter TURBO Elite laser, laser catheter. Importantly the integrated design allows a small seven fringe profile, while maintaining the ablation capabilities of the eight fringe TURBO-Booster system.

We put new features include a shorter (Inaudible) with the channel to hold the laser catheter in place, and a locking device that deploys the laser catheter and holding in place up to ramp during the ablation procedure. We are exited about the TURBO-Tandem and believe that it will give us an opportunity to capture market share in the above knee, PAD market.

Now I would like to discuss the treatments of in-stent restenosis in our ISR in the periphery. Yesterday we issued our press release announcing our submission of a pre-investigational device exemption to the FDA for the treatment of ISR in the leg.

Our objective through this submission is to determine, what if any or many steps maybe required by FDA to grant clearance to market, our laser ablation products for the treatment of ISR in the periphery. ISR remain remains a significant unmet need and to our knowledge no medical device today is specifically cleared or approved by FDA for treatment of in-stent restenosis in legs.

We believe there are nearly 150,000 stents were cleared annually above the knee and the clinical literature stent restenosis rates 12 months following the procedure ranging form 11% to 79%.

The pre-IDE submission makes reference to the results of our bench testing or the interaction between Spectrane laser and nitinol stents, which we previously announced in September, 2008 press release. This data shows that stents subjected to extensive fatigue testing following laser interaction had no fatigue-related failures.

The submission also includes reference to clinical data supporting the safety and efficacy of excimer laser treatment in coronary artery ISR. And in interim analysis of data from the Patent Study which is ongoing in Europe, in Germany.

Although the data from the Patent trial is preliminary, no evidence of stent damage has been observed during the procedure or during subsequent follow-up evaluations. Additionally, the application of laser energy in ablating neointimal hyperplasia within restenosed extensive leg have been successful results.

The few results show the present diameter stenosis has been reduced from a mean of 87% pre-treatment to 30% to post laser treatment in 39 subjects. The final residual stenosis after all treatment was 7%. We believe that the data, we have submitted to FDA supports the safety and efficacy of laser ablation in nitinol stents and we look forward to their feedback.

Now let’s turn to discussion in to our Crossing Solution product line. Our Crossing Solution product line, which consist of Quick-Cross Support Catheters and a small amount of Safe-Cross price, increased 35% over last year. Recall that we received FDA clearance in December 2008 to market our Quick-Cross Extreme products, which extend the line to include angled catheters. Of these new products contributed nine percentage points of the total crossing solution grow.

We hope to launch the 14 and 18,000 versions of these devices later this year. We now would like to discuss our thrombectomy line. Sales in thrombectomy product line increased to $1.4 million, its sequential increase of 6% total primarily by sales on our QuickCat aspiration device we acquired from Kensey Nash in May of last year.

We are in discussions with FDA about the clinical trail requirements for the next-generation ThromCat devices. And we anticipate launching this device internationally, either this quarter, or in the third quarter depending on when we receive CE mark.

That concludes my discussion of Vascular Intervention. Now let me turn our attention to Lead Management business unit. Our Lead Management business posted a very strong quarter with 29% year-over-year growth.

Press release we issued earlier this week highlights the clinical data from LExICon Study, and Retrospective Study that examines laser-assisted lead removal of 2,405 leads in 1,449 patients at 13 centers in the United States between January 2004 and December 2007.

Here are some highlights of the data. 97.7% clinical success rate and 96.5% complete lead removal success rate, a 1.4% major adverse event rate, which is a 26% relative reduction from the previous multi-center study evaluating the original laser sheath or SLS and importantly a 0.27% procedural mortality rate, which represents a 50% relative reduction from the previous multi-center SLS study.

LExICon Study has to the extensive body of knowledge supporting the safety and efficacy of laser-assisted lead removal. The dataset will provide physicians with valuable information as they assess a relative benefits and risks associated with problematic pacemaker and defibrillator leads.

The upcoming meeting of the Heart Rhythm Society in Boston from May 13 to May 16 is a perfect venue to discuss these data with physicians. We also expect the Heart Rhythm Society to present their revised lead extraction guidelines at this meeting.

I'll conclude my remarks by highlighting the continued strong performance of our international business, which recorded a total of $3.8 million in sales during the first quarter, up 47% from the year-ago quarter. This increase was led by sales of thrombectomy products acquired from Kensey Nash as well as increased lead management product sales.

Our investments in direct sales organization in Europe during 2008 has begun to pay dividend. For example, our disposable product business in Germany has increased to 133% on the first quarter of last year. Further, we were able to leverage in the Kensey Nash distribution network to begin selling Spectranetics products, which further extends our reach within Europe.

Key international initiatives for rest of the year include expanding our geographical coverage to include 40 countries from 34 currently, expanding our sales organization in Germany and France. Our team atherectomy reimbursements in France and lead extraction reimbursement in Japan and launching our next-generation ThromCat product following CE mark.

I am proud of quarter's results and I trust that you can see the many drivers in place that we have outlined today. Now I would like to play a few comments on profitability. We incurred a pre-tax loss during the quarter of $2.9 million, which includes a $1.4 million of investigation cost.

As we stated in our outlook, we anticipated incurring a pre-tax loss for the full year. However key focus of mine is to return the profitability. Obviously resolution of the investigation is an important component of that. From an operational perspective, our focus is on improving productivity within our sales organization and throughout the organization. It is the single most important condition that will get us there, and we hope to begin to seeing the result of this effort towards the end of this year.

Before I turn the call over to Guy, I would like to tell you what I can about the federal investigation. As I stated publicly in the past, it's my personal goals to resolve this matter prior to the end of 2009. We have had discussions with federal officials leading this investigation, and I'm fully co operate with them. Although I cannot comment on anything related to those discussions, I believe that the goal is reasonable, but we still have some work to do.

And please understand that I am unable to provide any more specifics on this matter concerning the timing or the substance of our discussions with federal officials. Accordingly, I will not be taking questions on this topic.

Now, I will turn the call over to Guy for further details of our financial performance during the quarter. Guy.

Guy Childs

Thanks, Emile. Earlier today, we reported revenue of $27.3 million for the first quarter, which increased 15% from the same quarter a year ago and 2% on a sequential basis. Vascular Intervention product sales grew 11% and Lead Management product sales grew 29%, compared with a year ago quarter.

Within Vascular Intervention on a year-over-year basis our atherectomy revenue declined 12% and crossing solutions increased 35%. Vascular Intervention product sales include $1.4 million of sales of thrombectomy products required from Kensey Nash last year.

Laser revenue declined 12% to $1.5 million due primarily to [2P] laser sales, as compared with last year. Net laser placements, which includes sold units as well as units placed under rental and other placement programs, totaled 17 during the quarter, compared with 24 during the first quarter of last year.

The overall decline in net laser placements was due primarily to a higher number of returned lasers during the quarter, as we continue to focus on bringing back non-productive laser units that we own in redeploying these units to new accounts.

Service and other revenue increased 14%, as compared with last year. Gross margin during the first quarter was 70%, compared with 72% during a year ago quarter. The decreased gross margin is consistent with the outlook provided during our last call.

Gross margin was negatively impacted by product mix as well as unabsorbed manufacturing overhead resulting from reduced laser system unit volumes. Operating expenses totaled $18.8 million and increased 19% during the quarter.

Approximately $1.4 million of legal costs associated with federal investigation were included in this number. The rest of the growth in operating expenses is primarily due to the expansion of our sales organization compared with last year.

Additionally, we incurred $600,000 of costs, which are included in the SG&A line to further enhance our regulatory compliance program. Although we anticipate these costs would be front-end loaded, it is possible that we will exceed our previously announced estimate of $1 million, related to this initiative for the year ended December 31, 2009.

Pre-tax loss was $2.9 million during the quarter, inclusive of the $1.4 million of federal investigation costs. This compares with the pre-tax loss of $0.7 million during the first quarter of last year.

Cash, cash equivalents and investment securities totaled $33.8 million, as of March 31, 2009, compared with $36 million as of December 31, 2008. The March 31, 2009 balance of cash, cash equivalents and investment securities includes $15.4 million of auction rate securities, which are currently not liquid due to market condition. These securities are backed by student loans and substantially all of them are guaranteed by the federal government.

I will close with some commentary on our outlook and update on our strategic initiatives for 2009. The company continues to expect revenue growth during 2009 in both of Vascular Intervention and Lead Management business units. The year-over-year percentage growth rate in Vascular Intervention revenue is anticipated to be in single-digit range through at least the first half of 2009.

Spectranetics is targeting increased Vascular Intervention revenue growth in the second half of 2009, which will depend primarily on new product introductions, most notably the next generation TURBO-Booster. Lead Management revenue growth in 2009 on a year-over-year percentage basis, is anticipated to be in the mid-teens, driven by continuing favorable market dynamics and our expanded sales organization.

As the company continues to focus on increasing revenue in existing accounts, net laser placements are anticipated to decline from 2008 level.

Gross margin is expected to decrease during 2009, as compared with 72% gross margin in 2008. The extent of the decrease depends primarily on product mix and the potential for unabsorbed manufacturing costs associated with reduced laser system unit volumes.

Cost associated with federal investigation can not be reliably estimated. Therefore, specific guidance will not be provided in this area. Management does expect to incur a pre-tax loss for the full year.

Our 2009 strategic initiatives are aimed to further enhancing the company's sales and marketing footprint, expanding its product offering and improving sales productivity. In particular, the company intends to add up to 15 individual to US field sales organization, increasing the total headcount to nearly 130.

Additionally, Spectranetics anticipate adding personnel to both Vascular Intervention and Lead Management marketing to support physician training, new product launches and other marketing programs.

During the first quarter of 2009, a total of nine individuals were hired into our US field sales organization, which now totals 121 sales professionals and includes 83 in Vascular Intervention and 38 in Lead Management.

We also intend to continue sales growth internationally by extending our geographic market reach from 34 countries currently to 40 by the end of 2009. Additionally, Spectranetics expects to add up to 10 individuals to the international sales and marketing organization primarily to support the company's direct markets in Western Europe.

We will increase investment in research and development to accelerate new product innovation in 2009 and beyond. We will focus on improving sales organization productivity, as measured by increasing sales per person and sales per account.

We will also further enhance our compliance programs and resources, reflecting the company's commitment to high standards of regulatory compliance. We incurred $600,000 of costs in this area during the quarter ended March 31, 2009, which are included within selling, general and administrative expenses.

Although we anticipated these costs will be front-end loaded, it is possible that we see the previously announced estimated of $1 million related to these initiatives for the year ended December 31, 2009.

This concludes our prepared remarks. Operator, we're now ready to take questions.

Question-and-Answer Session

Operator

(Operator Instructions). Our first question is from Amit Bhalla with Citi.

Amit Bhalla - Citi

Hi, good morning.

Emile Geisenheimer

Good morning.

Amit Bhalla - Citi

I wanted to just to start with the performance of the disposables business, and hoping, Guy you could tease out what portion came from unit growth versus pricing growth. And then maybe just explain why coronary is all of the sudden growing, and I have a follow-up.

Guy Childs

Sure.

Emile Geisenheimer

Guy will cover the first part of that, and I think I'll cover the coronaries.

Guy Childs

Amit, we did have a price component to the growth this quarter. It ranged from 3% to 5%. 3% primarily on the fiber based catheters, and 5% on the non-fiber based. But, still most of the growth was unit-driven.

Amit Bhalla - Citi

Okay. With respect to coronaries, our device is particularly effective in dealing with thrombus and you may recall that in our PMA label, we have an individualization of use for treatment of acute thrombus AMI and low injection low injection fraction.

The number of physicians have become very interested in this area and are using the device for those kinds of applications and that has led to increasing interest in fixing of coronary catheters.

Amit Bhalla - Citi

Is there a increased selling focus in coronary, and I have a question for Jason Hein, if you can maybe address what the belief is on how the Heart Rhythm Society guidelines for Lead Management is going to change next week?

Guy Childs

Amit, I can answer the coronary training fees. Certainly there is a big focus from our sales organization to reestablish our training programs as it relates to coronary and the objective here is really to get more physicians involved, get them trained and as I think what's actually been most effective for us, is actually having the sales representative be with the physician when he goes through this training, so that there is plenty of follow-up post training as well, so it has been very effective for us.

Jason Hein

Yeah, Amit. This is Jason. As far as the HRS guidelines, obviously those guidelines won't be rolled out until Thursday evening. But at a high level, we expect there has been a lot of discussion around training a physician in indications. So we expect those to be two major components in the new revised guidelines. But again, definitely expect to see a lot more in next week.

Amit Bhalla - Citi

And if I get to sneak a quick one, and you are doing a good job of hiring new reps can you just go through where they are coming from? Are you capturing some of those mere competitors? Thanks.

Emile Geisenheimer

Jason and Mike, probably both comment on that.

Mike Voss

Yeah, as far as picking up a few people in the Lead Management team, we have picked up very experienced sales professionals. Probably the last three or four hires, they are doing at least at ten years device-related medical sales. Two of them have been in the related pacing industry, but not from my direct competition.

Jason Hein

And I would also add to that on the Vascular Intervention side, with the renewed focus on making sure that we are getting, A players from the industry. And if you look at our strong management team that we have in place, we have the ability to truly be able to identify A players as they go through the interviewing process, and make sure that we are hiring those that have strong historical sales success as well, so I think we are doing again a very effective job in that area.

Amit Bhalla - Citi

Okay, thanks.

Operator

Our next question is from Suraj Kalia with SMH Capital.

Suraj Kalia - SMH Capital

Good morning, gentlemen. Congratulations on a nice quarter.

Emile Geisenheimer

Thanks, Suraj.

Suraj Kalia - SMH Capital

Emile, I know this might be a little short of the dark right now, but regarding your pre-IDE submission. If the FDA comes back and says, you know what? We like the data, but going to a many trial to get the specific labeling, or rather a broader labeling for ISR. From your internal planning that you all have done, what you all anticipate even a rough shot of the dollars that it would cost to do such a trial?

Emile Geisenheimer

Well, first of all we were prepared to do such a trial. That's what the FDA would like, but we are hopeful that they will accept the data that we submitted, because the data addresses both the safety and efficacy issues, [since you have to] the issues they may have had.

On the other hand, we are preparing to do a trail, that's what the agency wants. I think we have a capacity in our clinical trial budget this year, this year in such a trial, if we have to. The total cost of one, I haven't penciled that out, but certainly the start of one, which fit within our expense planning this year.

Suraj Kalia - SMH Capital

Okay. So, just to be clear that you all do not expected to be a huge burden on the company?

Emile Geisenheimer

No, I don't think there will be a huge burden on the company. I think that it would fit into our planning and not change the percentage of revenue for example that we spend on clinical trails either this year or next year.

Suraj Kalia - SMH Capital

Emile, in terms of the TURBO-Tandem, I think so, I know a little bit, but can you shed some color on what specific mistakes in your opinion were made with the first launch and how is the company going to tackle avoiding those mistakes when the Tandem, assuming you get a 510(k) in August or later. What's the plan there?

Emile Geisenheimer

Well, I think there are a few. First of all, we developed the device that had a separate pre-standing component that had to be in fact assembled by the physician or is tech onsite, consisted of a guiding device with this ramp and those go, but had to be run over the wire, positioned just on a laser catheter placed with inside the so-called TURBO-Booster.

Following that in order to use the device, the physician had to been able to hold the hand, the laser catheter on ramp position in a particular position and then advance the device through several passes, while rotating the device around the center of lumen. That was typical for physician to do according someone who told me, multiple more hands that I have.

So, the issue that it was an eight fringe device and as you know, that's an issue particularly for interventional cardiologist they first prefer a low profile devices. So, designing the TURBO-Tandem, we integrated the laser catheter and the guiding catheter into a single catheter and doing so, we were able to use the, what was previously a guiding catheter as the other lumen of the laser catheter and reduced the profile from eight fringe to seven fringe.

In addition to that, we greatly improve the nerves cone in the ramp. So, that there was no lateral movement of the laser catheter from the ramp that it being for many of our physician customers. First most importantly, we have added a locking device that permits the deployment of the laser catheter within the TURBO-Tandem and locks in place. So, that the physician doesn't have to hold it in place, while he is going to do the procedure. So, overall enclose to address the two major issues, which was decided advice and these reviews.

So, we believe that compare and combined with a very strong 12 months follow-up data on CELLO, which shows the durability of the results achieved with laser ablation that our sales force will be on that with pretty strong product and clinical data to market in the above and the segment, when we registered this product.

Suraj Kalia - SMH Capital

Emile, if I’d draw a pie chart, what would be fair to say that the reason the first launch there was a hiccup was because lets say 70% or 80% or whatever, was related to the operationing part of the device rather than the true clinical efficacy and hence you all have focused on that and in this launch all the issues that you all have addressed, are really address to focus on that and get it corrected and the clinical efficacy will take care of it by itself. Is that a fair assessment?

Emile Geisenheimer

Certainly I hope. I mean, it’s rather both or anyone have a claim that all of the things that all have been solved. We did a market survey of our customers sometime ago to determine what their objections were, and that was done very systematically post doing five cases with TURBO-Booster completed assessment and told us what their issues were and we use that information along with our conversations with our customers to determine, which phase we needed to address our success a part.

I tell you, one of the major aspects that Spectranetics has, is very strong relationships over many years with many other leading practitioners in every field that we are in around the world. So, our ability if that kind of Frank feedback was helpful to us. There is perhaps another issue that was somewhat a mistake.

First, we were in critical limb ischemia and the majority of critical limb ischemia treatment at that time of the TURBO-Booster launch in any case and perhaps still today, is that performed by interventional cardiologist. Our leading competitor above the knee focused several much greater extent on vascular surgeons.

So we have been guided more by interventional cardiologist first time around. They probably didn't pay enough attention to the ones who needed the vascular surgeons, so this launch will focus on vascular surgeons as well as interventional cardiologist and I think that's something that's new and different in terms of how we see the market.

Suraj Kalia - SMH Capital

Sure. And Guy, you mentioned if, and correct me if I misheard that VI growth in the first half is going to be in the single-digits. Now the VI growth, is it the way you all are measuring it? Is it atherectomy, plus crossing solutions, plus ThromCat or is it just atherectomy? And if it is just atherectomy, and if I am reading it correctly, there needs to be a significant ramp up in Q2 to hit that. Can you correct me where I'm wrong?

Guy Childs

Sure. We think that the Vascular Intervention is the three segments that you mentioned atherectomy, plus thrombectomy which is QuickCat and ThromCat plus crossing solutions, so when we talk about mid-single digits, we are talking about the sum of all those segments.

Suraj Kalia - SMH Capital

So technically you all should be seeing a slowdown in Q2, hen would that be fair?

Guy Childs

Yeah, we have a particularly top comparison in the second quarter. Recall that was the first quarter following the sales force split, which was implemented in the first quarter of last year and we realized some immediate benefits from that in the second quarter and give this a pretty tough comp coming up.

Suraj Kalia - SMH Capital

Fair enough and last question. Emile, if you can just as a broad say, how many accounts, what percent of accounts are you seeing trialing by competitive products? Thank you, guys for taking my questions.

Emile Geisenheimer

I'm going to pitch that to Mike Voss.

Michael Voss

Sure. Suraj, this is Mike. What we are saying is there is a high percentage, especially for higher volume accounts. They all have competitive products, many of them will have the other three main competitors that are in this market are all on the shelf.

One of the things it is working to our advantage however is that with increased focus on reducing cost within the hospitals, within this market is that there are a lot of our major hospitals are having to really choose and reduce the number atherectomy devices get on the shelf. And what we are finding is that most of these accounts are nearly down to two, and we always end up being one of them. So, stiff competition. But again, we feel that we are in a strong competitive place right now.

Suraj Kalia - SMH Capital

Thanks, guys.

Operator

Our next question is from Joshua Zable with Natixis.

Joshua Zable - Natixis

Hey, guys. Congrats to you on a strong quarter, and thanks for taking my questions. A lot of them have been answered, but I just kind of have quick follow-ups here. Just on the in-stent restenosis, just to be clear because I think it was Amit who asked about it.

You guys are trying to submit to get approval to do this without a trial based on your data that you have right now and that would be sort of for immediate approval that’s kind of the goal here?

Emile Geisenheimer

All right, let me give a little color on that. Pre-IDE filing is a mechanism of the FDA to wanted feedback from the agency on an approach to receive the clearance and it's a clearance (inaudible) product. So, we filed this. This opens a time clock with the FDA, and it opens a conversion with them about the data that we have and what their concerns may or may not be with respect to that data, and what more data they may want or whether they find the data that we have submitted to be sufficiently strong to provide a specific indication.

Recall that in the case of ISR, we have PMA level of approval for the coronaries in conjunction with breaking therapies, so we have been down this path before. The testing that we did on interaction of laser in nitinol stents was patented after the testing that we did to satisfy FDA in the PMA process for the coronaries.

The question of whether the laser can remove plaque within a stent it is the remaining question and we believe that we are able to demonstrate that with the patent data. However, the agency decides that they want more data that will come out in discussion will be formally by that pre-IDE submission, and we will react accordingly.

Joshua Zable - Natixis

Okay, that's very helpful. And then just talking about your goal of profitability here, just try to help us understand, or maybe prioritize. You obviously have a lot of good things going on, which is a good problem to have.

But talked about sort of investing more in the coronary or spending more time during training, obviously you talked about budgeting for potentially an ISR trial if that need to be, you are stranding your sales force and obviously legal expenses, which are obviously difficult to predict at this point, or maybe there aren't any new addition out going on, concern about that.

So, I’m just trying to understand sort of when you think about getting to that profitability goal, where does that fall inline with relative to these things, is that goal number one and what's give got to give here if anything could make that happen?

Emile Geisenheimer

Let's just look at it this way. With respect to the legal expenses, clearly they’re going to have to be behind us at some point, in order for us just to have operating profit including those. So, if you take those away and look at the results, bottom line results from operations, we're in a very strong competitive situation; in fact, even these adds to our sales force, even following those adds, in Vascular Intervention we will have fewer sales people than the number of our competitors.

So, while that competitive thrust is going on, if we were fail to respond to it and have the coverage that we plan to have, we would continue losing share to compete with substantially more sales people, 130 or so in the eye in clinical organizations.

So, that done investment, I'm happy to say, we substantially completed in March, and I believe in the April, we had filled all of; we opened territories in the VI. So, we filled in with experienced people, who are coming up to speak and productivity very quickly. So, as a result of that, the productivity we expect to deliver results, beginning in the third quarter and certainly significantly in the fourth quarter.

I hope I gave you some picture of our March profitability. I think this productivity effort is very important. The other aspect of that is a completion of our integration of our two manufacturing facilities and that's something that's going to bear fruit, once we've completed that. So, there’re number of initiatives to in place that seems to start producing operational profitability. We look to see that results begin to show up in latter part of this year and position us for a strong sustaining profitability beginning in '10.

Joshua Zable - Natixis

Great and then just one final question here on atherectomy. I think you said, it was flat quarter-over-quarter and I guess, one of your competitors made a couple comments about, they thought maybe kind of the drop was behind them. They were just talking about their own individual business. Here you seem to be flatting out as well. Is there any sort of sense to atherectomy maybe gaining more traction kind of in general that, the pie is growing for everyone or is it still really the pie is at same size never it's going to be reach other up.

Emile Geisenheimer

Mike, can you have that one.

Mike Voss

Sure, I’d say, there is obviously slight growth within the market overall in the US and I think what we are finding is in our comparison over from Q4, we did have slight growth over Q4 and we have a lot of programs in place that are moving forward here that we started to see the impact to that in Q1.

Certainly we are going to start to see a greater impact, we think in Q2. First we back loaded with several new product launches. So, for us I think on the VI side, that I think we've got tremendous amount of growth potential here on the back end.

Operator

(Operator Instructions). Our next question is from Jason Mills with Canaccord Adams.

Jason Mills - Canaccord Adams

Sorry, if I missed any I bouncing between couple of calls here. So, if you’ve answered this just a cut me off. I did hear the last question so it’s a bit of follow-on from the last question on, in terms of PAD procedure volumes that have to be mix.

So, Mike maybe this is for you. I’m wondering if you can give us the sense for what you think PAD procedural volume just procedure growth is in the United States and also what you're seeing outside the United States were it’s a nation’s opportunity.

Could you maybe estimate the percentage of these PAD procedures, today they're using atherectomy in general and where that was quarter-over-quarter and year-over-year have got. In that same vein sort of the three part question. What you're doing in the referral channel today, if your efforts, you seem like you're spending a good deal money on the sales force. I’m wondering what researches are you applying to referral channel relatively to perhaps a year ago or quarter ago or a plan ago or whatever?

Mike Voss

Right, but Jason if I miss some of those questions, you may have to remind me, we cut through that. First of all, from the PAD growth overall in the market I think the third-party data sources that are out there, are showing the PAD, I believes it’s rolling in the mid to lower teens and I think if you look at, as a percentage from the PAD side or on a atherectomy side, atherectomy growth in the market were showing between high single-digits to the low-teens across the Board.

For us specifically, obviously the focus that we have is not only to increase our share to the existing pie, but to grow the overall awareness the benefits of atherectomy within the overall PAD market itself. So, with that there are several programs that we’re working on.

That allow us to increase our focus on physician referral networks and increasing in finishing referrals and it's also focused on not only going after what the referral networks are, and what we can do to help them, but also we are partnering with a kind of a third-party that has an advanced ABI-type system, which will also allow physician, especially intervention cardiologist and surgeons to be able to screen their existing patients for PAD as well.

So anything we can do to help them screen their patients better is going to allow us to actually have more patients potentially that could fall within the atherectomy side of the business.

Jason Mills - Canaccord Adams

Got it. Going back to your growth, sense for the market, the low to mid-teens for PAD in the high single-digits to low-teens team for atherectomy, is that a domestic growth expectation or estimate, or is that worldwide?

Emile Geisenheimer

It's just domestic.

Jason Mills - Canaccord Adams

Okay. So, I'm wondering, who is getting all of the growth in atherectomy then. Fox Hollow or ev3 still the largest by way of revenue, you guys are either number two or number three. Both company's atherectomy is down double-digits, and we know CSI has been aggressive, but the company would have to basically double or triple to make the market growth consistent with that to the low-teen sort of level, so I'm wondering what I'm missing?

Mike Voss

Well I think.

Emile Geisenheimer

Go ahead.

Mike Voss

If you look at from the market share perspective in atherectomy, certainly I think you can see the CSI is making a strong advance. They are putting a lot of sales representatives in accounts.

Often times in major cities, we are at number five to one in some of those. And I think that they are certainly seeing a benefit just from a market share perspective, I'm not sure from a profitability standpoint. When you look at the mix, I think what you are seeing is that your Fox Hollow continues to lose share. We see ourselves as stabilizing our shares, especially as it relates from Q1 to Q4 and CSI have increased slightly.

Emile Geisenheimer

At the same time it's very dynamic. We have seen there is a third guy out there. Two of those or three competitors have sort of retrenched a bit by our entrance for financial reasons and had some layoffs and restructuring of their organization in the United States.

On the other hand, Fox Hollow, who a year ago announced that they didn't see the opportunity here more recently, has added a significant emphasis to atherectomy and if you who were on the call I’m sure you were. They have added a significant number of clinical support people and they are targeting in their field force that calls on these physicians that are a renewed growth, so I think it's a dynamic kind of thing, and stay tuned. We believe that we are going be able to launch into the above-the-knee segment as I have discussed earlier, and we hope that’s going to change the dynamics so.

Jason Mills - Canaccord Adams

That's fair, so just the last one this. Tell me if me this is fair assessment. Mike, your growth expectations for, both PAD and atherectomy, specifically atherectomy will it be fair to say that, that's where you kind of see things getting back to? Because as I have mentioned, the data just coming out of this quarter specifically and even last quarter, it's hard to get the type of growth that you are talking about just out of the numbers that we see publicly. So, is what you are saying more of an expectation then current reality is that there?

Mike Voss

Yeah, I would say it's a little bit of both actually, because I think Emile makes a great point. If you look at the opportunity that we have in the above-the-knee market, we estimate the size of just the above-the-knee market to be close to $160 million. And of that, we are certainly a single-digit player from a share perspective, so there is a lot of upside on the above-the-knee side of the market. So, big part of that would be on the expectation side and the growth opportunity we have ahead of us.

Emile Geisenheimer

Yeah, let me just re emphasize one point I have said this before and probably, when you haven't exhibit demand for a product, but the products are suboptimal and the market it is reflected in the sale like they are current. The real market is, if you have products that satisfy their different demand, that's the market. So if you look at the situation above-the-knee where FOX or ev3 basically re-fringed some time ago and shrink that market on actual sales basis, but didn't we didn't shrink these different demand.

Whereas a number of patients out there any that need treatment has not changed, it is increasing. So as we add our TURBO attendant to the market and they add resources and go after the market again, I think it is reasonable to expect that you will see the market grow again.

Jason Mills - Canaccord Adams

That's helpful. Okay, last couple of questions, I will get back in queue. I wanted to ask you Emile and Guy little bit about your cash management plans or thoughts. I have to commend you for adding or planning to add resources to the business to drive the business especially in light the investigation, it shows that you have confidence in your business.

On the other hand I'm concerned a bit given that you have over $50 million of cash equivalents that are tied up in auction rate securities, which leaves you liquid cash of under $20 million. I'm concerned that perhaps this may not be the right time to sort of strike quality in Tandem and throw more fuel into the fire, if you will from an expense standpoint. Could talk about your confidence that you won't need to go and raise capital in light of your plans to really raise the expenses and try to drive the business?

Guy Childs

You're right, Jason. Excluding the auction rates, we have less than $20 million. The current quarter, we used just a little over $2 million. We do expect to use cash in the second quarter specifically again. However, we don't see that sort of cash usage over $2 million to be a long-term sort of usage trend.

So, as Emile said, we remain focused on profitability. Its not manufactured in the numbers this quarter, but the numbers are exactly in line with where we anticipated to be at this point in year and our strategy here and we see the growth opportunities is to grow into profitability.

One alternative, which we considered and debated and had lot to constructive discussion on, relates to just go ahead and getting very aggressive on costs, but you have to keep in mind two points, first, what Emile mentioned relative to the competitive landscape and second we've invested substantial sums in attracting top talents for the company and that we believe will be leveraged.

If we were to take significant step backwards there, it would be just be very difficult we believe to turn back on the growth engine. So, we do believe we can grow in to profitability and very comfortable with less than $20 million of cash and investment securities and very comfortable that's going to fund our growth and prospects for the foreseeable future and I leave with that.

Jason Mills - Canaccord Adams

Guy thank you for that. That's very helpful. Let me ask you one other way and Emile, I know you said right up front you're going to take questions on the investigation, but it's fairly easy for us to reduce I guess one scenario here given that you have the confidence to be aggressive to add your sales force, increase your R&D spending, to invest in clinical trial work and continue to try to drive the business, in light of your current cash position.

It suggests that, obviously, with your current burn, you shouldn't burn down to under $10 million. However, what still out there is any penalty that maybe applied by the government associated with this investigation. So, it suggest that in your conversations with investigators that you’re getting confidence that you have, your arms around at least a range of number that doesn't significantly infringe upon that existing liquid cash balance. Is there any comment that you can give to that assessment?

Emile Geisenheimer

No. I can't comment on this area guys. I appreciate your frustration on the subject. You can appreciate my frustration I’m not being able to comment, but I can’t comment.

Operator

Our next question is from Brian Kennedy with Jefferies.

Brian Kennedy - Jefferies

Lot of my questions have been answered. So, I’ll just ask one. Very broadly can you explain what types of compliance initiatives are associated with the 600,000 in costs and then broadly again what still needed that gets you to the million dollar range and can you just say to some degree, how much of this would done proactively or in response to feedback you received potentially?

Emile Geisenheimer

Well, all of the things done proactively and none of its being done with respect to feedback.

Brian Kennedy - Jefferies

Okay.

Emile Geisenheimer

My personal goal and becoming a CEO here was to make certain that we had fully compliant company and we have very strong compliance programs in place, but we did undergo a significant expense in auditing all of our compliance programs and make sure that, where we need to be, to be a fully compliant company.

Some of the work is to enhance programs that the inflation lot of time. We also have to comply with new rules like (inaudible) rules that become effective in July that have changed a lot of things in lot of companies and we're going to be head of the game on that and frankly, it’s important. I think we get this done as quickly as possible. So, we've got a lot of that work in the first quarter and I’m pleased with the results.

Brian Kennedy - Jefferies

Okay. I appreciate it. That's it for me.

Operator

We have time for two further questions. Your next question is from Shawn Fitz of Stephens Inc.

Shawn Fitz - Stephens Inc.

Hey, just as we, kind of absorbed at the data from the LExICon Study and we think back, I think it was in May of last year, there was a study on Lead Management published in the Heart Rhythm Journal. And now could you just maybe discuss how much overlap there is between the LExICon Study and the one from last May in terms of the patients, I guess.

Emile Geisenheimer

Let Jason cover that.

Jason Hein

Shawn, so as far as the article you are referring to, do you know more details of the May article?

Shawn Fitz - Stephens Inc.

I think its Dr. Epstein, right?

Jason Hein

Yeah, Dr. Epstein put in a single-centre experience in the Heart Rhythm Journal, and he probably had close to, I think it was 498 or 500 patients in that study. Again that was just the patient treated at the Brigham and Women's Hospital in Boston.

A subset of those patients are included in the LExICon trial. So Dr. Epstein was one of the 13 sites, so the answer is yes. Part of Dr. Epstein's article from the Journal was included in LExICon, but not the entire subset. So I believe, his was probably in the range of eight years whereas the LExICon trial was just a four-year study.

Shawn Fitz - Stephens Inc.

Okay, thanks. And then Emile and Guy, just as we think about your growth objectives for the Lead Management segment of your business. How important is it that there be a, I guess a new recommendation or a new approach to Lead Management recommended here next week or so. How important is that to your growth objective of the mid-teens?

Emile Geisenheimer

I'll comment on that. I think it's certainly will be, we believe, helpful to us. But I think the data from LExICon is the most important thing as physicians began to look at this data and weigh the risk versus benefits of making decisions to manage problematic lead.

This is decision, and I'm going to make this very clear. We do not push for lead extraction, we provide data to physicians and we provide the tools and they have to make decisions based on the unique critical circumstances of their patient and in consultation with their patient about what approach they take to it.

We hope that if they decide to extract the lead they use, our technology and we believe data not just left LExICon the whole volume data show that it offers an effective and safe passage of extraction. Jason, you want to comment?

Jason Hein

Yeah, Shawn. I would like to add to Emile's comment. As far as the guideline, they are in place now. They have been out there for about eight or nine years. The revision that's coming out next week just builds on that and is brought up by the panel last year. They recognize there are probably over 4 million lead implanted in patient right now and that number has doubled in the last five years, which is of course since they came out with the original guideline, so the guideline is going to focus on addressing those two main issues.

How to address the growing numbers of patients. Again, what we saw in LExICon is over 40% of patient are getting extraction for something other than an infection, and that comes into that Class II or the discussion area.

So they want to clarify that, they also want to look at the fact, they are just growing number of lead, and they need to come up with something long-term. First on the indication and second on the physician, they will perform those procedures and that's when comment on training came in.

As far as the impact on mid-teens growth, I really see the guideline just having a very long-term impact. It won't be an immediate impact next week, or the week after, but these guidelines should be in place for many years. And that's going to something we look at long-term, not just here in the short-term.

Shawn Fitz - Stephens Inc.

Then just last question. Emile, as we think about Vascular Intervention segment may be as kind of standalone and distinct business, given your sales force headcount, what level of quarterly revenue would you need to attain in order for that division to be profitable on operating basis?

Emile Geisenheimer

Let Guy deal with that question.

Guy Childs

Thanks, Emile.

Emile Geisenheimer

Do you mumble, or do you just wanted want to talk?

Guy Childs

Shawn, we do, do some internal allocations and what not to look at those businesses individually, but I am going to have to hesitate to share that information. I think for the overall business, we continue to look for growth, particularly in the second half $30 million is an important milestone for us and we are focused on marching there as fast as we can.

Charley Jones

Okay, Guy, thanks. And we will talk to you all soon.

Emile Geisenheimer

Thanks, Shawn.

Operator

Our final question is from Larry Haimovitch with HMTC

Larry Haimovitch - HMTC

Good afternoon. Emile, I am going to direct this question to you. The company has been through lots of trauma with the FDA investigation, the markets are tough, the competition is increasing. I am just wondering if you could comment at all on the moral of the company and things that specific programs that you have put in place to retain key people and make sure that people are all pulling together as a team and making Spectranetics the best possible company it could be.

Emile Geisenheimer

Okay. That's a vertical question.

Larry Haimovitch - HMTC

That's an unusual question, but.

Emile Geisenheimer

No, and actually you are right. You are hitting on my closing remarks, but let me address it now. First of all there is an extremely enthusiastic team of people here. In our sales organization and in the headquarters, we have been successful in hiring and attracting to the company that some of the best performed industry and as their motivation and enthusiasm is decided. I've never seen in a company. So, that is, answer part of your question.

The other answer is that, as you may recall, we announced very shortly after I joined the company, a program of to retain our key people and that program, which has two elements, from new stock options, as well as some bonus driven money. We now smoke to the public. So, those options are patterned after some of our own options, which I proposed to the Board myself. That these options with vesting and will be triggered by hitting a $9 stock price and you know that speaks for itself.

It was my idea. I think it’s important to communicate to your organization that we're going to drive to that and beyond and I think there are people are very excited about the company. They see the growth. They see the rich product pipeline. They see the enthusiasm of our physician customers and I think that it's very pleasing to see.

Operator

That's all the time we have for today. Please proceed with your presentation or any closing remark.

Emile Geisenheimer

Thank you very much and you may expect that I spent a lot of time over the past six months with Spectranetics people both here in Colorado Springs and around the world in the field. It's my hope that in today's call, we convey sense of enthusiasm that the Spectranetics team feels about the company in its future.

Spectranetics will celebrate its 25th anniversary this year. Over the years the company has faced many challenges. Today Spectranetics is positioned to continue growth in both the Vascular Intervention, Lead Management business in the Unites States and Internationally.

The company has a robust product pipeline and world-class team of people and enjoys strong relationships with our physician customers in each of the market that we serve. We remain focused on resolving our legal challenges and maintaining growth, as we march towards sustained profitability.

I will thank you for your participation in the call and I especially want to thank the entire Spectranetics team for their hard work and enthusiasm. Thank you very much.

Operator

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

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Source: The Spectranetics Corporation Q1 2009 Earnings Call Transcript
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