The Spectranetics Corporation (NASDAQ:SPNC)
Q1 2013 Earnings Conference Call
April 23, 2013 04:30 PM ET
Lynn Pieper - IR, Westwicke Partners
Scott Drake - President & CEO
Guy A. Childs - CFO
Charles Haff - Craig Hallum
Adam Darrity - Citigroup
Good day, ladies and gentlemen, and welcome to the Spectranetics Corporation 2013 First Quarter Financial Results Conference Call. At this time, all participants are in listen-only mode. Later we will conduct a question-and-answer session and instructions will be given at that time. [Operator Instructions]. As a reminder, this conference call may be recorded.
I would now like to introduce your host for today's conference, Ms. Lynn Pieper. You may begin.
Thank you. This is Lynn Pieper with Westwicke Partners. Thank you for participating in today's call. Joining me from Spectranetics is President and Chief Executive Officer, Scott Drake; Chief Financial Officer, Guy Childs; as well as Senior Vice President, Operations Business Development and International, Shahr Matin; and Senior Vice President, Commercial Operations, Jason Hein.
Earlier today, Spectranetics released financial results for the quarter ended March 31, 2013. If you've not received this news release or if you'd like to be added to the company's distribution list, please call Westwicke Partners in San Francisco at 415-202-5678.
Before we begin, I'd like to remind you management will be making statements during this call that include forward-looking statements within the meaning of federal securities laws. These statements involve material risks and uncertainties that could cause actual results or events to be materially different from those anticipated.
For a list and description of those risks and uncertainties, please see the company's filings with the Securities and Exchange Commission. Spectranetics disclaims any intention or obligation to update or revise any financial projections or forward-looking statements, whether as a result of new information, future events or otherwise.
Furthermore, this conference call contains time-sensitive information and is accurate only as of the date of the live broadcast, April 23, 2013.
The company also announced today, in a separate press release, the commencement of an underwritten public offering of its common stock. The focus of this call is to discuss the company's financial results for the quarter ended March 31, 2013. In light of that, and SEC rules and regulations, the company will not be discussing or [asking] questions about the proposed financing.
I'll now turn the call over to Scott Drake.
Thanks Lynn, good afternoon everyone. Thanks for joining us on our Q1 call. This quarter reflects continue double digit growth, highlighted by our global Lead Management business in U.S. peripheral atherectomy that grew 22% and 16% respectively.
This afternoon, I will break down my comments as follows; first, I will walk through the quarter's financial performance for our Vascular Lead Management and international businesses. I will then provide an update on our highlighted growth drivers. We will discuss the significant progress we have made with our clinical programs. Guy will go deeper into the financials, and then we look forward to fielding your questions.
On the business front, this quarter represents another step forward. Our focus areas are contributing meaningfully and we are gaining momentum. As we look ahead, we have many reasons to be optimistic about our prospects. Both of our target markets are growing in the 10% range, and we are taking share in each. We are aggressively developing and pursuing strategies to accelerate this growth trajectory. We are introducing clinically meaningful products, and pursuing market changing clinical data, that leverage our infrastructure, as we expand into large underserved markets.
Before I delve into each business segment, I want to highlight our laser placements in the quarter. We installed 39 lasers to new customers, versus 25 in the year-ago period. This robust performance follows a record fourth quarter of 42 units, and bodes well for future growth. The pool of non-productive laser systems has significantly declined, so we are ramping up manufacturing to meet higher global demand.
On the vascular intervention front, we delivered 17.2 million and increased to 5%. Our initiatives to drive PAD awareness in the office-based opportunity fueled 16% growth in U.S. peripheral atherectomy. Lead Management continues to deliver. The franchise achieved revenues of $15.1 million, a 22% increase. This growth is characterized by solid underlying market dynamic, share gains, conversions to GlideLight, and new lead extraction programs. Our international team posted revenue of $6.9 million, a 26% constant currency increase. Strength in Europe, and robust growth in Japan highlight these results.
Gross margins remain strong at 73%, even in light of significant laser revenue mix in the quarter. Our net loss was $959,000 or $0.03 a share. This performance is right in line with our expectations. I do want to point out, that despite strong momentum in our focus areas, declining revenues in coronary atherectomy and thrombectomy are offsetting momentum in our VI business. We also highlighted this headwind last quarter, and we expect this trend to continue for the balance of the year.
Now, let's turn to our growth drivers. As previously stated, growth in our vascular business is predicated upon three things; atherectomy penetration and share gains, expansion into in-stent restenosis, and adding to our product portfolio. For the seventh consecutive quarter, we have grown our atherectomy business faster than the market, primarily driven by our PAD awareness and office-based lab initiatives. Market dynamics are broadly favorable, and the increase in office-based procedures continues.
Improved access to patient care, lower cost of delivered care, and reimbursement, provide the impetus for procedures to shift to this setting. These trends are a net positive for market growth generally and our business specifically. As a result, we are continuously working to ensure that our investment matches the opportunity.
I'd like to turn our attention to a significant future growth driver, in-stent restenosis. Notably, our progress in achieving an indication and demonstrating the clinical value of laser atherectomy, both in the near term and when drug coated balloons launched in the U.S.
First, EXCITE; we now have 153 patients enrolled and our full allotment of 35 sites are active. This represents an increase in our enrolment rate, as a result of recent efforts and new motivated investigators. Our partnership with the FDA is on track, and I am pleased to report, we have submitted our full adjunct analysis proposal. In short, we are striving to achieve the indication, prove clinical superiority with fewer enrolments, and potentially without six month follow-up for a subset of patients. To be clear, the path is not finalized, and we anticipate some more constructive dialog with the agency. We continue to believe that our mid-2014 timing is still the correct assumption.
On the PHOTOPAC front, 42 patients are enrolled, and full enrolment of 50 patients will be achieved this quarter. Last week, we were in Europe consulting with global luminaries, and we decided to increase the study size to 125 patients. Our confidence in the data, the importance of clinical proof, and guidance from thought leaders fueled this decision. Professor Thomas Zeller, one of the most respected and renowned interventionalists in the world, commented, 'Spectranetics is pursuing a very important goal, to identify and prove an effective durable solution for in-stent restenosis patients. I believe there is meaningful clinical benefit, of first debulking with laser atherectomy prior to deploying a drug-coated balloon. Expanding the size of PHOTOPAC increases the clinical relevance and confidence in a compelling outcome.'
The expansion of this study is another meaningful step forward in our path to treat ISR patients and capitalize on this transformational growth driver. The big picture, is that the ISR market is very large and underserved. Approximately 250,000 procedures per year, about $750 million market opportunity for us. Our vision is to be the only company with an indication, have compelling clinical evidence, and as drug-coated balloons enter U.S. labs, we will continue to draft on the wheel of big companies that are spending hundreds of millions of dollars developing the market. To this, we look forward.
Other highlights in our vascular business include the following; progress on the upstream acquisition is on track. Customer feedback across global regions is positive. Revenue is ahead of our pro forma, and operational integration is in hand. On the TAPAS front, we are gradually gaining traction. Last month, Dr. Rich Kovach initiated a 100-patient study to test the impact of laser atherectomy, combined with the liquid delivery of Paclitaxel. This work, along with Dr. Dippel's PacTAP study will help reveal the clinical value of the device. At this point, PacTAP results are early, and encouraging.
In summary, our vascular business is gaining momentum on the sales execution, clinical, and portfolio fronts. The future is bright.
Now for Lead Management. Our mission is to provide great patient care. We have focused our commercial programs, training and education efforts and new product development on this clear goal. We seek to ensure that every inspected lead is safely extracted, that all class-two leads are managed with the appropriate treatment, and adverse events could become a thing of the past. Our growth is governed and directed by our dedication to this cause.
While treatment of patients for acquiring lead extraction is climbing, the vast majority are still underserved, and our focus on responsible Lead Management will unlock the potential of this enormous opportunity. Our growth rate in Lead Management was 22% in the quarter, punchline again, we have a very nice balance of deeper penetration in current accounts, new Lead Management program starts, and the impact of GlideLight pricing.
Our GlideLight launch continues to go well. Customer response and adoption of the product remain very positive, and as previously reported, by mid 2013, we expect to have converted the vast majority of our base business to this new technology.
Q1 growth was also driven by the addition of several new lead extraction programs. As we have seen in the past, new programs grow even faster than our base business. Like new laser placements, these programs signal continued strong growth this year and beyond. We expect this promising trend to continue, as our pipeline of new accounts is robust.
On the simulation validation front, significant progress has been made. The pilot study publication was accepted by the journal of cardiovascular electrophysiology, and we expect it to be published in the near future. The full validation study will be completely enrolled this summer, and an abstract of the first 17 of 50 physicians has been accepted for presentation at HRS next month. This work points toward a very meaningful step forward for physician training and improved patient outcomes.
Last week, we announced the national tour of our Lead Management mobile simulator. We kicked off the tour in four northeast cities. We partnered with local hospitals and received both broadcast and print media coverage. We plan to visit other U.S. regions throughout the year, and will highlight our simulation capabilities at HRS in two weeks. Our goal, to provide physicians easy access to the best lead extraction training in the world, improve physician technique, and optimize patient outcomes.
Regarding our product pipeline, our mechanical tools programs are progressing nicely. Customer feedback is very positive, leading us to believe we are developing a real clinical advancement with these devices. For all of the right reasons, we are spending at the high end of the range of our R&D budget. This acceleration reflects our confidence in our team, and encouraging customer feedback.
In summary, our commercial team is executing well. GlideLight conversions are on-track. New programs are coming online, and we expect good things from our organic development and market development efforts. Our vision is to manage every lead and momentum builds.
Internationally we continue to drive solid results in Europe and rapid growth in Japan. Highlighting recent accomplishments; first, we launched our Quick-Cross Capture and Quick-Access devices in February. These products have had strong interest by European physicians and as mentioned, adoption is beyond our pro forma projections.
Second, in April, we received approval for our Quick-Cross Extreme and Select products in Japan. We are now waiting reimbursement, which should be imminent. This expands our Crossing Solutions portfolio and broadens our Quick-Cross launch.
Third, we are continuing our conversion to GlideLight and concurrently gaining share in Lead Management. We expect ongoing strength in our existing market, as we expand into new markets, yielding sustainable robust international growth.
Finally, some brief comments on the common stock offering we announced today. We expect to use the net proceeds for general corporate purposes, including working capital. We may use all or a portion of the net proceeds to acquire or invest any complementary businesses, technologies or assets, although, we currently have no present understandings, commitments, or agreements to enter into any acquisition, or make any investments.
In anticipation of questions on M&A, we want to be very clear. Number one, we don't need to do anything to achieve our three-year growth goals we've shared. Our goals are achievable with our organic efforts, and we're bullish.
Number two, any potential activity would be squarely in line with our current call points and clearly defined strategy; and number three, we don't comment on target speculation, with deals in line with our strategy that are accretive to our growth rates, and supportive of operating leverage are most attractive.
In summary, we are on solid footing. The team is executing well. Our products and clinical pipelines are compelling, and we are actively engaged with the salesforce optimization firm, to assess the path to further acceleration.
I will now turn the call over to Guy to provide more detail on the financials.
Guy A. Childs
Thank you, Scott and good afternoon everyone. It is my pleasure to reflect the outstanding performance of the Spectranetics team. Through their efforts, our organizational capability continues to increase and provide the foundation for continuing growth in our business. After reviewing the details of our financial performance for the first quarter ended March 31, 2013, I will provide an outlook for the full year.
First quarter revenue of $37.7 million increased by 13%, both as reported and on a constant currency basis. Vascular Intervention revenues of $17.2 million increased 5%, led by U.S. peripheral atherectomy growth of 16%. Crossing Solutions revenue increased 4%, aided by sale of the recently acquired Quick-Access Needle Holder and Quick Capture Guidewire Retriever products. These products were launched on February 1, and we are encouraged by early customer feedback.
Coronary revenue from atherectomy and thrombectomy product sales decreased 24%. As mentioned on previous calls, the coronary market is not a strategic priority, and we expect headwinds to grow in this product category through the rest of the year.
The peripheral market is a strategic priority for us, and our performance reflects it. Our growth continues to be driven by sales to office-based clinics, supported by our PAD awareness program.
Lead Management revenue grew 22%, a strong start for the year, following a record fourth quarter of 2012. We are encouraged by unit volume increases, GlideLight account conversions and a price premium that comes with the GlideLight product.
Laser system, service and other revenue increased 20% to $5.4 million. Sales of laser systems were particularly strong this quarter, and we expect that to continue into the second quarter. We believe 39 placements of new lasers is a leading indicator for growth, for increasing laser unit manufacturing volumes, given strong demand.
On a geographic basis, revenue in the United States was $30.8 million, an increase of 11%. International revenue was $6.9 million, which represents growth of 27% or 26% in constant currency. Our gross margin for the quarter was 72.6%, down 40 basis points from last year. This is due primarily to the strong laser sales in the quarter, which are lower margin products.
We continue to target gross margin improvements of at least 50 basis points from the 73% during the full year of 2012. In fact, we are making progress. Had the revenue mix been consistent with the first quarter of last year, gross margins would have been 73.4%, 80 basis points higher than we reported, and 40 basis points higher than last year.
Research, development and other technology expense was $5.2 million or 13.7% of revenue, compared with $3.8 million or 11.3% of revenue in the prior year. This increase was planned, as we ramp up our product development activity. We anticipate to launch a mechanical tool to our Lead Management customers in 2014, and have several other projects that are in the early stages.
SG&A expenses of $22.8 million represented 60.5% of revenue, compared with last year's $20.6 million or 61.9% of revenue. The dollar increase was led by increased spending with international sales and marketing, increased resources dedicated to the office-based setting and expansion of our physician training and marketing capabilities in the U.S.
We recorded $0.5 million related to the medical device EXCITE pack, which became effective on January 1, 2013. We had excluded these costs from adjusted EBITDA, primarily, for comparability purposes versus last year. It will only be excluded from adjusted EBITDA for 2013. Once the tax anniversaries on January 1, 2014, we will continue to disclose it separately, but it will not be carved out for adjusted EBITDA purposes. We support the ongoing effort to repeal the tax, but our outlook assumes the tax will remain in place.
We also recorded contingent consideration expense and acquisition related amortization expense, which totaled $0.4 million. Since these are new to our P&L, I will briefly describe the nature of these costs. Contingent consideration expense represents the accretion of a difference between the present value of milestone payments, and the estimated payment of future milestones. If the actual milestone pay differs from the estimates made in January 2013, that different will be recorded as contingent consideration expense, or benefit in the future. Acquisition related amortization expense represents the amortization of intangible assets acquired from upstream technology.
Since we recorded an income tax benefit this quarter, I wanted to provide some commentary on that, and the provision for income tax expense, expected for the year. The income tax benefit this quarter is expected to be offset with income tax expense later in the year, given our expectation to be profitable for the full year. We currently expect to record a provision for income taxes in the range of $0.7 million to $0.8 million for the full year 2013. In quarters with the pretax loss, such as our first quarter, an income tax benefit will be recorded. Please note, that the effective tax rate may vary significantly from quarter-to-quarter, given variability and levels of pretax loss and pretax income between quarters.
Keep in mind, this attached revision or benefit is a non-cash item, given our available net operating losses. However, the provision for income taxes is an important consideration for model update.
Net loss for the first quarter was $959,000 or $0.03 per share, compared with net income of $12,000 or breakeven per diluted share last year. Adjusted EBITDA, which excludes the medical device tax, amortization of acquired intangible assets, and acquisition related contingent consideration expense was $1.8 million for the first quarter of 2013, compared with $2.5 million in last year's first quarter. This is consistent with the expectations we established in our February call, and reflects our investment in research and development, targeted at accelerating revenue growth. Tables showing reconciliation of non-GAAP financial measures are provided in the press release.
Cash and cash equivalent totaled $25.2 million as of March 31, 2013. We used $12.5 million in cash in the quarter, primarily due to $6.5 million paid for the acquisition completed in January, combined with a net loss and seasonally high working capital requirements, they are typical in the first quarter of the year.
I will close my prepared remarks by reiterating our outlook for 2013. We project that 2013 revenue will be in the range of $153 million to $155.5 million, an increase of 9% to 11% over 2012. Net income for 2013 is projected to be in the range of breakeven to $0.5 million or breakeven for $0.01 per diluted share, including the impact of the medical device tax, estimated to be approximately $2.5 million.
Projected net income also includes amortization costs and acquisition related contingent consideration expense of approximately $1.6 million to $2 million. Adjusted EBITDA excludes these items, and is anticipated to be in the range of $13.5 million to $14.5 million in 2013, and improvement over $13.1 million in 2012. Adjusted EBITDA provides for comparability between periods and represents an additional measure of the operating performance of the business.
We anticipate a net loss of up to $2.5 million in the first half of 2013. As a result of seasonal operating expenses that are higher in the first half of the year, investments in research, development and commercial program, non-cash amortization, contingent consideration costs and the impact of the medical device tax.
This concludes our prepared remarks and we are ready to take your questions. Operator?
Thank you. [Operator Instructions]. Our first question is from Charles Haff of Craig Hallum. Your line is open.
Charles Haff - Craig Hallum
Hi. Thanks for taking my question. My first question is, what's the approximate cost to produce one of your laser boxes?
Guy A. Childs
Charles, this is Guy. We haven't disclosed that, but I would say, you think about typical capital equipment margins, very low, approximately 20%, sometimes lower depending on the quarter. So that's the laser mix that we alluded to.
Charles Haff - Craig Hallum
Okay. Thanks. And my next question is, on the vascular sales force side, I know you are quite a bit smaller, maybe about 50 or 60 reps smaller than your two competitors on vascular. Is there any plans for expansion there over 2013?
Yeah Charles. We are -- I alluded to it in my remarks. We are engaged with a salesforce optimization firm that we have done handful of engagements with previously. They are a great firm, and they are going to help us validate, whether or not, we are appropriately resourced there. Our budget currently calls for an addition of up to about 10 sales reps to cross our businesses, and we are contemplating, what more, if anything, we would like to do going forward. So, you now have a view of our budget, and we are testing our current though process externally, with a firm that I trust a bunch.
Charles Haff - Craig Hallum
Great. And my last question is regarding PHOTOPAC. I think your previous disclosure showed that the study in Europe had 0% TLR. Is there any update on that, or should we still assume that level?
You know what I think you are referring to Charles, is the Jos Van Den Berg single-center work that was done or perhaps Dr. Gambini's work that was done in Italy. Those two studies had very compelling outcomes, and that's part of what reads on our expansion of PHOTOPAC here from 50 to 125. We don't have any read on PHOTOPAC at this point, given that we are midway through enrolment here. So, no crisp data on that front; but our confidence is pretty high, given what other physicians have done.
Charles Haff - Craig Hallum
Great. Thank you. Nice quarter.
Guy A. Childs
[Operator Instructions]. Our next question is from Amit Bhalla of Citi. Your line is open.
Adam Darrity - Citigroup
Hi, this is actually Adam in for Amit today.
Adam Darrity - Citigroup
Hey. I was just wondering if you could quantify for us what the GlideLight conversion was like in the quarter, and then maybe help breakout for Lead Management, what the unit volume versus price contribution wise?
Guy A. Childs
Yeah, happy to. From a GlideLight perspective, GlideLight now represents about 70% of our unit volume, as we speak today. And as we stated last quarter, and we don't get too much more granular here Adam, other than to say that we had very balanced growth in the lead management business. Deeper penetration in current accounts. New accounts coming online, [reading into] that share gains, and the impact of pricing. Very good balance, both in Q4 and here in Q1 and we anticipate that that will continue as we go forward.
Adam Darrity - Citigroup
Okay. And then, maybe you can provide a little more color on what you are seeing in adoption trends, with both TAPAS and some of the upstream technology?
Yeah, very early on upstream. We have only had two months of commercial experience with the products in the U.S., one month in Europe. I am pleased to report that customer feedback across the regions is very positive, and that bodes well I think for the future. We are ahead of our pro forma expectations. We haven't shared that, exactly what those numbers are, as we do with other new product launches, we generally wait a couple of quarters to get more experienced with them, before we share specifically what the numbers look like. And I would tell you, on the TAPAS front, it is slow but sure. We anticipate that, that will continue kind of as it has -- it has gone slower than we originally anticipated. I think and hope we have been relatively clear on that front. We don't anticipate significant volume from TAPAS here in the near term, but as this clinical work, both what Dr. Kovach is doing and Dr. Dippel, as that clinical work comes to light, we hope for and are going to put muscle behind acceleration of the ramp right there.
Thank you. I am not showing any further questions in the queue. I'd like to turn the call back over to management for any further remarks?
Okay. Thanks Ashley and thanks everybody for joining us on the call here this afternoon. We look forward to any follow-up that the investor community has and look forward to updating you on our next call.
Ladies and gentlemen, thanks for participating in today's conference. This concludes today's program. You may all disconnect. Everyone, have a great day.
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