Volcano Management Discusses Q1 2013 Results - Earnings Call Transcript

May. 3.13 | About: Volcano Corporation (VOLC)

Volcano (NASDAQ:VOLC)

Q1 2013 Earnings Call

May 02, 2013 5:00 pm ET

Executives

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

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

Analysts

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

Matthew Dolan - Roth Capital Partners, LLC, Research Division

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

Ben Andrew - William Blair & Company L.L.C., Research Division

Matthew Keeler - Crédit Suisse AG, Research Division

Jayson T. Bedford - Raymond James & Associates, Inc., Research Division

Misha Dinerman

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

Jose T. Haresco - JMP Securities LLC, Research Division

Operator

Good afternoon, and welcome to Volcano Corporation's First Quarter 2013 Earnings Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded, Thursday, May 2. A replay of the call will be available through May 9 by dialing (404) 537-3406, passcode 34024703 or via the company's website at www.volcanocorp.com.

I would now like to introduce Mr. John Dahldorf, Volcano's Chief Financial Officer. Please go ahead, sir.

John T. Dahldorf

Thank you, and good afternoon, everyone. With me today is Scott Huennekens, Volcano's President and Chief Executive Officer. Scott will address recent operational highlights and our perspectives on the current market environment. I will follow with a review of our financial results for the quarter and an update of our guidance for 2013.

Before turning the call over to Scott, let me remind you that today's discussion will contain forward-looking statements that involve risks and uncertainties that could cause our actual results to differ materially from those discussed in today's call. These risks and uncertainties are outlined in today's press release and in our filings with the Securities and Exchange Commission, including our 10-K for 2012. We caution you not to place undue reliance on our forward-looking statements, and we disclaim any obligation to update these statements.

Scott?

R. Scott Huennekens

Thank you, John. And good afternoon, everyone. Volcano's results for the first quarter reflected both the continued execution of our growth strategies and the dynamics of the current market environment, including slowing PCI volumes in the U.S. and the weakening of the yen. In spite of these challenges, we demonstrated solid performance overall in the first quarter.

Highlights of our results include the following: medical revenues grew 9% on a constant currency basis, and we continue to win market share in our core FFR and imaging businesses in all geographies. FFR disposable revenues grew 36% on a constant currency basis amidst a continued strong pace of adoption in the U.S., Europe and Japan.

Third, FFR image and imaging demonstrated solid growth on a percentage basis in Asia Pacific and Latin America. These geographies are emerging territories with higher current and future growth for the company.

Fourth, Europe, Middle East and India, or our EMEAI region, generated 21% growth as we move beyond the direct-in-Spain initiative.

Fifth, Axsun Medical continued to meet our growth expectations led by successes in ophthalmology.

Sixth, peripheral IVUS imaging in the U.S. grew in the mid-teens, and we have moved forward with our new clinical study initiatives and marketing programs to further advance our growth in a large market opportunity as we move forward.

And lastly, seventh, we expect all of these trends to continue through the balance of the year.

At the same time, like many others in our sector, we are buffeted by greater-than-expected weakness in the U.S., stable PCI volumes and in FX fluctuations with the yen. Stable PCI volumes in the U.S. continue to soften, and we now expect total PCI volumes will decline in the range of 5% to 7% in 2013. It declined roughly double our prior expectations and will continue to decline in 2014, although at a lesser rate, and stabilize in 2015 and beyond. We do not see this level of weakness in other geographies.

I should note that it is our belief that stable PCIs, which is the market in which our products are more often sold, have actually experienced a greater downturn than the overall numbers for PCIs, which suggest that unstable PCI volumes have remained constant or experienced modest growth. These new assumptions on PCI volumes are built into our updated guidance that John will discuss.

I want to emphasize that we continue to validate, and believe in the three-pronged growth strategy that we outlined in our Analyst Day in New York in early March.

First, our core FFR and intravascular imaging businesses and coronaries and peripherals; second, developing and commercializing our robust product pipeline; and third, acquiring products that is synergistic and provide us diversification beyond our traditional, stable PCI market and create long-term value for the company.

As we discussed at the end of March, we continue to believe that over the next 5 years, our base business can drive compound annual growth in revenues of 11% to 13% on a constant currency basis, with contributions from our pipeline and business development activities being additive. We continue to see our functional PCI strategy of providing precision-guided therapy solutions to address the clinical and economic trends impacting our customers, driving long-term growth and expanded profitability for Volcano. The pressure is impacting our customer, such as the need for appropriateness to stent, validating outcomes and improving outcomes while lowering costs are only increasing and are not going to go away.

Before speaking to the other aspects of our business, I'd like to provide a brief overview of our financial results, which John will cover in more detail. As I mentioned, we are seeing 2 crucial factors impacting our financial results: declines in U.S. stable PCI volumes, greater than our estimates and the estimates of others; and second, the continued weakening of the yen versus the US dollar, which had a nearly 5% negative impact on our reported revenues in the quarter.

On a reported basis, our revenues for the quarter were $93.2 million compared to $90.4 million in the first quarter a year ago. FX exchange rates impacted our revenues in the quarter by approximately $4.2 million as the yen continued to weaken. Excluding the FX impact, quarterly revenues would have increased nearly 8% year-over-year. You should also note that we experienced about $0.5 million decline in revenues from Axsun Industrial as spending in the telecom sector continued to be weak.

We experienced good growth in our FFR disposable business, where revenues increased 33% year-over-year on a reported basis and 36% on a constant currency basis. In particular, I would note our Japan FFR disposable revenues increased from $1.8 million to $4.5 million on a reported basis and $5.1 million on a constant currency basis, as adoption increases there due to the reimbursement this year for the use of FFR during diagnostic angiography.

We are also hitting key milestones with our product developments programs in FFR, including IFR, our Instant Wave-Free Ratio, adenosine-free FFR technology. We have expanded our o U.S. limited-market release effort and now have the top technology in approximately 20 centers, primarily in Europe and Japan.

In addition, enrollment in our ADVISE II study, which is a global, multi-center retrospective study intended to generate data to support our global regulatory submissions for IFR, recently surpassed 350 patients. Data from this study will be presented at EuroPCR in Paris later this month. In the meantime, our 4 IFR datasets will be presented at the American College of Cardiology meeting in March, all demonstrating high levels of accuracy compared to FFR.

Turning to our imaging business. In Japan, we experienced a negative impact of the reduced reimbursement from last year and FX exchange rates. For example, all of the decline in Japan IVUS disposable revenues year-over-year can be attributed to the roughly 10% reduction in reimbursement that's in effect last April and the negative impact of currency exchange rates. I should also note that we had 3 fewer billing days in Japan in the first quarter of this year versus the first quarter of last year.

In Europe, we experienced some modest growth in IVUS disposable revenues along with 27% growth in FFR disposable revenues. While we continue to see resource constraints in many European countries, there were some increased utilization in countries such as the U.K., Germany and the Netherlands. In addition, we experienced pricing benefits from our going direct in Spain.

Also as I mentioned earlier, we are starting to gain good traction in emerging geographies, such as Asia Pacific and Latin America. In the near term, our primary activity will be console placements, which are helping us to lay the groundwork for generating disposable revenues in a meaningful way beginning 2014.

With respect to our imaging business in the U.S., we're seeing an acceleration of the trends that we discussed with you in the past, including stable PCIs or under pressure due to greater scrutiny of stenting. While the scrutiny is occurring in all of our geographies, this trend is having the most pronounced impact on volumes in the U.S.

In addition, the lingering concerns regarding litigation relative to over-stenting, hospitals are putting the increased pressure on their doctors to reduce costs. In fact, there's a sense within the clinical community that the pendulum has swung too far, and we are now experiencing some level of under-stenting.

Hospitals, cath labs in particular, are highly focused on reducing costs. Regardless of the potential to achieve long-term savings or empiric clinical outcomes. The impact of this trend is being heightened by the continued movement of physicians from private practice to becoming employees of the hospital. While this is having its greatest impact on our intravascular imaging business, we believe it is also having some modest effect on our FFR growth.

Finally, industry research reports and commentaries from others in our industry indicate that physician office visits to overutilization is down and in low- to mid-single digits year-over-year, which is reducing patient referrals to the cath lab.

So how are we responding to these challenges to our U.S. imaging business? In several ways. First, we continue to be the technology leader, capturing an excess of 90% of newly installed systems in the U.S. versus Boston Scientific. We are rolling out our 2 new catheters introduced last year: the PV .035 catheter for use in the peripherals and the new Eagle Eye Platinum short-tip catheter, which has potential applications for complex cases.

We also recognize the importance of clinical data in developing the imaging market, and we have initiated programs to leverage the ADAPT study, the largest study conducted with IVUS guidance in the DES era. It involved more than 3,300 patients in the IVUS sub-study. As we discussed at our Analyst Day, this trial demonstrated compelling data for the use of IVUS, which showed that the sicker the patient, the better the outcome with the use of IVUS. The use of IVUS changed the treatment regimens 74% of the cases. It improved clinical outcomes at 30 days and 1 year. And at 1 year, IVUS patients experienced a 33% reduction in myocardial infarction, 50% reduction in stent thrombosis and a 38% reduction in ischemic-driven, urgent vessel revascularization.

We have recently developed new clinical education tools on ADAPT and are in the process of getting them into the marketplace. In addition, we are incorporating the findings from data as an important part of our functional PCI seminars for clinicians and hospital administrators. And data from the STEMI or ACS arm of the study will be presented at EuroPCR for the first time.

Finally, we are broadening our efforts beyond our traditional coronary imaging indications. This includes continued expansion in the more complex cases, such as AMI and ACS, where the need for imaging is acute in each of the peripheral market. We spent a great deal of time on the peripheral opportunity during our Analyst Day. But as a reminder, we believe that the peripheral imaging growth will outpace that of coronary.

Today, peripherals account for approximately 15% of our imaging revenue, and we believe that our U.S. peripheral imaging revenue grew in the mid-teens for the first quarter of this year versus the first quarter a year ago. We see significant growth opportunities in this area, given peripheral volume growth, expanding clinical data supporting IVUS and FFR use in the peripherals, clinical studies utilizing IVUS and our FFR and our sales focus in this area. The PV .035 catheter, I mentioned earlier, will help us drive market share gains as well in the peripherals.

Another element of our intravascular imaging program is the development of our OCT offering. We continue to track the program milestones we outlined at our Analyst Day. We expect to begin first demand in clinical trials to support regulatory submissions soon and submit for regulatory approval in Europe and Japan by the end of the year. Overall, our pipeline execution is consistent with the program timelines we outlined at the Analyst Day.

In terms of the acquisitions we completed at the end of last year, Sync-Rx and Crux, the integration progress is going very well. We're hitting the key product deployment timeline, and we believe we're on track to begin recording revenues from this transaction during the first half of 2014.

Finally, with respect to our M&A strategy, nothing we have discussed today changes our thinking that we outlined in January at the JPMorgan Conference or in March at our Analyst Day in New York City. We will be judicious and employ the criteria we discussed then.

In closing, we continue to successfully execute our growth strategies while dealing with the temporary challenges of the stable U.S. PCI volume and yen currency fluctuations. We firmly believe in the value of our products today and those in the pipeline and their increasing relevancy in the changes in the health care environment that are impacting patients, clinicians, hospitals and governments. All of us at Volcano are focused on relentless execution that will deliver our top line objectives while it positions us for enhanced profitability the future.

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

John T. Dahldorf

Thank you,, Scott. Revenues for the first quarter of 2013 were $93.2 million on a reported basis versus $90.4 million in the first quarter a year ago. FX exchange rates had a negative impact of approximately $4.2 million. Medical segment revenues, which includes primarily systems, FFR and IVUS disposables, and Axsun Medical increased 4% on a reported basis and 9% on a constant currency basis. Axsun Medical revenues were $2.2 million versus $2 million a year ago, while revenues from Axsun Industrial were $1.5 million versus $2 million a year ago.

Consolidated sales of multi-modality systems and related equipment in the quarter were $8.9 million versus $8.1 million a year ago. Total console placements in the quarter were 181 versus 174 a year ago, including 84 in the U.S. versus 83 last year. In Japan, we had 32 placements versus 32. While in Europe, we had 31 placements versus 41 last year. We placed 34 consoles in the rest of the world versus 18 a year ago. We now have approximately 7,900 consoles placed worldwide.

As Scott mentioned, FFR disposable sales in the quarter increased 33% on a reported basis and 36% on a constant currency basis, including 17% in the U.S.; 27% in Europe; and in Japan, 150% and 188% on a reported and constant currency basis, respectively.

Gross margins in the quarter were 64.5% versus 67.2% in the first quarter a year ago. Factors impacting our gross margin in the quarter versus the year ago included unfavorable FX, product mix and duplicate costs associated with our transition of manufacturing to Costa Rica.

Operating expenses in the first quarter were $61.9 million versus $58.9 million a year ago. Overall, SG&A expenses were down slightly from a year ago. Increases this year included expansion of our sales and marketing organizations across all geographies, infrastructure support costs and the medical device tax of approximately $635,000.

These increases were offset by approximately $2.2 million related to Costa Rica start-up cost a year ago, approximately $1 million of favorable FX this quarter and approximately $800,000 of reduction in legal expenses versus a year ago.

R&D expenses in the quarter were $15.7 million versus $13.6 million a year ago, reflecting the addition of the Sync-Rx and Crux product development activities. Acquisition-related items of $1.6 million relate primarily to the accretion expense of the Crux contingent consideration. Other items of note beyond operating income include interest expense of $6.5 million related to our convertible debt and other income of $1.9 million related to the proceeds from the sale of our strategic investment.

The income tax benefit of $3.7 million in the quarter reflects an estimated effective tax rate of 38.5% and a $1 million benefit for the R&D tax credit of 2012 that was recorded in the quarter.

For the first quarter of 2012, we report -- or 2013, we reported the net loss of $3.2 million or $0.06 per basic share versus net income of $271,000 or $0.00 per share -- per diluted share in the first quarter a year ago.

Basic weighted average shares were 54.2 million at the end of the quarter. Excluding acquisition-related items, amortization of intangibles and non-cash interest expense on our convertible debt net of tax, we reported non-GAAP earnings per diluted share of $0.02 on 56.2 million diluted shares.

With respect to guidance for 2013, based on current foreign currency exchange rates, we are now expecting revenues on a reported basis of $394 million to $400 million. This compares to prior guidance of $406 million to $412 million. Roughly 2/3 of the reduction in expectations for revenues on a reported basis reflects the impact of foreign currency exchange rates with the balance due to the reduced expectations around U.S. PCI volumes that Scott spoke earlier about.

On a constant currency basis, we expect revenues of $418 million to $424 million versus prior guidance of $422 million to $428 million. As we indicated in our last call, while we don't provide quarterly guidance, we expect quarterly revenues as a percent of total year revenues in 2013 to track similarly to previous year for that first quarter being the lowest and our fourth quarter being the highest.

All the other items -- all the other guidance items I will discuss today will be on a reported basis. We expect gross margins will be in the range of 64.5% to 65% versus prior guidance of 65% to 65.5%. And net operating expenses will be 65% to 66% of revenues versus prior guidance of 62% to 63%. As indicated in our last call, included in operating expenses will be incremental expenses of approximately $3 million related to the medical device tax and approximately $5 million related to acquisition accounting for x -- for Sync-Rx and Crux acquisitions, as well as $3.3 million of amortization of intangibles.

As you can see, we will continue our planned investments in the product pipeline and clinical programs, as well as market development and distribution initiatives that we laid out during our Analyst Day. However, we are being mindful of the current market environment, and we'll continue to monitor discretionary spending very closely. As a reminder, interest expense will be approximately $27 million, of which $19 million is non-cash.

We expect a net loss on a GAAP business of $0.26 to $0.28 per share versus prior guidance for net loss of $0.19 to $0.23 per share. We expect our annual tax benefit to consist of our annual effective tax rate of approximately 38.5% plus the $1 million benefit related to the 2012 R&D tax credit that was recorded in the quarter or an impact of approximately $0.20 per share.

On a non-GAAP basis, we expect net income of $0.03 to $0.05 per diluted share. This compares to prior guidance of $0.08 to $0.11. Now non-GAAP results exclude acquisition-related items, amortization of intangibles and non-cash interest expense, as well as an effective tax rate of 38% for the GAAP to non-GAAP adjustments.

We expect weighted average shares in 2013 will be approximately 54 million basic shares and approximately 56.2 million shares on a diluted basis. As a reminder, approximately 32% of our revenues are in Japanese yen and 14% are in euros, so that for every dollar of impact of FX at the revenue line, approximately 90% drops down to the gross margin line and 65% down to the operating margin line.

In addition, I should note that we have recently implemented a cash flow hedging program in addition to our current balance sheet hedging program for intercompany sales transactions. While it's too early to quantify the specific financial impact of this program, we do believe that it'll add predictability and reduce volatility from the impact of FX exchange rates on a go-forward basis.

In closing, prior to our next scheduled conference call, we'll be appearing at the Deutsche Bank Health Care Conference on May 29, the Jefferies Health Care Conference on June 4 and the Goldman Sachs Health Care Conference on June 11.

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

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from David Roman of Goldman Sachs.

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

So I can appreciate a number of moving parts here in the quarter, one of which is currency and the other is PCI volumes. Maybe, Scott, you could talk to, or John, how we should think about the business going forward if PCI volumes decline at the rates that you suggested, 5% to 7%, for this year and then moderating and ultimately stabilizing in 2015? I mean, to what extent are both part of your businesses tied to PCI volumes? And do you think that FFR can break away from that, providing a better offset to drive accelerating growth?

R. Scott Huennekens

Yes. So -- yes, both are tied to a degree to PCI. We are seeing it as more of a U.S. issue when we look at our performance in Q1 and what we're projecting forward. You'll see that in our guidance, and that is -- primarily, it changed due to the U.S. with a small portion relative to Axsun Industrial. So 80% of that or a more significant portion relative to our feelings about the inability to grow imaging is much because of PCI constraints versus FFR. But there is an FFR effect most definitely. There's just less cases to use the product in. So as I've stated in the script that we went through, we feel good about our base businesses being able to grow over our strategic horizon, 11% to 13%. As we said on our Analyst Day, we see 2013 being a little more of a struggle based upon uncertainties relative to PCI. We said 3% to 5%. Now we're saying 5% to 7%. And the fact that a lot of our new products in our core businesses don't come until next year, as well as some of our pipeline products until next year. You start to get the effects until next year in '14. They become more significant in '15 and '16; as well as some of the clinical data on the peripheral side in '14 and '15.

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

Okay. And then maybe a follow-up on gross margins, understanding that there is a currency impact here. But John, can you maybe walk us how to think about the ramp in gross margins throughout the year and when do we start to see the redundant costs go in Costa Rica and then will that ultimately mean to sort of "exit rate" on underlying gross margins and where the number can go going forward?

John T. Dahldorf

Yes. So I think that you're going to see gross margins kind of between that 64.5% and 65% range through the next couple of quarters. I mean, there might be some modest fluctuations as we kind of deal with the timing of product that's moved between Northern California and Costa Rica. But I really kind of expect to be exiting the year closer to 67% and I think that -- and it'll be the fourth quarter where we really start to -- end of third quarter, beginning of fourth quarter, where we rationalize a lot of the Rancho Cordova duplicate capacity. And then as we kind of roll into 2014, I think that you'll see the step-up that we've described in the past.

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

And then just on your -- the last thing you mentioned in the call was the FX hedging program. Can you just maybe provide any further detail on the impact that has to either our modeling of the income statement or cash flows?

John T. Dahldorf

Yes. So I think that -- and again, it depends on where the FX goes and the way that the program kind of works. I mean, right now, as we're kind of layering in these forward-looking contracts -- I mean, we're layering them in the high 90s. So assuming that FX stays around the high 90s, it really doesn't have much of an impact at all. The impact really gets translated into -- to the extent that FX goes greater than that, we will be hedged against that. So it's kind of hard to describe to you, David, exactly what the impact is going to be. That's why we really didn't get into any specifics on the scripted remarks only because then -- you have to say, "Okay, well, if it’s 105, what would it be? If it's 110, what would be?" And those things are just kind of hard to determine at this point.

Operator

Our next question comes from Matt Dolan of Roth Capital Partners.

Matthew Dolan - Roth Capital Partners, LLC, Research Division

I wanted to maybe shift to Japan and see if you could give us a breakout of what the unit growth there was for IVUS and maybe even normalize on a per-day basis. Because, Scott, I think you said there were fewer selling days there. Just try to normalize for some of the things that were happening in the prior year period.

R. Scott Huennekens

Yes. So on a unit basis, we grew about -- on the IVUS side, we grew about 3% to 4%. And then if you add the billing day impact, that would probably bring it up to about 5% to 6% growth. On the FFR side, as you could see in the numbers, I believe that -- and we grew FFR almost 200% in the quarter. And that's consistent on a unit basis as well.

Matthew Dolan - Roth Capital Partners, LLC, Research Division

Okay. And then shifting to peripheral, are there certain applications where you're really seeing the majority of this growth? Or is it a fairly broad performance among some of the applications we saw at your Analyst Day?

R. Scott Huennekens

Today, it's mainly in AAAs and in FFA stenting. We haven't moved into those new areas. We're beginning clinical study as we speak, and we think that will help drive additional uses physicians start using out there.

Matthew Dolan - Roth Capital Partners, LLC, Research Division

Okay. And then last one, John, on the pacing throughout the year, given the first quarter, it looks like sequentially you'll have to grow a little stronger than we saw maybe in the last year. Is this something where your growth rates should start to improve steadily through the year on a year-over-year basis? Or anything more that you can give us on what you've seen thus far into the second quarter would be helpful.

John T. Dahldorf

Yes, yes. So versus last year, you'll see a little bit bigger step-up in the second quarter because we'll be annualizing the 10% IVUS reduction in Japan. And so that's a pretty big one. And then the second one is that as we continue going direct in Spain, that business is going to -- is gaining momentum. So as we kind of progress through the year, we'll be getting more and more contributions from Spain. Whereas last year, we didn't have any contributions from Spain, literally, in the first, second or third quarter. And so I think that you'll have those kind of playing in. And then, in the U.S., as you recall, we hired 10 peripheral sales specialists in the fourth quarter. We've really kind of seen them in the field for one quarter now. We expect them to be able to get some momentum and make some traction in their targeted accounts, as they progress through the year and increase their productivity. And so that's what gives us confidence that we will see momentum through the balance of the year.

Operator

Our next question comes from Chris Pasquale of JPMorgan.

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

Scott, I want to start off with the PCI question in the U.S. What gives you confidence in your view on how those trends evolve over the next couple of years? It's been a headwind now for some time. It seems to have gotten worse recently. What inning do you think we're in there, with regards to this effort to reduce unnecessary stenting? And how do you get comfortable with the risk that it gets worse from here and not better?

R. Scott Huennekens

Yes. It's a completely reasonable question. I mean, it's a triangulation of our assessments by clinical indication, looking at whether it's a single-vessel case, multi-vessel cases, bifurcations, going through all those. It's talking with Medtronic, Abbott, others. It's talking with clinicians, doing market research, et cetera. So it's -- we're staying close to it. We are triangulating as much as possible, relative to our understanding. And we're hearing for the first that, "Hey, there's -- we're kind of getting there." But I think we were hearing that before, and we had a little more. So we feel like we want to be conservative and estimate 5% to 7% for the rest of this year. And we think we'll be in a better position than not being conservative.

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

Okay. And then U.S. FFR sales down sequentially, I think, for the first time this quarter. It's going to draw a lot of attention, given how great a growth driver that's been for you. Other than the weak PCI environment, were there any other factors that came into play there? And under the current indications, how much headroom do you think you have for further growth going forward?

John T. Dahldorf

Yes. And so, I mean -- Chris, I think if you went back and you'll -- and again, you just have a law of a larger and larger denominator, one. And then I think as we progress through 2012, I think you did sequentially see the growth declining. And I think we are in the mid-30s at the end of the fourth quarter, and we are in the high teens here in the beginning of the first quarter. So obviously, as we have addressed before in previous questions, the -- just the reduction in cath lab activity that we saw in the first quarter definitely had an impact on FFR. But we're still getting reports back where we're taking market share, and we are getting penetration as well. And so I would think that if you take a step back and you say, "Okay, what percentage of PCI is FFR penetration?" We still -- we think the number in the U.S. is still like around 14%, 15%. And just based on the data alone, we believe that, that number can be at least twice as high. So we still think that we have a lot of legroom here, and we continue to do experience a lot of interest in the technology. And as you go from kind of interventional cardiologist meeting to meeting, you know it is still one of the #1 topics that they're discussing. And so there's still a lot of activity around it, and we believe that we are really kind of just still right in the middle of that growth trajectory.

R. Scott Huennekens

Yes, I would reiterate that position and would also say that, and I mentioned it in the script. It doesn't seem to matter if you improve costs or you improve outcomes in today's U.S. health care environment. People are running scared relative to hospitals and their physicians relative to getting ready for the Affordable Care Act. And they are arbitrarily just telling departments to cut budgets. So we constantly are having discussions with physicians, cath lab managers, head of the cardiologist, saying, "We need to use more FFR. We need to use more IVUS." We have limited budgets, and we need to get through this year and get through the messaging around this to get budgets for it as we go forward. So it's a tightly constrained operating budget environment within U.S. hospitals right now.

Operator

Our next question comes from Ben Andrew of William Blair.

Ben Andrew - William Blair & Company L.L.C., Research Division

A couple of things. First, Scott, you mentioned this notion of under-stenting and some of the recall you're hearing about. Where is that coming from? And how durable and impactful do you think it could be?

R. Scott Huennekens

That's coming from clinicians who feel constrained by the OCT [ph] guidelines and feel like there is adjustments that are necessary as we move forward, and that -- we're going to see that happen. We're going to need data and data will get generated. And that also we have patients that we're putting on optimum medical therapy for 30, 60 and 90 days. And all we're doing is pushing the demand curve to the right and that they end up not benefiting from that and end up in the cath lab at some point in the future. So they're being -- it's kind of like what you saw, Ben, with kind of the orthopedics and the spine steps where you have go to physical therapy for a period of time. And before you could have the surgery approved, it kind of moved into that here over the last 18 months in stenting. And that's part of also the answer to Chris' question why I think as you enter '14, some of that demand has moved over, starts to happen out in the future but we have to wait and see that happen.

Ben Andrew - William Blair & Company L.L.C., Research Division

Okay. And then maybe a quick one for John. If you do in fact see that stabilization or perhaps improvement in '14, does that give you an opportunity for some material improvement in op margin, given that revenue improvement?

John T. Dahldorf

Absolutely. I mean, what you're going to see in -- I mean you would see a lot of that just drop down to the bottom line as we continue to leverage our distribution channel that we have out there. Because we are not spending more in our distribution channel than our revenue growth even at this point this year. The other leverage point that you're going to see is the gross margin improvements that we talked about a little bit earlier in the Q&A. You're going to see significant drop too from there. And so we're expecting to see a pretty significant step-up in operating margin percent of revenues in 2014 versus '13.

Operator

Our next question comes from Bruce Nudell of Credit Suisse.

Matthew Keeler - Crédit Suisse AG, Research Division

This is Matt in for Bruce. I was wondering, can you talk about -- in light of your updated expectations on U.S. PCI volumes, what are you thinking about worldwide IVUS revenue growth for the year?

R. Scott Huennekens

Well, you almost have to go by geography because you got -- like in Japan, you got the 10% reduction in Q1. And this is really kind of on a constant currency basis. And so we expect to see modest growth in Q2 through Q4 in Japan. We were down a couple of points in the U.S. in Q1, but we kind of see it being flat for the entire year as we get more traction in peripheral and in our FPCI [ph] program, especially around complex lesions. And in Europe, we expect to see good, solid, mid-teen growth, primarily driven by the -- by going direct in Spain. And albeit it's small, the Asia Pacific, Latin America, Canada areas based on some of the initiatives that we've got going on right now with console placements, we expect to see some nice growth on IVUS towards the back half. So obviously, that's probably in the 20% to 25% growth rate range, again, off of a fairly small number. And so for overall, for the year, you're probably talking kind of low- to mid-single digits.

Matthew Keeler - Crédit Suisse AG, Research Division

Okay. And then just shifting gears here, can you give us any more color on your expectations for OCT approval timing in the U.S.?

R. Scott Huennekens

The time is consistent with what we talked about in New York.

Operator

Our next question comes from Jayson Bedford of Raymond James.

Jayson T. Bedford - Raymond James & Associates, Inc., Research Division

I guess just looking at the U.S. FFR growth, embedded in your guidance, what are you assuming for FFR growth in the U.S. for the year?

John T. Dahldorf

It's pretty consistent with what we experienced in the first quarter.

Jayson T. Bedford - Raymond James & Associates, Inc., Research Division

So kind of high teens?

John T. Dahldorf

Correct.

Jayson T. Bedford - Raymond James & Associates, Inc., Research Division

Okay. And then, I guess, does the softer business environment at all accelerate your M&A efforts? Have you allocated more resources to this effort?

John T. Dahldorf

No. Again, we kind of laid out a very disciplined approach both at JPMorgan, as well as the Analyst Day. And they're -- we don't let external factors or kind of the state of the business really kind of change our focus, our due diligence efforts, how we look at deals. And a big part of that is we feel very confident in our base business and in our pipeline over the time horizons that we planned strategically.

Jayson T. Bedford - Raymond James & Associates, Inc., Research Division

All right, okay. On Crux, when do you expect to launch that product?

John T. Dahldorf

We currently plan to launch it in the first half of 2014.

Operator

Our next question comes from Brooks West of Piper Jaffray.

Misha Dinerman

This is actually Misha Dinerman for Brooks. Just a quick question, I guess, on the ADAPT study. Has that been factored at all into the guidance? And if not, what do you see there as potential upside? How quickly can that become part of guidelines? And would that have an analogous sort of effect as the FAME study you did with FFR?

R. Scott Huennekens

So we don't have any meaningful increase in IVUS revenue related to ADAPT. If it does have a positive effect, faster rather than later, or sooner rather than later, that would be upside. It is not a study, that's a randomized trial. Even though it is sizable study of -- with over 3,300 IVUS patients to create any impact on guidelines. So we see it as a study, especially the data that's coming at PCR relative to ACS and AMI patients. That could start to give us the data and enter that portion of the patient population or PCI population in a more meaningful way to drive IVUS sales. We think that starts having any kind of meaningful impact on IVUS growth in 2014 though.

Operator

Our next question comes from Ben Haynor of Feltl and Company.

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

Given the frustrating difficulties with foreign exchange and PCI volumes, is there anything that you might be able to do either with sales incentives or any sales and marketing moves that you may be able to make to kind of help out on the margins?

R. Scott Huennekens

Ben, there -- those programs, at least, based on our historical experience, the elasticity of the price -- elasticity of those types of programs really isn't evident. We're basically -- the 2 markets that we're in are basically oligopolies. And so whereas there is pricing competition and pressure and those type of things, I just -- we just don't see the opportunity to incent our customers to use the technology with pricing types of programs or any promotional types of programs like that. I mean, it really needs to be clinically evidence-driven and an education kind of driven, which is -- which are the areas that we're focused on and investing in.

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

And there's nothing you might be able to do on the sales force side?

R. Scott Huennekens

What do you mean? We're always -- we're going to let you...

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

Well giving the sales guys more incentive or something of that nature?

John T. Dahldorf

They've got plenty of incentives.

R. Scott Huennekens

They've got plenty of incentives.

Operator

Our next question comes from Jose Haresco of JMP Securities.

Jose T. Haresco - JMP Securities LLC, Research Division

John, a housekeeping item. Could you go through the console placements per territory again, please?

John T. Dahldorf

Yes. So in the U.S. -- well, in total -- well, I'm kind of getting there. In total, we did 181. In -- so in the U.S., we did 84; in Japan, we did 32; in Europe, we did 31; and the rest of world, we did 34.

Jose T. Haresco - JMP Securities LLC, Research Division

Okay. Let's see here. You obviously can see things kind of swinging in both directions when intervention was -- start getting really conservative, but then as you noted, they often swing back the other way. I guess, what gives you confidence that things could swing the other way as you go into 2014? And somewhat related to that, when you first started getting in the FFR, we saw IVUS being cannibalized. Are you still seeing that in this kind of this pressure that you're seeing in the cath labs? Increasing that dynamic or has it leveled off a bit?

R. Scott Huennekens

So Joes, we don't see things swinging the other way in 2014. As we said, declines in PCI will continue in '14. We see stabilization in '15. Relative to IVUS cannibalization, we don't see that in any meaningful way at this point. I think you heard from John, he talked about PCI volumes being down 5% to 7% in the U.S. And you say, "Hey, that means the stable PCI is really more down 8% to 10%." And we're growing IVUS 4%. We're taking some share. We're still increasing penetration to a modest degree. Now a lot of that or more of it's incurring on the peripherals side. So coronary is pretty flat. So we don't see IVUS being cannibalized in any meaningful way. Whereas we'd expect some growth because of the data, there's pressure on the economics in the cath lab, where they're saying, "Hey, if I'm going to add some additional dollars for these kinds of products, we're adding them more towards the FFR side of things."

Operator

And at this time, I'd like to turn the call back to Mr. Huennekens for any further remarks.

R. Scott Huennekens

We appreciate everyone's time on the call today, and we look forward to a solid and very productive second quarter. Look forward to seeing some of you possibly at EuroPCR. Thank you.

Operator

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

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