Volcano Management Discusses Q2 2013 Results - Earnings Call Transcript

Aug. 5.13 | About: Volcano Corporation (VOLC)

Volcano (NASDAQ:VOLC)

Q2 2013 Earnings Call

August 05, 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

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

Danielle Antalffy - Leerink Swann LLC, Research Division

Bruce M. Nudell - Crédit Suisse AG, Research Division

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

Jason R. Mills - Canaccord Genuity, Research Division

Chris Lewis - Roth Capital Partners, LLC, Research Division

Joanne K. Wuensch - BMO Capital Markets U.S.

Brooks E. West - Piper Jaffray Companies, Research Division

Michael Rich

Jose T. Haresco - JMP Securities LLC, Research Division

Operator

Good day, ladies and gentlemen, and thank you for standing by, and welcome to the Volcano Corporation's Second Quarter 2013 Earnings Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded, Monday, August 5. A replay of the call will be available through August 12 by dialing (404) 537-3406, pass code 11845995 or via the company's website at www.volcanocorp.com

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

John T. Dahldorf

Thank you, and good afternoon. With me today from Japan is Scott Huennekens, Volcano's President and Chief Executive Officer. Scott will outline key events during the quarter, and I will follow with a review of our financial results.

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 our filings with the Securities and Exchange Commission, including our 10-K for 2012 and 10-Q for the first quarter of 2013. 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, konichiwa, everyone. Volcano had a very good second quarter, as we continue to execute on our near and long-term growth strategies. As a reminder, those growth strategies are: one, FFR; two, peripheral imaging; three, Axsun Medical; four, execution of our pipeline; and five, growth in emerging markets or geographies beyond the U.S., Japan and Western Europe, while maintaining the strength of our underlying, market-leading coronary imaging business.

Key highlights of the quarter included growing revenues on a constant currency basis, 12%, including more than 13% growth in medical segment revenues and generating non-GAAP earnings per share of $0.03. We experienced solid growth of 29% on a constant currency basis in FFR disposable revenues, with gains across all of our geographies and our IVUS activity showed signs of stability as we continue to drive penetration in the peripheral market, where peripheral catheter revenues increased approximately 25% on a constant currency basis year-over-year.

We continue to demonstrate strength in our Europe, Middle East, Africa and India markets, what we refer to as EMEAI, with increased console placements and generating a year-over-year increase in revenues of 24% in the quarter. We also continued to gain traction in Latin America, particularly in Brazil. As we indicated in our last call, our strategy for these emerging markets, such as the Middle East and Latin America, is to initiate console placements as a mechanism for laying the groundwork for future growth during -- future growth through disposable sales.

We also continue to win the market share battle, achieving more than 75% share of system placements around the world. We expect to maintain this trend as we roll out improvements on our systems and disposables, such as our new core system and the Verrata FFR wire, both of which we introduced at EuroPCR in May. And we achieved FDA clearance for Verrata in June.

Axsun Medical met our expectations as revenues nearly doubled year-over-year as we continued to gain share and new partners in the ophthalmology market and expand into new medical verticals. In terms of our product pipeline, we completed a successful launch of our iFR adenosine-free FFR product in Europe, and we have just initiated a limited market release in Japan. In addition, we are tracking with our launch efforts for the Crux IVC filter and Sync co-registration products, with introductions expected by the first half of next year.

Finally, we realized good progress with our clinical market development initiatives, including continued release of highly positive iFR data, and the initiation of several new clinical studies in the FFR and peripheral imaging areas.

Before reviewing these and other items in more detail, I want to touch on the current market environment. Based on our internal research and what others in our sector have indicated, we believe that in the quarter, there was some nominal growth in U.S. PCI volumes sequentially quarter-over-quarter. Although year-over-year, volumes were approximately off 2%.

There also continues to be modest growth in PCIs in a number of European countries, while volumes in Japan remain flat. Despite the slight improvement in the U.S., our outlook for PCIs in the U.S. this year has not changed, as we expect total PCI volumes year-over-year will decline approximately 5%, with a slower decline occurring in 2014 and reaching stabilization in 2015.

On the other hand, the U.S. peripheral procedure growth year-over-year is projected at 8% for the quarter and year. Although much smaller than the U.S. peripheral market, the O-US peripheral market is growing faster than the U.S.

With more than 3.1 million procedures globally, and imaging penetration at less than 3%, we see the peripheral imaging market eventually approaching the size or exceeding the size of the coronary artery imaging market. We also continue to see a shift from a fee-for-service environment to one that rewards efficiency and value, driven by the expansion of accountable care organizations, the Affordable Care Act and the CMS penalties around 30-day readmissions, as well as concerns related to appropriate use of PCIs.

In addition, U.S. hospital consolidation, GPO and IDN increases and physicians becoming employees of hospitals are all having an effect on the market. Industry analysts and commentary by many in our sector have suggested that both physician office visits and hospital utilizations are continuing a slow decline in the low to mid-single digits year-over-year.

While these issues are causing short-term disruptions for many in our sector, they fit nicely with our product offerings and strategy to treat only those needing therapy and do it in a cost-effective and high quality manner. We continue to believe in and pursue our underlying functional PCI strategy, providing precision guided therapy solutions to address these clinical and economic trends impacting our customers, to drive our long-term growth and profitability objectives. I also note that the United Health Care recently announced that over the next 5 years, they will increase to $50 billion annually the value of contracts it has with doctors and hospitals, based on quality and outcome measures. As United's Chief Medical Officer noted, we are shifting from a volume-based model to one that is value-based. The American health care system cannot afford to go back. We believe strongly that the more risk-based delivery of care benefits the adoption of FFR and IVUS in the U.S.

Turning now back to our results in the second quarter, revenues of $101.3 million represented an increase of 6% on a reported basis, and 12% on a constant currency basis, versus the second quarter a year ago. As I mentioned, we had a strong quarter in our FFR business, where we grew revenues 25% and 29% on a reported and constant currency basis respectively; including 71% in Japan and 24% in Europe on a constant currency basis.

FFR disposable revenues in the U.S. increased 19% versus a year ago. Our IVUS disposable revenue grew 5% on a constant currency basis, including 15% growth in EMEAI on a constant currency basis, demonstrating the benefit of going direct in Japan and expanded distribution efforts in other geographies such as the Middle East. In addition, we continue to expand our presence and success in Latin America.

Also, as I mentioned, our peripheral IVUS business continued its growth and expansion as our dedicated sales force, which is augmenting the efforts of our total U.S. sales force, has started to achieve good traction in the market since hitting the Street at the end of last year. We are very pleased with the progress we are making in the peripheral sector.

Revenues from peripheral imaging catheters, as I mentioned, increased approximately 25% on a constant currency basis year-over-year. As we have stated, we believe the peripheral imaging growth will outpace that of coronary. To address this opportunity, we are complementing our new sales and distributions effort with products such as the PV.035 imaging catheter for use in the peripherals, which is now in the market. We are the only company able to offer a phased array catheter for peripheral indications, and we believe the depth of penetration, its ease-of-use, plug and play and imaging diameter capabilities provide us a meaningful competitive advantage. Today, we believe our peripheral imaging market share globally is in excess of 75%.

In addition, we're initiating new clinical studies and increasing our presence at major medical meetings such as Viva and V. Our primary focus in this area includes FFA, EVAR TEVAR, ev access and vein compression, an underlying cause of DVTs and venous reflux disease.

Another key event during the quarter was the EuroPCR meeting, which provided a platform for major breakthroughs in our FFR program, including the release of preliminary data from our ADVISE II study for our iFR technology in a late breaking clinical trial. The outcomes mirrored previous data sets showing a classification match with FFR, more than 90% of the time while eliminating the need for drugs such as adenosine in more than 50% of patients, providing both reduced procedure time and cost. The data also demonstrated the clinical usefulness of an iFR FFR hybrid approach to simplify lesion assessment.

This data presented -- represented the first prospective test of the true iFR algorithm analyzed through an independent physiology core lab. We have now completed enrollment in ADVISE II, with 800 patients at 40 European and U.S. centers. Also presented at EuroPCR was confirming data from the approximately 400 real-time cases performed live in the cath lab for more than 20 centers in Europe, Japan and South Africa, and iFR now has been validated in more than 3,000 patients overall. We continue to be on track for a U.S. iFR regulatory submission later this year.

Outcomes from RIPCORD, a FFR study in Europe that enrolled 200 patients with chest pain at 10 centers, was also presented at PCR. This was a blind study that compared diagnostic angioplasty versus FFR assessment in the same patients, with 26% of treatment plans changing, following FFR. With angiography alone, 36% of patients were categorized for treatment with medical therapy, 45% for PCI, 11.5% for CABG, and 7.5% for further evaluation.

Correspondingly, following FFR, 45 -- 44.5% of patients were identified for treatment with medical therapy, 40% for PCI, 15% for CABG and 0.5% for further evaluation. Based on angiography, 81 patients were found to have no significant lesions and 2 have left main disease. Post FFR, 89 had no significant lesions and 5 had left main disease, significant differences between the 2 populations in the treatment of patients.

These findings were further amplified by outcomes in a CDIT defer registry in Japan. The key takeaway from these and other studies is that using FFR does result in a meaningful difference in treatment approaches, which not only benefit the patients but also create significant cost savings for the health care system.

Aside from the important data presentations at PCR, there was a significant meeting for Volcano as well, by featuring our Verrata pressure guide wire, which represents our fifth new guide wire in 5 years. Verrata closely nears an everyday interventional guide wire, enhanced with tools such as iFR. As I mentioned, we received FDA clearance for the Verrata in late June, and had our first-in man at the Cleveland clinic a couple of weeks ago. We believe we will receive CE Mark very soon, and approval in Japan by early next year. We will initiate our full market release for Verrata in conjunction with TCT in October. In addition, we formally launched our core system, our next-generation console technology, that will facilitate our planned product pipeline launches.

Finally, at EuroPCR, Volcano announced that it will co-sponsor SYNTAX II, the study designed to test precision-guided PCI using a clinical SYNTAX score, along with live iFR FFR hybrid measurements as a vessel to determine which patients and lesions are treated. The placement of drug eluting stents will be guided by IVUS to provide more accurate stent placement than has been demonstrated with angiography alone. SYNTAX II is emblematic of our strategy to address more complex multivessel disease and acute cases. During the balance of the year, we will be announcing a series of clinical studies designed to draw clinical, economic and ease-of-use end points beyond stable coronary PCI, which addresses a population or the net double the covered -- by the current guidelines.

In closing, we're off to a strong start, halfway through 2013 through continued growth in our core businesses, driven by our large installed base in the industry's broadest product portfolio and by executing on opportunities such as FFR, peripheral imaging, Axsun Medical and our pipeline. They will enable us to diversify beyond stable coronary PCI indications.

In addition, we are gaining increasing traction in emerging markets such as the Middle East and Latin America, and look forward to the contributions from iFR and Verrata as we finish out the year and from Crux and Sync-Rx during 2014. Despite the temporary challenges over the past 12 months, represented by slowness in U.S. stable PCI volumes and fluctuations in the yen, we believe our functional PCI strategy addresses the trends impacting patients, clinicians and hospitals that I mentioned at the outset of my comments, as well as the growing under-penetrated peripheral imaging market.

We are executing to a growth strategy that will add value to the company and position us for long-term profitability. We continue to execute on, and project 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 initiatives adding to that. Lastly, we remain committed to our previously outlined disciplined approach to any M&A activity.

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

John T. Dahldorf

Thank you, Scott. Revenues for the second quarter of 2013 were $101.3 million on a reported basis, versus $95.4 million in the second quarter a year ago. FX exchange rates had a negative impact of approximately $5.5 million.

Revenues for the first 6 months of 2013 were $194.6 million, versus $185.7 million a year ago. FX headwinds had a negative impact of approximately $9.7 million. Medical segment revenues, which include primarily systems, FFR and IVUS disposables and Axsun Medical, increased 7% on a reported basis, and 13% on a constant currency basis in the quarter. Axsun Medical revenues were $2.7 million, versus $1.5 million a year ago, while revenues from Axsun Industrial were $2.3 million, versus $3.3 million a year ago.

Consolidated sales of multi modality systems and related equipment in the quarter were $11.5 million, versus $10.8 million a year ago. Total console placements in the quarter were $248 million versus $243 million a year ago, including 86 in the U.S. versus 107 last year. In Japan, we had 25 placements versus 48 a year ago, while in Europe, we had 99 placements versus 50 last year.

Our placement activity in Europe this year reflects 1 large distributor order that included both new systems and swapping their current fleet of s5 systems for our new core systems that Scott mentioned earlier. Without that order our placements in Europe would've been comparable to the prior year.

We placed 38 consoles in the rest of the world, versus 38 a year ago. We now have approximately 6,500 consoles, excluding our legacy IVG systems placed worldwide. To give you an apples-to-apples comparison, systems placed as of a year ago, excluding IVGs, were 5,700 and going forward, we'll be providing this metric excluding IVGs.

A couple of notes regarding our top line results. For the quarter, FFR disposable revenues on a consolidated basis increased 29% on a constant currency basis, including 19% in the U.S., 24% in Europe and 71% in Japan. For the first 6 months of 2013, FFR disposable revenues increased 32% on a constant currency basis, including 113% in Japan and 65% in Europe. And for the quarter, we experienced slight increases in our U.S. IVUS disposable business, both year-over-year and sequentially. In Japan, our IVUS disposable business during the quarter increased 4% year-over-year on a constant currency basis.

A couple of notes regarding our results in Japan. First, with the second quarter, we have now anniversaried the reduction in reimbursement that we incurred a year ago. Second, our revenues were negatively impacted by 18% due to the FX exchange rates.

Gross margins during the quarter were 64.4% versus 66.5% in the second quarter a year ago. Factors impacting our gross margin versus a year ago include: favorable-unfavorable FX, which accounted for more than 1/2 of the difference; product mix due to increased sales of lower margin systems; and duplicate capacity costs. As we have indicated to you in the past, gross margins will be a bit lumpy through the balance of the year, as we continue the transition of our manufacturing activities to our Costa Rica facility.

Operating expenses in the second quarter were $65.4 million, versus $56.8 million a year ago. Year-over-year SG&A increased approximately 9%, due primarily to increased sales force headcount and expenses associated with our new peripheral imaging-marketing programs. Other infrastructure expenses and medical device tax also contributed to the increase.

R&D expenses increased by approximately $4 million year-over-year, reflecting cost associated with the development of the Sync-Rx and Crux products and increased clinical activity, including faster-than-anticipated enrollment in the ADVISE II study.

Regarding other expense categories, we recorded acquisition-related charges of $911,000 related primarily to the Crux transaction. I also want to highlight the interest expense line. Of the $6.6 million indicated, approximately $2 million is a cash expense. However, we've noticed that some of you are modeling only the cash number, instead of the reported number. As we have indicated, this expense will remain consistent through the balance of the year. Finally, other income of $2.3 million relates primarily to a milestone payment received by Volcano, related to the sales of strategic investments.

With respect to income taxes, we recorded a tax benefit of $2.4 -- $2.1 million, versus a tax expense of $2 million a year ago. For the second quarter of 2013, we reported a net loss on a GAAP basis of $2.4 million or $0.04 per share, versus net income of $3.3 million or $0.06 per diluted share in the second quarter a year ago. Basic weighted average shares were 54.6 million at the end of the quarter. Excluding acquisition-related items, amortization of intangibles and noncash interest expense, net of tax, we reported net non-GAAP earnings per diluted share of $0.03 on 54.4 million shares.

With respect to guidance for 2013, we are reconfirming our prior guidance for reported revenues of $394 million to $400 million, based on current foreign currency exchange rates, with revenues on a constant currency basis of $418 million to $424 million.

For all other items on a reported basis, we expect gross margins will be in the range of 64.5% to 65%, and net operating expenses will be 65% to 66% of revenues, including: approximately $3 million related to the medical device tax; approximately $5 million related to acquisition accounting for the Sync-Rx and Crux acquisitions; and $3.3 million for amortization of intangibles.

As a reminder, interest expense will be approximately $27 million for the year, of which approximately $19 million is noncash.

On a GAAP basis, we expect a net loss of $0.26 to $0.28 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 we recorded in the first quarter.

On a non-GAAP basis, we expect net income of $0.03 to $0.05 per diluted share. As a reminder, non-GAAP results exclude acquisition-related items, amortization of intangibles, and noncash interest expense, and assume an effective tax rate of 38% for the GAAP to non-GAAP adjustments.

We expect weighted average basic shares in 2013 will be approximately 54.4 million, and we expect approximately 56.2 million shares on a diluted basis. I also want to reiterate that approximately 30% of our revenues are in Japanese yen, and 14% are in euros, and that for every dollar impact that packs at the revenue line, approximately 90% drops down to the gross margin line, and 65% to the operating margin line.

In closing, prior to our next scheduled conference call, we will be appearing at the Canaccord Genuity Growth Conference on August 15. In addition, we will be sponsoring an investor event at TCT in San Francisco. We'll be providing additional details in the near future.

Thank you, again for joining us today. And we'll now open the call to your questions. In the interest of time, we'd ask that you limit yourself to one question and a follow-up.

Question-and-Answer Session

Operator

[Operator Instructions] And our first question will come from the line of David Roman with Goldman Sachs.

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

I was hoping maybe you could talk through some of the changes, just in the top line that occurred this quarter, pretty nice turnaround in constant currency revenue growth, going from 8% to 12%. Scott, as you look through the details, is there any way to parse out, from your vantage point how much of this was stabilization in the end markets, uptake of new products, selling days? Maybe just walk through in a little bit more detail how you perceive the drivers of the uptick and sequential growth.

R. Scott Huennekens

Maybe John can go through the details, but in general, I would say that we had very good quarters in all geographies, with the exception of Japan which was a little bit weaker. So very strong in Europe, which is a combination of stabilization of market, plus continued growth in our core businesses, expansion in those emerging markets that are part of EMEAI. As it relates to the U.S., just good, solid performance and some stabilization of the PCI market. As I mentioned, it was the first quarter-over-quarter increase in PCIs in I think, 2.5 years, and then very solid performance in our APLAC group, which was also over plan: Asia Pacific; Latin America; and Canada, with strong growth in Latin America. John, do you want to give any of the specifics?

John T. Dahldorf

Yes. I mean, as Scott kind of mentioned, across all of our geographies, we saw pretty solid performance. Again, we've kind of cited the growth in FM. And as I know in the U.S., we did see some modest growth in IVUS disposables and FFR grew greater than the 19%. And then, it always helps to anniversary the every-other-year reimbursement change in Japan and to kind of have that behind us, as far as the comp is concerned. So that's how I would basically summarize the data. I mean, no real contribution from new products; those are really kind of in our future at this point. It was just really, again, just solid performance across all geographies.

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

Okay, and then maybe as a follow-up. John, in your prepared remarks you talked about lumpiness in the gross margin as you start to phase in Costa Rica. Any updated thoughts on -- through the exit rate for gross margins on an FX neutral basis, and where you think that could end up next year as Costa Rica comes in to a more normal operating outlook?

John T. Dahldorf

Yes. So I think that you'll see probably an uptick in margins in Q3, as some of the efficiencies that we are running through our Rancho Cordova operations early in the year, as those roll off the balance sheet as we sell that inventory. So you'll see an uptick in margin by 100 to 150 basis points in Q3, and then you'll see a decline in Q4, again, as we go through the transition and start to deal with some of these duplicate capacity costs. So again, as we kind of talked about, we think we'll exit the year, 64 to 65 for the whole year. I would say that next year, we are looking at 150 to 200 basis point improvement, which is pretty consistent with what we've been kind of talking about, since we started the transition into Costa Rica, and we still feel very comfortable with that projection.

Operator

Our next question will come from Chris Pasquale with JP Morgan.

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

You mentioned a strength in peripheral IVUS sales. Could you just remind us how big that piece of the IVUS disposables business is, maybe on an annual run-rate basis? And then Scott, just give some of your thoughts on the potential to break that segment out, so that investors can better appreciate what should be a nice growth driver for you over the next few years.

R. Scott Huennekens

John, you want to take the first one?

John T. Dahldorf

Yes, so we estimate peripheral is approximately 15%, or maybe even a little bit higher now, of our total IVUS disposable business in the U.S. One of the challenges that we have, which may address some of your -- the second part of your question, Chris, is that we have a specific line of catheters that are fully peripherals, but our Eagle Eye line of catheters, which are primarily used in the coronary, they're also used in the peripherals, and it's a little harder for us to track the usage of those in the peripherals. So to the extent that we have visibility to our, obviously the growth of our peripheral catheters, but I would say that there's also a pretty decent percentage of our phased array catheters for the coronaries that are also used in the peripherals. It's a little challenging to break it out as its own segment at this point.

R. Scott Huennekens

Yes, so as we move forward into next year, I think we'll have enough information to start breaking it out. We're tracking it. We're doing internal surveying of possible accounts and our sales reps to get a handle on it. We just want to feel very comfortable with the accuracy of the information before we start reporting it.

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

Got it. That's helpful. And I just wanted to clarify John's comments on the big distributor order in Europe on the system size of the business. Was there also a bolus of disposable sales associated with that? Or should we think about the European disposables revenue as a relatively clean number?

John T. Dahldorf

Yes, the disposable -- the European disposable number is clean. This was strictly a console deal.

Operator

Our next question will come from the line of Danielle Antalffy with Leerink Swann.

Danielle Antalffy - Leerink Swann LLC, Research Division

I wanted to ask a question on the peripheral side of the business. Our checks indicate that while it's growing at a lot of centers that we've spoken to, some centers are more cautious to use IVUS in the peripherals. There are some barriers to adoption. Some of the things we heard are just general comfort level of the physician. What are you guys doing, or how can you guys break down those barriers to adoption, to potentially maybe even drive accelerating growth from here? Is that how we should be thinking about it?

R. Scott Huennekens

Yes, sure. It's the same story from the past. You've heard me say, a number of you, over the last 6 or 7 years, there's no silver bullet to driving adoption of IVUS or FFR. It's multifactorial. And what we mean by that is, number one, you've got to make the technology fast, simple and easy to use for them. Number two, you've got to get them the data that shows, not only that you drive better clinical outcomes, but you affect economics. Number three, you have to do what you can, relative to reimbursement. And #4 is, you need to expand your distribution to the channel to educate them, as well as call on them, and there's training of the physicians, training of the staff, training of your own reps that fit in that bucket. So we're doing all of those. John mentioned we're expanding our marketing to different medical meetings. We're pursuing numerous clinical studies by indication. We're expanding our product line to make it simpler and easier to use. Things like the IVC filter, getting an IVUS indication for bedside placement, making the products so that the IVUS and the IVC filter on 1 platform so you don't have to take a patient to a cath lab. All of those are part of this multifactorial multi-year plan. You got to realize you've got 3-plus million procedures with minimal IVUS penetration. So it's a brand-new thing. And from the data that exists today, it's very similar to the coronary data, and we've got 16% penetration in the U.S. So with some expanded data, better distribution and number of reps, better technology, we feel good about the particular indication list that I went through, that we can drive 20%-plus growth in peripheral imaging over the next 5 years. And again, we kind of have the market leading technology with phased array for this segment, because you generally need to see farther out, like in a AAA or vein compression cases. These are 4 millimeter size stents that being be put in there, much bigger or grafts.

Danielle Antalffy - Leerink Swann LLC, Research Division

Right, got it. Okay. And as we look out over the next few years, how big ultimately do you think peripherals will be as a percentage of your total IVUS sales? And then last question, if you could remind us again, sort of, when we look at the pipeline, how we should think about the cadence, at what point some of the pipeline products like iFR, FLIVUS, FACT, will contribute to top line growth in '14 and beyond?

R. Scott Huennekens

Yes, I'll let John answer the second one. But we strongly believe, and I think it was in Neil Hattangadi's presentation in March at the Analyst Presentation, that just imaging and physiology applications in peripheral will be an over $100 million business. Add on top of that, the Crux IVC filter, that's a $300-plus million market that we think can grow to be a $400 million or $500 million market with us being a significant player in that segment. So you have to look at both those products together. They are the majority of our peripheral business from the products we have today. John, on the pipeline?

John T. Dahldorf

Yes, so Danielle, as we kind of look out in 2014 and '15 and beyond, I would say that 2014, I think that Crux and Sync-Rx will have contributions in a modest way, as far as our revenue growth as well as the continued introduction and rollout of iFR and the Verrata wire that we talked about on the call. For the rest of the pipeline, I really don't see any material contributions by the rest of the product pipeline until 2015, 2016.

Operator

Our next question in queue comes from the line of Bruce Nudell with Crédit Suisse.

Bruce M. Nudell - Crédit Suisse AG, Research Division

Scott, on the acute coronary syndromes represent about 60% of the PCI case mix or at least over 50%. What's your -- how would you scale the technical or clinical uncertainty of really having FFR being as profound an influencer of care path in that segment? And what would that success there, due to the 15% CAGR that you've got embedded through 17 for the market? Because we have similar expectations, but we don't have any of the acute coronary syndromes really built into our models. And then I have a follow-up.

R. Scott Huennekens

Yes, that's a great question. And again, pointing back to the detail we provided in March when Joe Burnett updated on our physiology business. In our 5-year plan, we have not included that segment of the market. We said to you, it's all upside and we expect to execute on that upside. It is 60% of the market, and it's going to be multifactorial how we approach it. But it's, in effect, going to be an iFR play. And that is, you're going to fix your STEMI or non-STEMI in that ACS patient population, but you still have disease generally in the second or third vessel. But today, they don't want to go in and do an FFR on those and give adenosine. So what they do is stage that patient to come back in a month and do an additional procedure, which has an additional cost. Whereas we believe, and a number of physicians we're working with believe, that once you fix that target lesion, you can then, with a non-adenosine iFR approach, evaluate the second and third artery or any proximal portion of the artery that you are fixing and get a mapped heart, and then can determine what the additional therapies might be needed. You may do those in a staged fashion, but you don't have to bring the patients back for their diagnostics. So we have studies in that regard that will begin and start and run through 2014, and will start, I'm sure, marketing towards that indication pending indications for use in FDA approvals in 2015 and beyond.

Bruce M. Nudell - Crédit Suisse AG, Research Division

And my follow-up question pertains to Boston on their recent conference call. You noted that they'd be entering the FFR market in '14. I suspect I know the answer, but specifically what -- could you remind us of the competitive advantages of Volcano's position in that market? And specifically, are there any IP challenges that you expect on calendar along the way?

R. Scott Huennekens

Yes, I think, another great question. Yes, there definitely will be IP challenges and limitations for them. I think you see that in the bickering between the 2 market leaders, St. Jude and Volcano, which have had lawsuits going back and forth on the whole area. There's -- but I don't know what Boston's approach is. There's a light-based approach here as well that a company like Opsens is pursuing, and we believe there's some limitations to the light-based approach. And maybe Boston is taking that approach where the IP landscape is a little more open. The advantages that we have start with the fact that we have over 7,000 installed systems and we have multi-modality systems. So this multi-modality approach has led to us winning 94%, 94% of placements in the U.S. over the last 2 years. So customers don't just want a better version of PowerPoint. They want all of Microsoft outlook that has Word, Excel, Outlook, Internet Explorer. So that's going to be difficult to overcome. Now they do have IVUS, but they'll have to have a multi-modality platform and we have intellectual property in that space as well. So where the market is also going is daily wires, iFR and then our Sync-Rx technology, which co-registers your IVUS image onto your angio, is also going to co-register your FFR onto your angio as well. Then you're also talking about connector-less and wireless technology on wires. So similar to like what we're doing with IVUS 7 or 8 years ago, we're continuing to build the barriers to entry through the installed base, intellectual property and advanced technologies, which we believe it's going to make it very difficult for people to keep up or compete with us on.

Operator

Our next question will come from Ben Andrew with William Blair.

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

Scott, maybe talk a little bit about some of the commentary you're hearing from clinicians about PCI volume. Are they seeing just organic patient growth coming back? Or is the mix of the patients that they're seeing somehow changing, including the peripherals growth, that is what's giving you the more encouraging performance on kind of the volumes at this point.

R. Scott Huennekens

Yes, fair question. So I was at the Hawaii Interventional meeting with a lot of the key opinion leaders, the medical directors like of Abbott, Chuck Simonton and we had a whole afternoon discussion on this area. And when you look at the data itself, people were saying, there's a dramatic switch to STEMI and non-STEMI patients and the stable angina patients has gone down dramatically. But the NCDR database from the ACC would suggest that there's been a general, general decline across all procedures, although stable patients have experienced a little more of the decline. That's kind of year-over-year, Ben, but over the last quarter, there's just been a general stabilization. I think that there was a, not an enthusiasm in the room or in the community, but just a feeling of okay, things have stabilized to a degree, and the discussions were more or not around volume, but about industry dynamics with hospitals consolidating and the pressure on 30-day readmits and the pressure on following the appropriate use guidelines. Those are the bigger things facing them. And that's where FFR and IVUS fit right into the story well. Now we do feel more bullish relative to volumes in general because peripheral volumes continue to grow and we know we have some significant clinical benefits we can bring to clinicians, and we have competitive advantages having the phased array technology. So again, when you're competing with Boston or St. Jude, would someone rather buy a system that has best-in-class peripheral? Or will they rather have a roll-around OCT system which they're not using. Yes, they feel like they need to have OCT-1 system, but we're just not just seeing the use. You use a couple of catheters a month, kind of thing. So we think we're well positioned.

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

Okay. Great. And then my follow-up question is for John. John, when would you think we're going to see a clean gross margin number for Costa Rica? Is that mid '14? Or are we going to continue to see the volatility quarter-to-quarter for a while?

John T. Dahldorf

I think that you'll start to see kind of a clean number by the second half of '14.

Operator

Our next question will come from Jason Mills with Canaccord Genuity.

Jason R. Mills - Canaccord Genuity, Research Division

John, for you, I wonder if you could give us a quantifiable sense for the unit growth rates in IVUS by geography? And Scott, within your IVUS business, I think you've talked openly and honestly in the past that in PCIs you're 65% of STEMI and non-STEMI and you're less than 5% penetrated, and most of the work you've done over the last 10 years in IVUS have been unstable. I wonder, with your internal survey, that you're doing it for peripheral, if you're picking anything up with respect to IVUS utilization between those 2 coronary segments and whether or not what you're picking up is giving you some confidence and seeing some renewed growth in your IVUS business?

John T. Dahldorf

Jason, can you say that again? I don't know that I completely followed you. I think I just really didn't understand, sorry.

Jason R. Mills - Canaccord Genuity, Research Division

Correct me, if I'm wrong, but IVUS is, what, 20% penetrated and stable? And then less than 5% penetrated in, so the STEMI, non-STEMI -- I'm wondering if in your internal survey work that you've talked about with respect to the peripheral business, you're seeing anything, any trends that might be positive, or I suppose negative as it relates to the segmentation of IVUS utilization between those 2 coronary segments?

R. Scott Huennekens

Let me answer that first. John can answer the other one. No, peripheral being different, we wanted -- when it's a AAA case, a AAA case, it's not kind of an unstable AAA case or stable line TEVAR/EVAR or SFA cases, vein compression, IVC filter placement, as we go forward. So those are going to be more the indication of the indication. So we're seeing growth primarily in the categories that exist today, the AAAs, the vein compression, the SFA in the peripheral area. As it relates to the coronaries, we continue our missionary kind of work relative to ADAPT-DES. The 1-year data is extremely positive. We expect a very positive 2-year data as that trend continues. It will be presented at TCT. And as a reminder, that's unstable patients where a portion of them got IVUS, a portion of them did not, and we're seeing -- we saw 1-year significant differences in death and MI, so hard-end points. And what we've seen from other studies, we'd expect that to continue and expand the difference. So again, back to the earlier question of how you develop these markets, we got to continue to improve the technology to use IVUS in the unstable angina patients to make it easier, and that kind of is in combination with our thrombectomy catheter, we got to build the data, we got to be able to call a client back. There's a lot of -- there are a lot of presentations at the recent Hawaii meeting by Barry Rutherford, the Japanese, like Dr. Park in Korea. Well, also, all uses are their standard of care, IVUS during AMI patients because you typically miss the spot that had the rupture. You will undersize your stent and you ended up getting edge effects, where you stent right into the lesion area which ruptured. And that's -- and you -- or like I said, undersized diameter and lengthwise. So we think that's a growth area for us next year as the ADAPT-DES data comes out at TCT later this year. John, to Jason's earlier question?

John T. Dahldorf

Yes, so Jason, just some high-level unit volume growth on the IVUS side: in the U.S., we saw units basically flat; Japan grew about 4% to 5%; Europe grew about 18%, 19%; and rest of the world grew over 30%. So total IVUS unit growth of about 6%. On the FFR side: United States, we saw growth unit 17% to 18%; Japan a little over 70%; Europe about 26%, 27%; rest of the world over 60%, albeit a very small base. So total about 26% growth in units.

Jason R. Mills - Canaccord Genuity, Research Division

That's helpful. Just as a follow-up, on the P&L, John, your operating expense guidance for the year, remind me, does that include or exclude the amortization of intangibles?

John T. Dahldorf

For total operating expenses, it includes it.

Operator

Our next question will come from Chris Lewis with Roth Capital Partners.

Chris Lewis - Roth Capital Partners, LLC, Research Division

First, just on the revenue guidance side. I understand seasonality plays a part in the equation in the third quarter. But can you discuss what you've seen so far this quarter that led to maintaining that full year guidance at this point, despite a strong second quarter here that perhaps exceeded original expectations and the slight stabilization of PCIs that seems to be developing in the U.S.?

John T. Dahldorf

Yes, so as we were sitting down and as we're kind of rolling through the end of the second quarter and through the beginning of the third quarter, the summer months have been harder to handicap the last couple of years, especially in the U.S. and Japan, to some degree. Just -- I think just due to the nature of -- as we kind of talked about, a lot more physicians are now employees of the hospital. They're taking kind of traditional vacations during the traditional times of the year. And so what we kind of saw towards the end of June and into July and in the beginning of August here, I would say that it's a surprise. It's not as basically kind of operating at the levels, and activity is at the levels that we had anticipated when we kind of set out and looked at our guidance and basically renewed the guidance at the same level. And so, we expect that the things will pick up here as it traditionally does in the middle of August and we'll have a strong September. And then obviously, the fourth quarter is always our strongest quarter from a volume perspective. So I mean, it's -- we're not seeing anything that causes us any concern at this point. And then again, we've got -- we feel like we have 1 quarter of stability, kind of under our belts in the U.S., as Scott has kind of talked about, but it's going to take a couple of quarters, I think, before we feel really good about the thing perhaps to have stabilized.

Chris Lewis - Roth Capital Partners, LLC, Research Division

Okay. That's helpful. And then in terms of building out your dedicated peripheral sales force there, first, how are those reps that were hired at the end of last year ramping up compared to your expectations? And then, can you provide some color on your plans to expand that group throughout the remainder of this year?

R. Scott Huennekens

Yes, so they're doing really well, and I think that they've kind of come up the learning curve very, very well, and they are -- and they've kind of really hit the ground running here. And so, we're still going to probably take a couple of more quarters to continue to evaluate their performance, their ability to kind of penetrate some of these areas that they're -- that we're focusing on. And so, I would say that as far as this year is concerned, I don't anticipate us adding another material amount of them, but I expect that as we kind of set up and start doing our plans for 2014, that we'll continue to make investments where we could see the incremental growth.

Operator

Our next question comes from Joanne Wuensch with BMO Capital Markets.

Joanne K. Wuensch - BMO Capital Markets U.S.

What is embedded in your guidance do you have for PCI volumes? And can you remind me if this is different or the same as your previous guidance?

John T. Dahldorf

Yes, so we have not changed our outlook on PCI volumes. We are kind of looking at, on an annual basis: a decline of approximately 5% in the U.S;, japan, flat; and Pan-European, flat, although there are some countries where we see some PCIs are up; but then, in other countries, like Southern Europe, Spain, Italy, France, PCIs are down. So Pan-European, we see those as flat as well. And so our thoughts haven't really changed much in spite of what we saw is maybe better than expectations in Q2.

Joanne K. Wuensch - BMO Capital Markets U.S.

Okay. And then, can you give us a preview or thoughts of what we may see at TCT? I know it seems months away.

John T. Dahldorf

Scott?

R. Scott Huennekens

Yes, so I think a continuation of what you saw at PCR. So on the FFR side of things, you're going to see additional clinical data from a number of our studies on iFR. You're going to see iFR. You'll see our Verrata wire and maybe some new technologies, if you sign our nondisclosure agreement in our development area. On the IVUS side of things, you'll probably see some new step relative to FACT, our next-generation catheter with more near-field imaging like OCT plus far-field imaging, as we continue to advance that technology for release in 2014. The Sync-Rx technology, the co-registration, we'll have that as a product technology there as well, as we prepare to launch that product in early 2014; the Crux IVC filter technology, as we prepare to launch that in early 2014 as well; and then the FLIVUS and FL.ICE and OCT pipeline products will probably just be in our, kind of behind-the-doors area, so to speak, to show to clinicians or others like we've done in the past. The big data on the IVUS side will be the ADAPT-DES, 2-year data, that will be at TCT.

Operator

Our next question will come from Brooks West with Piper Jaffray.

Brooks E. West - Piper Jaffray Companies, Research Division

Scott, I wonder if you could provide a little bit more color on the iFR launch. I think when we talked at PCR, you were in maybe 20 European accounts and headed into 5 Japan accounts, all high-volume current users. What are you looking for to hit the gas on that launch in Europe and specifically, as you look to accelerate in Japan? Then I've got one follow-up.

R. Scott Huennekens

Yes, so I would prefer not to go into too much detail, just from a competitive standpoint, but we are ahead of what we had planned in our launch relative to the number of accounts. And we are in front of where we thought we would be relative to utilization increases in those accounts, and how they're using the product and technology and the feedback we're getting from the clinical community on its effectiveness and ease-of-use in a real-world cath lab setting. But we're in full launch in Europe, and out here in Japan, we're doing full exhaustive training at our midyear meeting on the technology and plan on being more aggressive in our launch in Japan in the second half of the year. And we've had discussions with the FDA and feel good about our position relative to the requirements for our launch in the U.S. next year.

Brooks E. West - Piper Jaffray Companies, Research Division

Great. And then on the peripheral side, I'm wondering, are you calling on those accounts singularly? Are you looking to do more partnerships? I think that Covidien partnership is maybe on hold, but I'm wondering what kind of embrace you're getting from the peripheral-focused device companies, and kind of how you're thinking about pursuing maybe some relationships there?

R. Scott Huennekens

Yes. No, that's a great question, a fair question. Number one is that we have this peripheral sales force, but still 90% of our sales peripheral are from our existing sales force. So I think they work together in concert with our experts in peripheral, and they help and coach up our regular team and at the same time, do their own thing. So that is working very well. Covidien decided not to move forward with the Seehawk, with an eyeball on their old Fox Hollow hysterectomy device. As more and more procedures, I guess, move to the outpatient or physician office setting, they were concerned about price to that call point, with the added cost of building IVUS onto the device and the margins stack-up they saw there. So we do continue to work with Covidien relative to Fox Hollow , and CSI in identifying cases and the benefits of IVUS with them. Same thing with Spectranetics. And we'll work with anyone. We're Switzerland and we try and enhance the benefits of all of these different therapies, whether it's a drug-eluting balloon, where we see some real benefits to going with IVUS first, making sure if you should pre-dilate, so that you get the best effectiveness of your drug-eluting balloon, which we're seeing at some centers in Europe, and I think maybe an approach in the U.S., as well as getting drug-eluting stents as well. And I think you probably saw where Silver got additional reimbursement in this latest CMS intro -- information that came out in the last week. So a lot of new therapies, a lot of different things going on in peripheral, and IVUS can help you assess the area and then make sure you're treated properly and learn along the way.

Operator

Our next question will come from Jayson Bedford with Raymond James.

Michael Rich

This is Mike calling for Jason. Just most of my questions have been answered, but I was wondering if you can give us a little more flavor on the U.S. IVUS market. Based on what you're seeing, do you feel like you're still holding or gaining share in that market? Or are you seeing increased competitive pressure?

R. Scott Huennekens

Yes. So -- and one last thing on the last question, we also work very closely with the likes of Medtronic and Gore in the EVAR and TEVAR AAA space, in training and education as well. As it relates to the U.S. IVUS market, we are continuing to gain share. The market is competitive. We believe when we introduced FACT, that will be kind of the next important thing. We're introducing CORE, which is our new platform, which has the expandability to a lot of the things in our pipeline. There have been advancements, that Boston introduced their OptiCross. We don't see that being particularly significant. This is a market based on having FFR, peripheral IVUS, all of this different capability, and so they've made modest improvements in that product. We've made improvements with our revolution catheter with the introduction of the HI-Q software. So I don't see any market change. I mean, this is different. This isn't like someone has a little bit better drug-eluting stent, so they pull their drug-eluting stents and replace it with someone else's. You have an integrated system that's installed in the cath lab, that's running multiple modalities. So if someone like us has a little bit better wire or a little bit better IVUS, to get a customer, they pull 4 or 5 systems out, change all of those systems and all the capital that goes into that decision, learn a whole new software. It just doesn't happen. What it does is solidify your position in your existing accounts. So if there's a Boston-only account and they introduce OptiCross, it makes it a little more difficult for us to displace them from that account. That's how I would summarize it.

Michael Rich

Okay, that's helpful. And then just 2 quick pipeline questions, the first one is more of a clarification. The new core system or console, is that going to allow you to run the Sync core registration on that? Or will that require a different console? And then just lastly, I'm sorry if I missed it, did you -- or could you provide an update on OCT product development?

R. Scott Huennekens

So on the Sync system, it's a separate computer that plugs into the core system. So it's engine, on the first generation, it's a side-by-side computer, to allow it to run. In future generations, that will be integrated directly into the core system. But it's not really necessary to kind of, behind-the-scenes under the hood of the car, so to speak. As it relates to OCT, we continue to move forward on our timelines and our progress in that area.

Operator

Our final question will come from Jose Haresco with JMP Securities.

Jose T. Haresco - JMP Securities LLC, Research Division

Let's see here. Could you touch on core a little bit? How should we think about the rollout of that product next year in terms of its pacing? You guys sell a pretty consistent number of units or systems every quarter. Should we expect to see that pickup once the product launch has -- and I guess, over what time period of the quarter or years, should we expect the installed base to be replaced?

R. Scott Huennekens

John, you want to tackle that?

John T. Dahldorf

Yes, so we really aren't anticipating any, I would say, kind of blip, so to speak, as far as unit placements are concerned. As we've experienced in the past and we kind of introduced kind of next-generation technology, I think that the marketplaces, really around the world, are pretty well saturated. We will do it and we will hit a replacement cycle at some point, and we've always kind of thought maybe it's 7 or 8 years out, and we introduced the s5 family of consoles in 2006. And then, so we may start getting some placements that are kind of in the replacement cycle. But as you pointed out, we're pretty consistent. We give about 800 placements on an annual basis, and I don't expect that number to be any materially -- anything materially different than that, as we roll into next year.

Jose T. Haresco - JMP Securities LLC, Research Division

Okay. Question on the peripheral business with IVUS for a second. You mentioned that it's about 15% of IVUS right now. Is that 15% consistent across the globe? And can you give us a sense of the time period, how we got to 15%? In other words, when and what point was it 5% of the business globally?

John T. Dahldorf

Yes, so what the 15% is the percentage that's reflected in the U.S. It's a much, much smaller percentage in the rest of the world, probably mid to low single-digits. I really have to go back and look at what the peripheral business was 2 or 3 years ago. Off the top of my head, I don't have that information. But I would say that I wouldn't -- I'm going to be surprised in the U.S. if it's high single-digits that's grown to the mid to high themes at this point, based on kind of the growth and focus that we've seen over the last 4 quarters or so.

Operator

Again, ladies and gentlemen, this does conclude our time for questions. I'd like to turn the program back over to Mr. Huennekens for any additional or closing remarks.

R. Scott Huennekens

So I just wanted to thank you all for your time this afternoon, and we look forward to seeing all of you at TCT, if not sooner. Thank you.

Operator

Thank you, gentlemen. And thank you, ladies and gentlemen. This does conclude today's call. You may now disconnect, and have a wonderful day.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Volcano (VOLC): Q2 EPS of $0.03 beats by $0.04. Revenue of $101.3M beats by $3.4M. (PR)