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Cardiovascular Systems Inc. (NASDAQ:CSII)

F4Q 2013 Results Earnings Call

August 7, 2013 4:45 PM ET

Executives

David Martin - President and CEO

Larry Betterley - Chief Financial Officer

Analysts

Danielle Antalffy - Leerink Swann

Brooks O’Neil - Dougherty & Company

James Terwilliger - Wunderlich Securities

David Runkle - Newel Capital

Operator

Good day, ladies and gentlemen. And welcome to the Fourth Quarter 2013 Cardiovascular Systems Incorporated Earnings Conference Call. My name is [Carla] and I will be your operator for today. At this time, all participants' lines are muted. Later, we will conduct a question-and-answer session. (Operator Instructions) As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the conference over to your host for today, Mr. Larry Betterley, Chief Financial Officer. Please proceed.

Larry Betterley

Thank you, [Carla]. Good afternoon. And welcome to our fiscal 2013 fourth quarter conference call. During the course of this call, we will make forward-looking statements. These forward-looking statements are covered under the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995, and include statements regarding CSI’s future financial and operating results, or other statements that are not historical facts.

Actual results could differ materially from those stated or implied by our forward-looking statements due to certain risks and uncertainties, including those described in our most recent Form 10-K and subsequent quarterly reports on Form 10-Q. CSI disclaims any duty to update or revise our forward-looking statements as a result of new information, future events, developments, or otherwise.

We will also refer to non-GAAP measures, because we believe they provide useful information for our investors. Today’s news release contains a reconciliation table to GAAP results.

I’ll now turn the call over to David Martin, CSI’s President and CEO, for overview comments. Dave?

David Martin

Thank you, Larry, and hello, everyone. CSI had a strong finish to the fiscal year, building significant momentum as we entered fiscal 2014. Our easy-to-use and effective technology, combined with our focused sales strategy, educational initiatives and expanding wealth of scientific data are driving our strong year-over-year topline growth in the large and expanding $2 million -- $2 billion peripheral vascular market.

We’re also encouraged by the fact that there continues to be a high level of physician and market place interest in the pivotal 30-day data from our ORBIT II coronary study, released earlier in the year at the American College of Cardiology Conference.

During the fourth quarter, we presented this data at late breaking trial sessions at EuroPCR and C3 conferences. Results exceeded the trials primary safety and efficacy endpoints by a significant margin. Results show that patients treated with our technology had low rates of the angiographic complications and residual stenosis.

On the peripheral front, we began enrolling patients in our post-market Liberty 360° study. This trial is evaluating the acute and long-term clinical and economic outcomes of our orbital atherectomy system.

And we continue to share compelling new data from our confirmed studies series that evaluated the use of our technology as a PAD treatment in above and below the knee lesions.

Confirmed studied a real world population of over 3,000 patients treating nearly 5,000 lesions with no exclusions. All of our efforts are focused on our role as the primary therapy for arterial calcium.

We continue to make significant clinical and adoption progress in the large and under penetrated peripheral market. In addition, our compelling ORBIT II study results and PMA application progress positions us to be the primary therapy in the $1.5 billion calcified coronary opportunity.

Our goals for fiscal 2014 are consistent with last year’s initiatives, expanding the use of our orbital atherectomy system as the primary therapy for treating calcified arteries in the PAD market, building on our base to scientific data that supports the safety, effectiveness and economic benefit of our products, obtaining approval for coronary application which would allow us to launch our technology into a new market, and address a large unmet need in treating calcified coronary arteries.

During the fourth quarter, revenues rose 26% year-over-year and 9%, sequentially. And on July 19th, we responded to questions received from the FDA on our completed PMA application to treat coronary artery disease.

Now Larry will provide more details on our financial results and then I will come back to recap additional clinical and research activity before we take our questions.

Larry Betterley

Thank you, Dave. As Dave said, CSI recorded a strong quarter. For the fourth quarter of fiscal 2013 compared to a year ago revenues grew 26% to $28.8 million, which was above our guidance. Device revenues were 88% of the total.

We sold more than 8,100 devices bringing the life to-date total sold nearly 120,000 units. Reorder revenues remained high at 96% of total revenue consistent with last year. We added 59 new accounts compared to 49 in the year ago period.

Our Stealth customer base grew 10% from the third quarter this year to nearly 1,100 accounts. Stealth now comprises 99% of our total device revenues. Other product revenues rose at a similar rate as total revenue to $3.4 million from $2.7 million.

Gross profit margin was 76%, down slightly from 77% last year. The positive effect of higher production volumes was partially offset by Stealth’s higher direct unit costs and by slightly lower average selling prices.

We expect engineering enhancements to Stealth and increasing production volumes to reduce unit cost in the future. However, investments to prepare for our coronary launch are expected to offset these gains in the near-term.

Operating expenses rose 32% over last year, primarily from planned investments. Approximately, $4 million was for the ORBIT II trial in preparation for coronary launch. We also made investments for competitive enhancements to sales and marketing, and expansion of medical education programs to drive PAD adoption.

All of these investments are geared towards generating higher future revenues. Operating expenses were also affected by higher incentive compensation as a result of performance above plan.

As you know, the medical device tax became effective on January 1, and expense of $521,000 was included in SG&A for the quarter.

Net other expense decreased $459,000 to $160,000, mainly due to valuation changes of our debt conversion option asset. The resulting net loss of $6.8 million or $0.28 per share was within our guidance and compares to a loss of $4.6 million or $0.24 per share last year.

The number of weighted average shares outstanding rose to $24.2 million from $18.9 million last year. This was due to the issuance of $4.1 million shares in two equity offerings since the fourth quarter of fiscal '12, as well as the issuance of stock from debt conversions, employee stock plans and warrant exercises.

Adjusted EBITDA, calculated as loss from operations less depreciation and amortization and stock-based compensation expense was a loss of $4.3 million, compared to $2.5 million last year. The increase was driven by a larger operating loss, partially offset by higher stock compensation expense content in expenses. Excluding investments for the coronary application of $4 million, adjusted EBITDA for the PAD business was nearly positive for the quarter.

For the year ended June 30, 2013 compared to the prior year revenues rose 26% to $104 million. Reorder revenues were 97% of total revenue compared to 95% last year. The gross margin was comparable to the prior year at 77% for reasons similar to the quarter.

Operating expenses increased 31% to $102 million. Again for reasons similar to the quarter and included $16.6 million for the ORBIT II trial and coronary launch preparation.

Interest and other expense decreased $1.6 million from $2.3 million, mainly due to valuation changes of our debt conversion option asset. The year-to-date net loss totaled $24 million or $1.11 per share, compared to a loss of $16.8 million or $0.93 per share last year. The average shares outstanding grew by 3.7 million shares to 21.7 million, again due to the same factors noted for the quarter.

Adjusted EBITDA loss was $14 million versus $8.4 million last year and was $2.6 million positive for the PAD business excluding the coronary investments.

At year end our cash balance stood at $68 million, nearly double the level from a year earlier. These funds will support continued growth in PAD and our anticipated coronary launch.

I’ll now turn it back to Dave for further comments.

David Martin

Thanks, Larry. We’d like to detail the ongoing clinical progress we’re making centered around three things, our recent PMA submission, follow on data from our ORBIT II study and our Liberty 360° study.

First, our PMA application. CSI completed submission of its PMA application to the FDA for our orbital atherectomy system to treat calcified coronary arteries on March 15, 2013.

On June 14th, the FDA submitted its questions to our application. We’re able to quickly turn that around and provided them with our responses on July 19th, just one month after questions were received. Special thanks to the team here at CSI for an exceptional turnaround and a quality submission.

CSI and the medical community are very excited about the ORBIT II results and our PMA application. We’re working closely with the FDA to secure approval for an application to treat this most challenging underserved patient population. We anticipate that approval could occur in late calendar 2013 or early 2014, primarily depending whether or not a full advisory panel is required by the FDA.

In the meantime, we’re hard at work readying the organization for the support launch. We are educating physicians on the dangers of arterial calcium and we presented our ORBIT II data in the late breaking presentations at the 2013 EuroPCR Conference in Paris, and at the 2013 Complex Cardiovascular Catheter Therapeutics Conference in Orlando, Florida.

Dr. Jeff Chambers of Metropolitan Heart and Vascular Institute, Minneapolis, highlighted new data showing that 92.8% of patients were free from severe angiographic complications. Additionally, core lab assessed final procedural -- procedure residual stenosis was only 4.7%.

This new data adds to the excellent primary safety and efficacy endpoint results previously reported. We exceeded the trial target end points and by a significant margin. Including freedom from 30-day MACE of 89.6% and procedural success of 88.9%, excluding MACE procedural success was 98%.

As Dr. Chambers highlighted Patients who suffer from severely calcified coronary lesions are one of the toughest-to-treat populations. They are more likely to experience major adverse coronary events or even death. 30-day ORBIT II results demonstrate that our orbital atherectomy technology may be a superior treatment option.

Looking at the peripheral side of our business, we began enrolling patients in our post-market study or Liberty 360° during the quarter. This study is evaluating the acute and long-term clinical and economic outcomes of our orbital atherectomy system in treating PAD. Additionally, Liberty 360° is the first study of its kind to compare orbital atherectomy to all other PAD treatment options.

Dr. Cezar Staniloae of New York University Medical Center is the study’s principal investigator and performs the first procedure. The medical community is excited about Liberty 360° because it’s a success based on long-term outcomes and durability rather than acute angiographic results of the various treatments.

Moreover, the study’s patient population includes complex cases, even those with advanced and severe PAD. This is a subset of patients that has been excluded from other studies with CSI being the standout accession.

This is a prospective observational multi-center post-market study. It will enroll up to 1,200 patients at 100 sites across the United States, including 500 patients with claudication, which is the painful circulatory problem, another 500 patients who suffer from critical limb ischemia, a severe form of PAD and another 200 patients scheduled for amputation.

Liberty 360° will evaluate numerous parameters including procedural and lesion success, the rate of major adverse events, duplex ultrasound findings, quality of life, six-minute walk test, wound status, economic outcomes and development of plaque burden assessment.

Now I’d like to detail our outlook for the fiscal 2014 first quarter ending September 30, 2013. We anticipate revenue to be in the range of $27.5 million to $28.5 million, representing year-over-year growth of 18% to 22%. This includes the expected effect of lower procedural volume during the summer months.

CSI’s gross profit as a percentage of revenue should be slightly higher than the fourth quarter of fiscal 2013. We expect to see improvements in Stealth 360° component costs and increased utilization of our manufacturing facilities. Those will be partially offset by costs to prepare for a coronary launch.

We anticipate operating expenses approximately 9% higher than the fourth quarter of fiscal 2013. We are investing about $6 million in ORBIT II trial in preparation for a coronary launch and also in physician and sales team education. Interest and other expense should be about $300,000, excluding the effect of debt conversions or valuation changes of the related conversion option asset.

The resulting net loss is expected to be in the range of $9.6 million to $10.2 million, or a loss per common share ranging from $0.39 to $0.42. This assumes 24.5 million average shares outstanding. Again, this excludes potential effect of conversions or valuation changes related to our convertible debt.

Before closing, I’d like to make a few comments about the recent CMS reimbursement proposals. CMS has proposed reimbursement rates for 2014 that include increases for atherectomy in the hospital setting, both outpatient and inpatient, and decreases in the physician office setting. The decreases in the office-based setting seem to run contrary to pass CMS process and direction. And it will be debated over the 30-day comment period.

We feel confident about our growth potential going forward for the following reasons. The PAD market is larger and under served, especially in the treatment of calcified plaque in small vessels, where critical limb ischemia is prevalent.

We have clear advantage in the treatment of those conditions and have really just begun to penetrate that multi-billion dollar market opportunity. Patients will get treated in either the hospital or the office-based settings. While we feel the physician office is an attractive treatment setting with great growth potential, it’s a small portion of our business today.

We are very strong in the hospital setting, which received increases in the CMS proposal and have higher ASPs for CSI. Even at the proposed office rates, atherectomy is the highest single lower extremity reimbursement. Our technologies fast procedure time, it’s ability to treat multiple vessels with one device, its ability to routinely treat a broad range of disease including calcified in small vessels positions us well in that market.

To conclude, CSI is committed to helping physician’s treat the most difficult disease state including arterial calcium. We’ll do this through clinical rigor, constant innovation and a drive to improve patient outcomes.

Thank you for participating in today’s call. Operator, we would now like to take questions from the participants.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from the line of Danielle Antalffy with Leerink Swann. Please proceed.

Danielle Antalffy - Leerink Swann

Hi, good afternoon, guys. Can you hear me okay.

David Martin

Sure, can Danielle.

Danielle Antalffy - Leerink Swann

Okay. Great. Thanks so much. Congrats on a great quarter. I just wanted to talk a little bit about the growth guidance for fiscal first quarter of 2014 and your confidence in that double-digit growth number very strong growth still. Please could you talk about what gives you confidence in that number? Where is it coming from? Is it adding new accounts? Is it driving higher use or existing accounts given the fact that you are coming up on the test from year-on-year?

David Martin

Yeah. You bet. We’re confident in the double-digit growth. The technology continues to deliver clinical and economic benefits. We had another great quarter of scientific proofs off to that. We’ve got a huge prevalence of the disease unfortunately out there with rest to treat.

We continue to build new market and there is more site then ever with which to treat and the things that are enabling us to drive deep adoption in our top accounts are medical education. We’ve made a real commitment in the last year and a half two years to employ education and the device delivers a smooth tubular aluminum every time its stride. So there are a lot of things going for us even in the summer quarter.

Danielle Antalffy - Leerink Swann

Okay. Great. That’s helpful. And then this is probably Larry, more for you. The significant investment in ORBIT II is clearly an indication. When should we see that start to ramp back down? Is that no more second half of fiscal ‘14 or is that more fiscal ‘15 how do we think about that?

Larry Betterley

Well, the investment will actually ramp up Danielle as we get closer to the market launch. We’re going to add about 20 direct sales people to focus on that launch. And so it will probably continue to grow moving forward, leveling off towards the end of the year.

Danielle Antalffy - Leerink Swann

Okay. Great. And one last question. Any sense, based on the questions that you got from FDA, any better sense of how they’re thinking about a potential panel? I mean, are you guys still partaking to the likelihood that there will not be a panel?

David Martin

Well, we don’t really know. But we’re doing everything in our control to put us in the best window. And even if they did go to panel, we’re confident that while we might not get this calendar year approval that in the first half of the next year we would be approved.

Danielle Antalffy - Leerink Swann

Okay. Perfect. Thanks so much. Congrats, again, guys.

Operator

Our next question comes from the line of Brooks O’Neil with Dougherty & Company. Please proceed.

Brooks O’Neil - Dougherty & Company

Good afternoon. I just wanted to follow on with Danielle’s question. I’m just curious, if you guys have planned any flexibility in terms of your spending ramps for coronary related to the timing or a likely path to approval for that product?

Larry Betterley

Yeah. We can be flexible with that. We’re monitoring it and we’ll start adding people. And we think we’re getting close. It’s a bit of an art, but there is some flexibility that we have. Some of those 20 that I talked about will come out of our PAD sales force. So we have some control over the timing of that as well.

Brooks O’Neil - Dougherty & Company

Sure. And I’m curious, obviously, you commented in your prepared remarks and in the release that you’re able to respond to questions quickly, should we read into that the issues FDA was curious about with regard to your PMA submission were relatively straight forward and nothing that threw you for a loop?

David Martin

Yes. Absolutely they were straight forward and we were able to turn those around in less than 30 days.

Brooks O’Neil - Dougherty & Company

Right. And should we read into that greater likelihood of relatively smooth sailing to approval or would that be too bigger stretch?

David Martin

Well, we are rooting for that, but we don’t really know. What we do know is that the results are extraordinary. And the patients out there, large under served market can really use this device. So we think the FDA will be motivated.

Brooks O’Neil - Dougherty & Company

Right. That’s right. I’m just curious and you know I’m pretty new to the story, but could you just talk a little about the higher unit cost of Stealth 360 and the pricing, the lower average selling prices. What drives those two things?

Larry Betterley

Yeah. When you compare year-over-year, we had a lower percentage of Stealth last year than we did in the fourth quarter of this year. The Stealth with its new design, the direct cost is a little bit higher than the old Diamondback device, which we have the opportunity to drive cost out of overtime.

So we’ll get the cost down as we do future versions, but it is a little higher from a direct unit cost initially. You know overall the ASPs, they do fluctuate. It was down slightly from last year at this time, but, you know, still very strong and over $3100.

Brooks O’Neil - Dougherty & Company

Great. Thank you very much.

Operator

Our next question comes from the line of James Terwilliger with Wunderlich Securities. Please proceed.

James Terwilliger - Wunderlich Securities

Hey, guys. Can you hear me?

David Martin

Sure can, James.

James Terwilliger - Wunderlich Securities

First of all congratulations on a nice quarter and nice guidance going forward. I've got a couple of different questions though. The first question I have is when I look at this type of revenue growth versus what I would think is market growth or procedural growth, clearly you guys are taking share.

Can you comment on not who in terms of the competitive perspective you are taking share, but what type of technology? I mean, I would think you're taking share in terms of flat, removable technology. I think you'll be taking share in terms of balloons and stents and I thin you'd be taking share versus surgical bypass and the amputation. Can you talk a little bit about what you're seeing with the clinicians and where you winning those business at?

David Martin

Sure. With the increased awareness of calcium and its detrimental rule in patient outcomes, we are taking share from our balloon and all the other players, both stent and atherectomy. But the most exciting part of the story is we're expanding the market.

We go where the disease goes. We could make a smooth tubular lumen in smaller arteries, calcified arteries and we could even treat those patients who are at end stage, critically (inaudible) some of them scheduled for amputation and that's really great sticky revenue and more and more of our physicians are going through medical education programs to learn how to treat these patients routinely.

James Terwilliger - Wunderlich Securities

Well, that would lead me to a different question. When you look at those liberty trial, in this post market study, 1200 patients, 100 sites, I mean, the thing that jumps out here is the level of clinical excitement that you are actually going after patient scheduled for amputation?

David Martin

Yeah. Extraordinary story and one that the United States needs. We still have 150,000 or more amputations a year in the United States because of peripheral vascular disease. We could treat the worst of the worst and quite frankly we could treat people with less severe disease. We could treat multiple lesions. We could treat soft plaque and calcified plaque. This device and its ability to go where the disease goes is a real winner for patient outcomes, both clinical and economic.

James Terwilliger - Wunderlich Securities

It's very exciting. I want to switch a little bit in terms of the coronary PMA. Well you have these questions and you’ve already responded, that's a tremendous turnaround time. Is it safe to assume that all the questions were in module three and module one and two are pretty much done?

David Martin

You are asking about where the questions were from, the latest submission, what's the majority of them?

James Terwilliger - Wunderlich Securities

Yeah.

David Martin

And they are really straightforward. Some of them were in the submission that we tried to point out where the answers were.

Larry Betterley

Yeah. There were a few follow-up to our responses to modules one and two, but very few.

James Terwilliger - Wunderlich Securities

Okay. And then lastly in the release, when you talk about the $4 million for the coronary launch, is all of that in sales and marketing or is some of that in R&D?

Larry Betterley

Actually it's mostly in R&D James.

James Terwilliger - Wunderlich Securities

Okay. So it's all in R&D on the coronary, because R&D kind of trended down here a little bit and then the last question I had got, in the release, you talk about the arterial calcium 65% of all PAD arteries have this. But more importantly 80% of all the small arteries below the knee, does that one data point provide you tremendous confidence for what the -- your technology can do in the coronary application? That to me seems very powerful and significant.

David Martin

Yeah, it does. The vessels below the knee are 1 to 4 millimeter in size, so the vessels in the coronary arteries got a long history of success with calcified arteries and patients who are really sick. And then the results from ORBIT I and now ORBIT II are really extraordinary. So there's a need for this device. The prevalence of calcified coronary arteries is enormous and we’re really excited to get approved and start helping patients out.

James Terwilliger - Wunderlich Securities

Okay. Thanks for taking my questions. And again, congratulation on a great quarter. Thanks guys.

David Martin

Thanks, James.

Operator

(Operator Instructions) Our next question comes from the line of David Runkle with Newel Capital. Please proceed.

David Runkle - Newel Capital

Yeah. Dave, my question is about your educational offering. Are you finding a good physician attendance for that offering?

David Martin

Yeah. Extraordinary physician attendance. We’ve got few really great advantages for the physicians who face this disease everyday, every week. One is, we’ve got an extremely low physical profile. So we can really go where the disease goes.

And secondly, we have the advantage of -- because of our low profile of accessing the vascular tree from different points including the foot and the calf and that allows physicians to treat in a way that they haven’t treated before and treat disease that they haven’t treated before more successfully. Our training programs are featuring these new access point and new ways to treat difficult disease. Attendance has been very strong.

David Runkle - Newel Capital

Okay. And some of the physicians that are attending the educational seminar, is that resulting in some of your new account number for the quarter?

Larry Betterley

Well we’ve got some new accounts every quarter but we also have more physicians per our current accounts attending. So if for example, one or two physicians were using our device a couple of quarters ago as a result of our physician training now four or five are in that same institution.

David Runkle - Newel Capital

So that’s kind of a ripple effect then?

Larry Betterley

Yes.

David Runkle - Newel Capital

From the education point. Okay. All right that’s all I have. Thanks.

Operator

I would now like to turn the call over to Mr. David Martin for closing remarks.

David Martin

Thank you. Fiscal 2013 was a year of accomplishments that the whole CSI team could be proud of. We delivered very strong revenue growth. Completed the key submissions to the FDA, expanded education initiatives and continue to generate scientific data through clinical trials. This offset the stage for more growth in the years ahead.

Operator

Ladies and gentlemen, that concludes today’s conference. Thank you for your participation. You may now disconnect. Have a great day.

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