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Executives

Julie Tracy – Senior Vice President & Chief Communications Officer

Robert J. Palmisano – President, Chief Executive Officer & Director

Shawn T. McCormick – Chief Financial Officer & Director

Analysts

David Lewis – Morgan Stanley

Thomas Gunderson – Piper Jaffray

Analyst for Michael Weinstein – JPMorgan

Jason Mills – Canaccord Adams

Joshua Zable – Natixis Bleichroeder, Inc.

Larry Neibor – Baird

Joanne Wuensch – BMO Capital Markets

ev3, Inc. (EVVV) Q3 2009 Earnings Call October 27, 2009 8:30 AM ET

Operator

Welcome to the third quarter 2009 ev3 Incorporated earnings conference call. At this time all participants are in listen only mode. 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, Ms. Julie Tracy.

Julie Tracy

Welcome to ev3’s third quarter 2009 conference call. We appreciate you joining us. I’m Julie Tracy, ev3’s Chief Communications Officer. With me on the call today are Bob Palmisano, ev3’s President and Chief Executive Officer and Shawn McCormick, ev3’s Chief Financial Officer. We issued a press release this morning regarding our third quarter 2009 results. A copy of that press release along with an investor presentation summarizing our third quarter 2009 results is available on our website at www.ev3.net.

The agenda for this call will include a business update from Bob, a review of our third quarter financial results and guidance from Shawn followed by a question and answer session and closing comments from Bob. Before we begin I’d like to remind you that during the course of this conference call we will make forward-looking statements regarding our future financial and operating results and our business plans, objectives and expectations.

These forward-looking statements are covered under the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995 and ev3 desires to avail itself o the protections of the Safe Harbor for these statements. Please be advised that 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 annual report on Form 10K and on our subsequent quarterly reports on Form 10Q. We suggest that you read these reports and filings and other future filings that we may make with the SEC. ev3 disclaims any duty to update or revise our forward-looking statements.

On this call today we will also disclose certain non-GAAP financial measures. We use non-GAAP financial measures as supplemental measures of performance and believe these measures provide useful information to investors in evaluating our operations period-over-period. For each non-GAAP financial measure that we use on this call, we have posted a reconciliation of the non-GAAP financial measure to the most directly comparable GAAP financial measure on our corporate website at www.ev3.net under the subsection entitled non-GAAP measures under the investor relations section.

Please note that non-GAAP financial measures have limitations as analytical tools and should not be considered in isolation or as a substitute for our financial results prepared in accordance with GAAP. With that, I’ll turn the call over to Bob for a business update.

Robert J. Palmisano

This was a quarter in which we continued to make good progress towards our operating goals in both our neurovascular and peripheral vascular business segments. We saw top line growth which continues to be at or above market rates, margin improvement and execution of our new product launches including the Pipeline Embolization Device and TurboHawk Plaque Excision System.

We reported net product sales for the third quarter of $112.8 million, an increase of 15% on a constant currency basis versus prior year quarter. We are pleased by the initial sales contribution from our Pipeline Emoblization Device which was launched in Europe and Shawn will discuss an increase in our 2009 revenue expectations for Chestnut later in the call.

We also achieved another quarter of profitability as GAAP earnings per share for the third quarter was $0.06. This strong earnings performance was primarily driven by good top line revenue growth, strong sequential gross margin expansion of 250 basis points to 74.6% as well as continued expense leverage. Non-GAAP adjusted earnings per share for the third quarter was $0.17. In summary, this was another solid quarter for our company and I believe that these results underscore our ability to penetrate our neurovascular and peripheral vascular markets, stabilize our atherectomy business, sustain and improve GAAP profitability and generate cash.

Turning now to our neurovascular business performance; during the third quarter our neurovascular sales grew 39% on a constant currency basis versus the prior year quarter. This growth significantly outpaces the overall neurovascular market which we believe is growing at approximately 15%. As I mentioned earlier, we initiated the launch of our Pipeline Emoblization Device in Europe and on a limited basis in other international markets such as Canada and Australia.

During the third quarter initial physician response in treating large and [inaudible] aneurysm has been encouraging and we believe that the Pipeline flow diversion procedure is well positioned to become a first line treatment option for aneurysms patients. To ensure appropriate clinical training and a strong clinical foundation, we are following a controlled rollout strategy. We completed a training of our international sales organization for the pipeline device at the beginning of July. We also established several physician training centers with experienced proctors to forge proficient use of the Pipeline device.

Although physician training got underway later in the third quarter due to the European summer holiday, we are very pleased with the number of new Pipeline users that were trained many of whom were at high volume centers with extensive experience in endovascular aneurysm treatment. We now have approximately 50 physicians who are certified or have almost completed training versus 20 physicians at the time of the acquisition. We expect continued success as we support these physicians and add new Pipeline users in the month ahead.

You’ll recall that we completed enrollment of 108 patients in the PUFS study to treat uncoilable or failed aneurysms in July and we are now currently following these patients for six months to determine safety and effectiveness. Data from the PUFS study will be used to support an application for US regulatory approval for the Pipeline device which is anticipated in 2011. We are continuing to enroll patients in the COCOA study which is a 200 patient randomized trial comparing Pipeline to coils in smaller aneurysms.

We are also pleased to announce that we initiated a physician preference test for AXIUM PGL and nylon microfilament coils in the US and Europe during the third quarter. We believe that these coils will be particular appealing to neurovascular specialist who prefer a coil that combines the handling and long term implant stability of a bare metal coil with a microfilament technology that may accelerate acute and long term healing and increase packing volume within the aneurysm.

During the third quarter we launched our new [Markston] delivery catheter and Alligator retrieval device in the US and Europe. We also introduced access product line extensions including the HyperGlide 5.0 balloon in the US and Europe and the HyperGlide 3.0 balloon in the US. Since receiving the CE mark for our Solitaire FR or flow restoration device to treat ischemic stroke in July, we have completed the first cases in our European physician preference testing and expect to launch this product in the first quarter of 2010.

In summary, our neurovascular business continues to execute to our plan and is well positioned for future success. We are off to an excellent start with Pipeline, are seeing continued penetration of AXIUM coils and ONYX Liquid Embolic and have generated significant momentum for new product introductions, expanded geographic presence and improved pricing. I believe that we will continue to improve upon our number two worldwide revenue share position.

Now, turning to our peripheral vascular business; excluding atherectomy, our legacy peripheral vascular sales grew 6% on a constant currency basis compared to the prior year quarter and we saw steady sales growth of our stents and embolic protection devices in the third quarter compared to the prior year quarter. With regard to our atherectomy business, sales were $19.6 million in the third quarter versus $21 million in the prior year quarter. On a sequential basis, over Q2 of 2009 we did see some softness in procedures in the first half of the third quarter but do not believe that we lost any market share.

Compared to Q2 ’09 atherectomy was negatively affected by approximately $1.6 million relating to a sales reserve on RockHawk and normal seasonality in our European business. We remain encouraged by the progress we are making and expect that the recent launch of our new TurboHawk atherectomy system, along with the positive momentum we have seen in September and October will have a positive impact on sales going forward. I’ll discuss TurboHawk more in a moment.

Our US peripheral vascular sales for [inaudible] execution or productivity continues to progress and average annual US peripheral vascular sales revenue totaled $1.6 million per territory in the third quarter versus $1.4 million a year ago. We continue to expect to exit the year at our goal of $2 million per territory.

Now, moving to our TurboHawk launch. At last month’s TCT meeting we introduced our new TurboHawk Plaque Excision system for surgical use. The TurboHawk features a four angled super cutter blade that are designed to provide an efficient directional atherectomy tool for above the knee interventions including severally calcified lesions for which very limited or no options have been made available to date. With the ability to now address a broader range of lesions, we believe we can capture incremental procedure volume at a higher average selling price.

In addition, we plan to expand the availability of the TurboHawk super cutter to international markets. We also plan to launch a smooth cutter version of the TurboHawk for above the knee use in treating soft plaque in the first half of 2010. Given the promising start and high level physician interest we have seen, we believe TurboHawk will have a positive impact on procedure adoption and treatment of calcified lesions going forward.

During the third quarter we also conducted physician preference testing for our Trailblazer Support Catheters and initial performance feedback has been excellent. The Trailblazer’s ability to assist in crossing lesions with better push, maneuverability and torque has been well received by physicians. There will be a full release of the Trailblazer during this quarter.

The ongoing launch of our EverCross and NanoCross PTA balloons is progressing according to plan as sales of both balloons continue to ramp up in the third quarter versus Q2. Looking forward we are starting to prepare for the launch of our PowerCross .018 PTA balloon platform. We expect to roll this out during the first quarter of 2010.

In summary, I’m very pleased with the progress we have made to enhance our peripheral vascular product portfolio, improve our business processes and capture our operating leverage opportunities. For the remainder of 2009 we will continue to focus on growing our revenue, improving our margins and profitability and building a strong balance sheet. Shawn will now take us through a discussion of our third quarter financial results and guidance.

Shawn T. McCormick

Total net sales were $112.8 million in the third quarter of 2009 increasing 5% compared to $107 million for the third quarter of 2008. Third quarter of 2008 net sales include $7.0 million of research collaboration revenue. Third quarter 2009 net product sales of $112.8 million were up 13% versus net product sales in the prior year quarter and 15% on a constant currency basis. Changes in foreign currency exchange rates had a negative impact of approximately $1.7 million on third quarter 2009 net sales compared to Q3 of ’08.

On a business segment basis, net sales of peripheral vascular products increased 1% to $67.6 million for Q3 of ’09 compared to Q3 of ’08. Net sales included $19.6 million of atherectomy products in Q3 2009 compared to $21.0 million for Q3 of ’08. Stent sales grew 8% or 10% constant currency to $28.8 million in Q3 of ’09 compared to Q3 of ’08 primarily due to our EverFlex family of stents. Thrombectomy and embolic protection device sales were also solid growing 5% or 7% constant currency to $7.3 million in Q3 of ’09 compared to Q3 of ’08.

In the neurovascular business segment, net sales increased 37% to $45.2 million for Q3 of ’09 compared to Q3 of ’08. On a constant currency basis, neurovascular products in the third quarter increased 39% over the prior year quarter. Embolic product sales increased to $28.4 million growing 56% or 59% constant currency over the prior year quarter with strong growth in our AXIUM coils, ONYX Liquid Embolic and the Solitaire Stent. The Pipeline Embolization Device also contributed to the quarter-over-quarter growth.

Sales of neuro access and deliver products also showed strong growth increasing 12% to $16.8 million or 14% on a constant currency basis over the prior year quarter. In the third quarter of ’09 we achieved an overall consolidated gross margin of 74.6% an improvement of over 1,000 basis points over Q3 of 2008 and 250 basis point improvement over Q2 of ’09. We continue to realize overhead and volume manufacturing efficiencies including synergies related to the consolidation of our Redwood City manufacturing operations, margin improvement associated with selling our own line of PTA balloons and increased volumes. The stronger neurovascular product mix also contributed to the improvement in gross margin.

Operating expenses excluding product cost of goods sold totaled $76.6 million in the third quarter of ’09. SG&A expenses as a percent of net sales declined to 49% of sales in Q3 of ’09, a decline of approximately one percentage point compared to Q3 ’08. Our research and development expenses were 11% of sales or $12.5 million in the third quarter of 2009 consistent with the $12.1 million in the third quarter of 2008.

ev3’s net income for the third quarter of 2009 was $6.7 million or $0.06 per common share compared to a net loss of $7.3 million or $0.07 per common share for the third quarter of 2008. On a non-GAAP basis ev3’s adjusted net income was $19.4 million for the third quarter of 2009 compared to adjusted net income of $3.9 million for the third quarter of 2008. Non-GAAP adjusted earnings per share was a positive $0.17 per diluted share which exceeds the previous range of guidance of $0.09 to $0.12 per diluted share. The better than expected non-GAAP adjusted earnings were driven by higher revenues, improved gross margins including the benefit of a weaker than expected US dollar and cost savings.

Our cash and cash equivalents balance as of the end of the third quarter of 2009 was $80.5 million reflecting an increase of $20.1 million from our balance as of the end of the second quarter 2009. This increase was a result of another positive quarter of cash provided by our operating activities. Cash flow from operations totaled $20.9 million in the third quarter of 2009.

In summary, we are extremely pleased with our third quarter performance which demonstrates our execution against plans to improve margins and control costs by leveraging our infrastructure. Let me turn now to the financial targets for the full year of 2009. As detailed in this morning’s press release, we are raising our revenue estimates and expect our full year 2009 net sales to be in the range of $446 to $450 million compared to $402.2 million of product sales in 2008.

Our guidance represents full year product net sales growth of 11% to 12%. We expect foreign exchange rate fluctuations rates to have a negative impact of approximately $6 million to $7 million on 2009 product sales compared to 2008 or two percentage points on revenue growth for 2009. We are also raising our earnings per diluted share guidance to $0.36 to $0.40 on a GAAP basis including the tax benefit of $0.18 per common share resulting from the acquisition of Chestnut Medical in the second quarter of 2009.

We are increasing our non-GAAP adjusted earnings per share to $0.58 to $0.62 per diluted share. ev3’s adjusted earnings per share guidance excludes estimated amortization expense of approximately $25 million inclusive of amortization related to Chestnut of approximately $3.1 million, non-cash stock-based compensation of approximately $14.6 million, shares of approximately $4.9 million related to changes in the fair value of the Chestnut acquisition contingent consideration, vacant lease facility reserve expense of $3.4 million, the gain on the divestiture of non-strategic investment assets of $4.1 million and the non-cash income tax benefit of $19 million.

For the fourth quarter of 2009 we expect net sales to be in the range of $124 to $128 million compared to $105.7 million of product sales in the fourth quarter of 2008 which represents a 17% to 21% increase over Q4 of ’08. We expect foreign exchange rates to have a positive impact of about $2 million to $3 million on sales compared to Q4 of ’08. We also expect atherectomy sales to increase sequentially over Q3 of 2009.

For Q4 of 2009 we expect GAAP earnings per share to be in the range of $0.09 to $0.13 per diluted share. We expect non-GAAP adjusted earnings per share to be in the range of $0.20 to $0.24 per diluted share. Non-GAAP adjusted earnings per share for the fourth quarter exclude estimates for amortization expense of approximately $6.6 million including the amortization related to Chestnut of approximately $1.4 million, non-cash stock-based compensation of approximately $3.6 million and charges related to the changes in fair value of the Chestnut acquisition contingent consideration of $2.4 million.

As stated in our prior quarter earnings call, sales related to the acquired Chestnut products are included within our neurovascular embolic products and access and delivery product categories. We are not providing specific product or product category guidance beyond 2009. I will however say that we are very confident that Chestnut product revenue will exceed our prior estimate of $4 million to $5 million and will now be in the $6 million to $7 million range for 2009.

In 2010 we continue to expect $6 million of non-cash amortization expense related to Chestnut and non-cash accounting charges of approximately $15 million to $20 million relating to the change in fair value of contingent consideration. As previously disclosed, excluding these non-cash charges, we anticipate Chestnut will be accretive to non-GAAP adjusted earnings in 2010 and beyond.

With that update, we would now like to open the call to take questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from David Lewis – Morgan Stanley.

David Lewis – Morgan Stanley

Shawn, I just wanted to begin where you left off, can you kind of just walk us through the updated change to not disclose Pipeline revenue? And, can you give us the estimate in the third quarter?

Shawn T. McCormick

I’m not sure I understand your question David. We said originally that we were just going to disclose the $4 million to $5 million for the full year impact of the Chestnut acquisition on revenue. We did not break that out by Q3 or Q4.

David Lewis – Morgan Stanley

Can you just share with us just the third quarter number given you’re not going to give it going forward?

Shawn T. McCormick

Well, we prefer not to. We’re very pleased with the start we got as you can tell by the increase in our overall number to the $6 million to $7 million range. We’re a little more bullish on the momentum we can get in the fourth quarter with that product. But, for various reasons we’d prefer not to disclose the specific product numbers.

David Lewis – Morgan Stanley

Given there’s no direct competitor to the product, I’m just trying to understand the rationale for not disclosing the specific numbers either now or going forward?

Shawn T. McCormick

Well, there’s not a direct competitor but we do believe there are plenty of competitors that would like to know exactly what we’re doing with that product.

David Lewis – Morgan Stanley

Then Bob, your comments on the US business were helpful, can we just get more specific as it relates to atherectomy procedure support and stenting all were a little lighter than we were expecting in the quarter. Do you think there was an economic effect or a destocking effect at all affecting your business in the third quarter?

Robert J. Palmisano

Hard to tell; the quarter started off fairly slowly in January and August and picked up a lot of momentum in September and October going forward so it could have had some effect but that’s all anecdotal David. We don’t think on an overall basis the economic environment in the country will have a big effect on our business one way or another.

David Lewis – Morgan Stanley

Lastly, Shawn the gross margins were very strong can you just help us understand the drivers of the gross margins maybe on a percentage basis because peripheral was weak and neuro was very strong so how much of this was a mix shift in the quarter and how much was operational improvement?

Shawn T. McCormick

David, the vast majority of it quite honestly is operational improvement. We’ve had and we’ve disclosed before our lean sigma efforts and what we saw again in the third quarter was programs being pulled in quicker than we anticipated and so the majority of this benefit is really being driven by manufacturing efficiencies and volumes and quite honestly across both businesses.

Operator

Your next question comes from Thomas Gunderson – Piper Jaffray.

Thomas Gunderson – Piper Jaffray

Neuro sales up 39% constant currency, Shawn can you give us some sense of what that would have been? Are we talking 20% to 25% increase if not for the Chestnut number?

Shawn T. McCormick

I guess what I would say Tom is Chestnut did not come close to doubling the growth rate.

Robert J. Palmisano

I know a lot of people want us to get specific here and I guess we just don’t think that’s appropriate. I would say that we expect of the guidance that we have given regarding Chestnut for the year, the $6 million to $7 million, the majority of that is going to come in Q4.

Thomas Gunderson – Piper Jaffray

Because Bob, I think you said both last quarter and in your prepared remarks today that this was more of a September launch, was that correct?

Robert J. Palmisano

That’s correct. That’s why I’m saying the majority of that forecast that we’ve given is a Q4 forecast.

Thomas Gunderson – Piper Jaffray

Then I guess asking it a different way is can you give any comments on why you thought neuro was so strong in what’s usually a seasonally weak quarter?

Robert J. Palmisano

Every category was strong. Our coil business was strong, our liquid embolics were strong, just every product category that we had, our US business was particularly strong during Q3 versus a year ago. I just think that the community, the medical community and the hospitals are pretty much of the opinion that today with our product portfolio we probably have, in our opinion and I think a lot of other opinions, the best bag of products available and we’re taken very seriously now in the neuro space. I think that’s just gaining momentum for us.

Thomas Gunderson – Piper Jaffray

One more on neuro and that would be China, AXIUM was approved in June, did Q3 have some contribution to that neuro strength?

Shawn T. McCormick

There was some contribution Tom, I would not attribute the significant growth to China though. As Bob said, we saw growth across all geographies and I would not say that China weighed in to a significant extent on those growth rates but we did see some contribution and continue to see good progress in China.

Thomas Gunderson – Piper Jaffray

Then on atherectomy, Shawn can you give me a little bit more color on the $1.6 million sales reserve?

Shawn T. McCormick

With the launch of our TurboHawk product we took an assessment of our overall inventories on the RockHawk product and basically determined that we had excess and would actually expect some swapping out of RockHawk inventories at customers with the TurboHawk and so with that we recorded a sales reserve allowance. That combined with the seasonality that we see in the international markets specifically Europe is that those are the two pieces that make up the $1.6. If you back those two pieces out we feel pretty good that basically we were flat from Q2 to Q3 in revenue.

Robert J. Palmisano

Regarding the sales reserve, we had anticipated taking that but we thought it was going to be more a fourth quarter issue but we actually launched TurboHawk a little bit earlier than we had anticipated in Q3 and that’s why that hit in Q3.

Thomas Gunderson – Piper Jaffray

Bob or Shawn, do you think that covers it? I mean, seeing the comparison of TurboHawk to SilverHawk, it’s dramatic, is $1.6 enough to cover the reserve?

Shawn T. McCormick

Yes Tom, we’re very comfortable. The $1.6 isn’t entirely the reserve but we are very comfortable that we have an adequate reserve.

Operator

Your next question comes from Analyst for Michael Weinstein – JPMorgan.

Analyst for Michael Weinstein – JPMorgan

Not to beat a dead horse here but while embolics have been obviously a strong performer for you guys over the last couple of quarters really an outlier in this quarter especially comparing the sequential numbers versus 2Q across the different segments. Was there any stocking, anything unusual this quarter that would have had revenue growth exceeding procedure volumes? I know you guys have a lot of physician testing going on?

Robert J. Palmisano

No. I mean this was pretty much a normal kind of sales flow through, there was nothing special.

Analyst for Michael Weinstein – JPMorgan

So really just the base business was responsible for the close to $7 million sequential uptick?

Robert J. Palmisano

Yes.

Analyst for Michael Weinstein – JPMorgan

In the accounts you have started, the 50 positions you started with Chestnut over in Europe, obviously only one quarter of data but at this point how are they utilizing the Pipeline product? Is it expanding the aneurysms that they’re able to go after or are you seeing some cannibalization?

Robert J. Palmisano

It really is generally speaking, and there are some exceptions, but it generally is what we would consider these wide neck uncoilable aneurysms. One slight little thing that is even more encouraging is we had projected about 1.5 Pipeline devices per procedure and it’s running about 1.8 so that’s encouraging also. Just based on that these are still these wide neck big aneurysm given that they’re using more stents.

Analyst for Michael Weinstein – JPMorgan

Then just lastly, you mentioned the reversal for RockHawk, you’ve not got a pretty broad range of products on the market for atherectomy, how do you anticipate segmenting the market and will TurboHawk become a primary product in the majority of procedures or is there really a difference in application?

Robert J. Palmisano

I think long term it’s our anticipation that TurboHawk will cover above the knee, below the knee, calcium and plaque and that’s I think the direction we’re going in, yes.

Operator

Your next question comes from Jason Mills – Canaccord Adams.

Jason Mills – Canaccord Adams

I wanted to start in the middle of the P&L, Bob the SG&A leverage was very strong, I’ve been counting on that for a while. Is this the beginning of a trend where we’re going to see SG&A leverage sort of trend down over time? You took a big step this quarter, I’m just wondering where that can go and how quickly it can get there?

Robert J. Palmisano

I think we do have opportunities there particularly as we get really humming on our productivity measures. Our peripheral vascular sales organization has done a nice job and they’re now running in the high 20s as a percent of sales and I think that’s where it’s going to stick pretty much so what we have in the other categories has to make the rest up but we see a trend down and I think we should continue to see it trend down. Not big stair step trends down but a steady trend down over the next years and years ahead. I think we’re pretty much on top of this and we think it’s a good opportunity to leverage our business.

Jason Mills – Canaccord Adams

So it will be driven in peripheral vascular it sounds like via revenue growth getting atherectomy to grow year-over-year again, etc., that should contribute going forward so as revenue grows do you still expect PV sales to be in the high 20s or could that go lower?

Robert J. Palmisano

We think that $2 million per sales territory is right about where we want to be. So, as sales increase over that we will be adding people but staying in that same kind of range in the high 20s is what that amounts to.

Jason Mills – Canaccord Adams

Then gross margins we thought you gave some indication it was going to be good, I don’t know if any of us thought it was going to be this good. Is this level sustainable in to the fourth quarter, in to 2010 and should we expect that the things that are driving it manufacturing efficiencies, mix, etc. can contribute more leverage to the gross profitability line?

Robert J. Palmisano

Well, I think we can continue our trend. I think there’s still some opportunity in just the kind of blocking and tackling but there are some other things. We see a nice continued trend of gross margin expansion on a pretty much normal basis as we go forward.

Jason Mills – Canaccord Adams

So this business can run at a higher gross margin level at some point in the future is what you are saying?

Robert J. Palmisano

That’s correct.

Jason Mills – Canaccord Adams

Over to neurovascular, I’m wondering – several people on the call have tried to get at what drove the growth and how you could have grown this fast, or that significant contribution from Chestnut which it sounds like you didn’t have in the quarter. Is it possible you’re getting a halo effect from Chestnut coming down the pipeline, no pun intended in the US as well as the launch in Europe? In other words, are you getting growth in AXIUM and ONYX because of having chestnut in the bag?

Robert J. Palmisano

I think that is happening and as I said I think that the medical community is now looking at ev3 as having really the best kind of overall product portfolio. We have some terrific products when you think of not only Pipeline, you think of Solitaire platform, you think about ONYX and AXIUM. We have top of the line products in just about every area that we’re in right now and so it’s a great position. The whole neurovascular market is ripe [inaudible]. There’s a lot of things happening in this business, it’s a great market to be in. Any market that is growing 15% on an annual basis is a pretty good market. We happen to be doing a lot better than that because of our product portfolio.

Jason Mills – Canaccord Adams

Last question, on Solitaire, update us on your plans from a regulatory standpoint in the United States, what you’re hearing in a bit more detail about that product internationally?

Robert J. Palmisano

Solitaire is CE market approved outside the US for clot removal. We’re physician preference testing now and we intend to have a full launch of that in Q1 of 2010. We will be enrolling a study in the US, whether it’s Q4 or Q1 of next year so that’s going to be a long process to get Solitaire approved for ischemic stroke in the US. But, we’re working on it, we think it’s a great product and in the meantime we have still about 60 or so, high 60% of our neurovascular business comes outside the US. We’re in a great position to launch that product for ischemic stroke for Q1 2010 outside the US.

Operator

Your next question comes from Joshua Zable – Natixis Bleichroeder, Inc.

Joshua Zable – Natixis Bleichroeder, Inc.

Just again, getting back to this neuro and again, I know you guys have answered it but I guess you talked about a pretty strong pipeline of new products, you guys commented Chestnut obviously not the major contributor to growth, I know you launched a couple of coils, can you just kind of review that for us and tease out sort of if you don’t want to give exact numbers just how much of this was maybe new products.

Robert J. Palmisano

I don’t think we have that Joshua. I think most of its organic, good organic growth. We are launching some stuff that is not in the number, we talked about PGLA and nylon, some different catheters that are being launched that we think will continue the momentum that we have. But, I think our neuro business is driven primarily by AXIUM coils, by ONYX and our access products are the big pieces of that. We have some exciting stuff as we mentioned, the new coils, the microfilament coils, we have Pipeline that’s going to contribute somewhere from $6 million to $7 million in revenue this year. It’s a mixture of organic growth and some new products.

Operator

Your next question comes from Larry Neibor – Baird.

Larry Neibor – Baird

When might we see the TurboHawk approved for below the knee procedures?

Robert J. Palmisano

It’s hard to say. I think we plan to have that probably later 2010, maybe this time next year.

Larry Neibor – Baird

Is there clinical trial work underway for that currently?

Robert J. Palmisano

No. I think that we’ll be building off our – it’s a [510K] I believe and I think we’ll be able to build off our experience with the current device. I don’t think that’s an [inaudible]. Technological challenges is more, these are smaller vessels that we have to deal with below the knee. We think we have a clear path to get there. The R&D team did a fantastic job of launching the TurboHawk that we had ahead of schedule and I think that we’ll be able to launch that as I said probably this time next year.

Larry Neibor – Baird

In terms of your international growth versus your US growth, I think US is up 8%, international is up 26% constant currency. Can you walk us through the discrepancy in terms of growth rates?

Robert J. Palmisano

The international markets are more heavily neuro and I think that’s most of it. Also, we do always have geographical expansion out there. We’re now direct in Australia for example, we’ve got CE market approval for AXIUM in China so there are those kinds of opportunities. But, the primary difference is that international is very heavily in to doing neuro procedures and neuro revenue as opposed to the US which is more peripheral vascular. Those markets are just growing at different rates.

Larry Neibor – Baird

Given that perhaps 80% of procedures in the US already use coils, how much market share do you think you gained versus your competition in the most recent period?

Robert J. Palmisano

Where we are today is that – I think we’ve gained market share it’s just really hard to say because everyone doesn’t report and break this out. She’s growing at such a higher rate than the overall market it would be very easy to conclude that we’ve gained market share. Certainly over the year we’ve gained a pretty good chunk of market share versus our competitors I just don’t know the exact number.

Larry Neibor – Baird

Final question, again one on the PED, you said you had 50 physicians trained to use the product. Can you explain whether that training was done on a patient or on a model? Whether the cases that are going to be doing going forward require proctoring or not?

Robert J. Palmisano

As we said we had 50 doctors that are fully certified or close to being fully certified but those are proctored cases. We’re more interested in doing this right than fast and I think that you have to have five proctored cases to get certified so it’s a good program and people come out of there very comfortable.

Larry Neibor – Baird

Any idea of the backlog of patients?

Robert J. Palmisano

No I don’t, I really don’t.

Operator

Your next question comes from the line of Joanne Wuensch – BMO Capital Markets.

Joanne Wuensch – BMO Capital Markets

When I take a look at your guidance for next quarter if I take the midpoint of your revenue range in order to get to your EPS, one of two things or both of two things are happening, either you’re significantly expanding gross margins sequentially or you’re significantly decreasing SG&A as a percentage of revenue. Am I looking at this right and if so, which one is it or is it both?

Robert J. Palmisano

I think it’s both Joanne.

Joanne Wuensch – BMO Capital Markets

Can you add a little bit more than that? I mean, where are we getting the SG&A leverage at this stage?

Robert J. Palmisano

The revenue number goes up pretty nicely in Q4. By the way, on atherectomy we still intend to be at last year’s lever in atherectomy for the year 2009 versus 2008 so that’s a pretty significant jump up. We have a pretty significant jump up in both our businesses PD and neuro in Q4 and I think that’s also a very important piece of that.

Joanne Wuensch – BMO Capital Markets

Can you comment on the healthcare reform and what you think it might mean for ev3?

Robert J. Palmisano

Shawn did some analysis of that, why don’t you pop in Shawn.

Shawn T. McCormick

On the bill that’s proposed right now just in terms of the tax, our view is sort of a worst case scenario on applying that to our 2009 revenues it would have worst case maybe a $6 million impact of the tax. Obviously, what ultimately comes out is yet to be seen but we think that’s kind of our worst case scenario. I think also we believe with peripheral artery disease, that is such an underserved market that healthcare reform may actually benefit us in terms of patient flow in access to therapy for peripheral artery disease. To a large extent the patient population with PAD is a lower economic population and so healthcare reform may actually be a benefit to us in that market.

Joanne Wuensch – BMO Capital Markets

You talked about the EverCross and NanoCross products which have been out now for a couple of quarters and then I heard you mentioned PowerCross. This is new to me at least, when is this coming out? US? No, US?

Shawn T. McCormick

The PowerCross is the 018 platform of the PTA product line so that is coming out basically in Q1 of 2010, we’ll have that fully launched.

Joanne Wuensch – BMO Capital Markets

In both geographies?

Shawn T. McCormick

Yes. We actually launched the 014 and the 035 in Q1 of 2009. We were selling those alongside the Invatec balloon and since then just our own products and we’re getting very good feedback on those products. The sales are ramping up quite nicely, it’s no or slightly ahead of our plan in terms of converting to selling our own line so we’re very pleased. Very good feedback on the performance of the balloons and when we get the 018 platform out there we will expect to continue to expand our own franchise?

Operator

There are no further audio questions, I would now like to turn the conference over to Bob Palmisano.

Robert J. Palmisano

Over the last several quarters we have demonstrated our ability to deliver consistent operating and financial results including GAAP profitability and significant cash generation. In addition to these results we have initiated launch activities for several new products including the Pipeline Device, our new AXIUM PGLA and nylon coils and the TurboHawk system. We believe that these products as well as the clinical studies that are underway will drive growth and deliver enhanced value to our shareholders. For the remainder of 2009 we will remain focused on achieving revenue growth at or above market growth rates, sustaining and improvement in profitability and cash generation.

Before I close I’d like to thank the ev3 team for their efforts during the third quarter. We continue to make excellent progress and I am confident that we will continue to drive our business forward as we look towards fulfilling our vision to be the best at identifying and treating lower extremity arterial neurovascular disease. Thank you for listening today and for your interest in ev3.

Operator

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

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Source: ev3, Inc. Q3 2009 Earnings Call Transcript
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