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Novadaq Technologies Inc. (NASDAQ:NVDQ)

Q3 2013 Earnings Call

October 22, 2013, 8:30 AM ET

Executives

David Martin - Vice President Corporate Development and Investor Relations

Arun Menawat - President and Chief Executive Officer

Stephen Purcell - Chief Financial Officer

Analysts

Matt Miksic - Piper Jaffray

Jason Mills - Canaccord Genuity

Matt Blackman - Stifel

Steven Crowley - Craig-Hallum

Doug Miehm - RBC

Operator

Greetings and welcome to the Novadaq's third quarter 2013 earnings conference call. (Operator Instructions) It is now my pleasure to introduce your host David Martin, Vice President, Business Development and Investor Relations. Thank you, sir. You may begin.

David Martin

Good morning, everyone. Thank you for joining us today to review Novadaq Technologies financial results for the third quarter 2013. On the call today representing Novadaq are Arun Menawat, President and Chief Executive Officer; Stephen Purcell, Chief Financial Officer; and myself, David Martin, Vice President, Investor Relations.

Before I start, I want to remind you that certain statements made in this conference call may be considered forward-looking. Such statements involve known and unknown risks, uncertainties and other factors that may cause actual results, performance or achievements to be materially different from those implied by such statements, and therefore these statements should not be read as guarantees of future performance or results.

All forward-looking statements are based on Novadaq's current beliefs as well as assumptions made by and information currently available to Novadaq and relate to, among other things, results of future clinical tests of the SPY, FIREFLY, PINPOINT and LUNA Imaging Systems, anticipated financial results, our business prospects, strategies, regulatory developments, market acceptance and future commitments.

Listeners are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of the press release. Due to risks and uncertainties, including the risks and uncertainties identified by Novadaq in its public securities filings; actual events may differ materially from current expectations. Novadaq disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

With that said, I'll now turn the call over to Dr. Arun Menawat.

Arun Menawat

Thank you, Dave. Good morning, and welcome everyone. The agenda for today as usual is for Steve to highlight our third quarter financial results. After that, I will discuss Novadaq's Q3 2013 achievements as well as outlook and strategic initiatives going forward. We will then have Dave provide an overview of the latest clinical publications. After that, we will open the call to questions.

Steve, please proceed.

Stephen Purcell

Thank you, Arun, and good morning. Q3 '13 revenues of $8.9 million exceeded Q3 '12 revenues by $2.9 million, a 49% increase. SPY product sales increased by $3.1 million, while TMR product sales and service decreased $200,000 due to lower capital laser sales.

Q3 '13 recurring revenue for Novadaq SPY business were $3.5 million, representing an increase of 23% year-over-year, while SPY kit shipments to hospitals increased by 39%. Recurring revenue growth was lower than kit shipment growth due primarily to increased kits sales of SPY Elite, LUNA and PINPOINT capital and rental customers, who pay a lower per patient cost and inventory adjustments by our partners.

Royalty revenue increased in the amount of $15,000, in comparison to say during last year due to increased unit sales by our partner. In comparison to Q2 '13, revenues increased in the amount of $798,000 mainly due to increased SPY product sales.

Gross profit of $5.7 million in Q3 '13 increased from $3.9 million for the same period last year, due to increased sales from alliances for their own partners as well as direct sales of PINPOINT and LUNA products. In comparison to Q2 '13, gross profit is higher by $687,000 mainly due to increased SPY product sales.

Operating expenses of $6.8 million exceeded previous year Q3 expenses by $1.8 million. Selling expenses increased by $2 million due to the direct sales personnel being hired to support our PINPOINT and LUNA sales program along with increased promotional expenditures.

Research and development expenses increased by $400,000 to support expanded operations, higher non-cash depreciation expense on equipments utilized in clinical trials, higher patent expenses for new and existing patent, higher product development cost and higher non-cash amortization expenses related to Digirad's Trapper and the TauTona asset purchased.

Administrative expenses were lower than Q3 '12 by $600,000 due to lower professional fees and lower amortization expense, as the PLC manufacturing rights were fully amortized.

Q3 '13 non-cash warrant revaluation expense of $5.9 million was lower than Q3 '12 warrant revaluation expense of $8.1 million, as the share price increase for Q3 '13 was $3.12 compared to previous year quarterly increase of $3.54. In comparison to Q2 '13, warrant revaluation expense decreased by $1.6 million, as the Q3 share price increase was lower than the previous quarter.

Net loss of $6.9 million in Q3 '13 was $2.4 million, lower than the net loss of $9.3 million in Q2 '13, due to lower non-cash warrant revaluation expense of $2.2 million; higher gross profits by $1.8 million, offset by higher operating expense by $1.8 million. Lower interest and imputed interest expense offset by lower gains in investments and higher taxes combined for a net improvement of $200,000.

Cash contributed from operating activities was $1.4 million, which included working capital contribution of $800,000 and cash contribution of $600,000 from operations.

Cash on hand was $86.9 million at September 30, reflecting a decrease of $1.6 million from our cash position as of June 30, '13. Included in cash reduction were fixed asset expenditures of $1.3 million to build equipment utilized in our SPY placement model and $2.5 million cash utilized to purchase the Digirad's Trapper, the TauTona asset and other intellectual property, partially offset by cash generated from financing activities in the amount of $800,000.

Now, I will hand the call back to Arun.

Arun Menawat

Thanks, Steve, and again welcome everyone. Q3 was an excellent quarter for Novadaq. Our growth rate is right on target with expectations and we continue to meet or exceed our 2013 objectives, including building a long-term secular growth company, building our direct sales team, introducing PINPOINT and LUNA to their markets and continuing to strengthen the value proposition of our company by conducting clinical studies.

The capital sale of 31 Novadaq SPY imaging technology systems across our markets was a strong driver of our growth in Q3. Of those, 21 were PINPONT and LUNA systems sold by our own direct sales team. Here are some other key highlights. We estimate that SPY technology was used in more than 5,900 procedures in Q3 and that our penetration into U.S. breast reconstruction market reached 16%.

As we have discussed before, we expected that FIREFLY sales would dip in Q3. While our FIREFLY related revenues are down compared to last quarter, a total of 69 FIREFLY systems were deployed in Q3, 48 of which were through new systems and 21 were upgrades to existing imaging system. We are pleased that FIREFLY continues to be a popular upgrade.

With respect to PINPOINT and LUNA, building our own sales team remains our number one priority. Since our last analysts call, we have added 20 new sales professionals to our team and we now have a total of 42. At this point, we look to finish 2013 with a sales team totaling 60. Based upon our current performance, we expect that the new members of the team will begin to become effective in the second half of 2014.

We continue to be satisfied with the pace of introduction of our new products, PINPOINT and LUNA. More than 60 of these systems are deployed today and are either in commercial use or are being evaluated or being used for clinical study. Many of the evaluation systems represent key opinion leading centers. And although we are at early stage, feedbacks with respect to clinical value and reimbursement remains positive.

In addition, this past weekend, Novadaq sponsored an educational program for physicians and program managers from wound care centers throughout the United States. The program attracted an attendance of more than 100, which is a benchmark for our progress. In our opinion, the education programs are helping our physicians, gain a better understanding of the potential of our technology and at the same time becoming enthusiastic supporters.

As we have mentioned before, we have also been exploring opportunities for our technology in international markets and are so far pleased with the response. Specifically, we anticipate expanding our distribution network in the Asia-Pacific region in the near future.

Novadaq's clinical study program is also robust. We completed the enrollment of patients in our PILLAR II study in August and are working with our investigators to prepare the final results for submission to a surgical journal in November. We anticipate publication in Q1 2014.

In parallel, we have begun designing the next phase of PILLAR, which will be a multi-center randomized study of PINPOINT in low anterior colon resection, which we anticipate will begin enrollment in the first half of 2014. We have also begun formal trials to study the use of PINPOINT for the detection of endometriosis lesions during laparoscopy and gynecological surgery and in minimally invasive esophagectomy and esophageal reconstruction.

In addition, two single-center studies for the use of LUNA in the management of patients with chronic non-healing foot wounds and registration work in lymph node mapping in gynecological oncology are underway. Several of the physicians involved in these studies will be presenting at the Novadaq's Second Annual Investor and Analyst Meeting on November 18 in New York City and we look forward to seeing many of you at this event.

To maintain our first mover advantage, this quarter we made several small acquisition of assets and intellectual property related to the surgical radiopharmaceutical imaging technology, the Surgical Marker, nerves and lymph node localization and erythrocyte labeling with the total cost of the acquisitions totaling less than $3 million.

In additional, we have filed a shelf prospectus, which will be active for a 25-month period upon final acceptance by the OSC. This will allow us to explore all options to access on any key market or expand our direct channel including through M&A. Overall, we are seeing signs on multiple fronts and the market we have created imaging-for-surgeon, is here, to say.

Our goal is of taking one core technology into four specialties with unique form factors for open, minimally invasive and robotic surgery and wound care, starting to pay dividends to the extent that there is now a SPY technology ecosystem with standardized imaging interpretation and image familiarity across specialty and with clinical data that can be cross-pollinated across Novadaq's four commercial imaging systems. We remain committed to building this ecosystem, as we believe it will be a core driver to maintaining our leadership position.

At this point, I'll turn the call over to Dave to discuss key clinical publications from the third quarter.

David Martin

Thank you, Arun. On our last earnings call, we discussed studies published in the head and neck surgery application as well as a payer perspective by cost analysis in breast reconstruction. This quarter publications and presentations covered abdominal wall reconstruction, esophagectomy, sentinel lymph node mapping, cardiac surgery and numerous robotic surgery applications.

The first study was presented by [indiscernible] at the recent Abdominal Wall Reconstruction Conference in Washington. We're particularly interested in ab wall reconstruction, as it is emerging as another high-value application for SPY Elite and our partner LifeCell is very strong in this market.

In the [ph] Ziegler study, the authors retrospectively evaluated postoperative complications for 14 patients, who had undergone abdominal wall reconstruction to repair complex ventral hernias. The patients were split into two groups; eight, whose surgery was guided by clinical judgment; and six, whose resection of skin and subcutaneous tissue was guided by clinical judgment plus SPY imaging.

In the SPY group, the surgical site occurrence or complication rate was 0%. In the clinical judgment alone group, the complication rate was 37.5%. Adding further to the validation of SPY, in the clinical judgment alone group, five patients had actually been imaged with SPY, but without the surgeons revising the surgical plan based on SPY per protocol. Two of these five patients had surgical site complications and in both cases SPY predicted the complications.

The study concluded that SPY Elite reliably predicts cutaneous and subcutaneous perfusion abnormalities with a 100% sensitivity prior to leaving the operating room. And by doing so, maybe able to predict and possibly reduce SSOs associated with complex AWR.

A second study published by [indiscernible] in the Journal of Plastic Surgery and Hand Surgery, also focused on the ab wall reconstruction application. In this 70 patients study, 42 patients in the non-SPY group compared with 20% in the SPY group experienced wound healing complications. There was 0% operative debridements and wound infection rates in the SPY group compared with 17% for both conditions in the non-SPY group.

Moving to esophageal reconstruction, [indiscernible] reported results for a series of 11 patients in the American Journal of Surgery. Among the patients, all were determined to have good perfusion on gross examination. SPY imaging, however, revealed one patient with four perfusion and this patient went on to develop an anastomotic leak. For this patient, the office commented that electing to the [indiscernible] anastomosis might have been a better clinical strategy. One other patient with good perfusion based on gross exam and SPY also developed a leak. This patient was noted to have other comorbidities.

In general, anastomotic leaks occur in up to 30% of patients undergoing esophageal reconstruction and mortality rates are very high in the 20% to 60% range. The office concluded that given the expense of morbidity associated with anastomotic leakage, using SPY may prove to be cost-effective, as further studies confirm that the leak rates can be decreased.

Before I turn the call back to Arun, I just want to finish by mentioning that for the second year in a row, Novadaq's imaging technology and robotic surgery or FIREFLY as it's called, once again garnered high profile at the American College of Surgeons and the Clinical Robotic Surgery Association meetings held two weeks ago in Washington D.C.

FIREFLY was discussed in da Vinci, bariatric, cardiac, colorectal and cholecystectomy surgeries in the context of improved outcomes, enhanced surgical decision making and increased procedural efficiency. As many of you are aware these surgeries can be done as robotic MIS, non-robotic MIS or open. And as a result of positive clinical benefits reported for FIREFLY, a robotic surgery typically map well onto PINPOINT and SPY Elite with a converse also being the case.

At this point, I'll turn the call back to Arun.

Arun Menawat

Thank you, Dave. I will now like to ask the operator to open the phone lines for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from the line of Matt Miksic with Piper Jaffray.

Matt Miksic - Piper Jaffray

So a lot to talk about here, but maybe just focus on just a couple of things. First on SPY Elite and the channel, and your systems now there. Based on your comment, the 31 systems, PINPOINT, LUNA and SPY Elite; and then the 21 that you mentioned that are just direct PINPOINT and LUNA. It seems like your SPY Elite sales jumped off a little in the quarter to around 10, at least by my estimates and then if I am understanding your numbers correctly.

So first, is that right? And if so, and we're seeing this increased system sales versus system placement through that channel. Can you talk a little bit about what you think is driving that increase other than obviously the favorable key economics for those centers?

Arun Menawat

Your numbers are accurate. And, yes, you're right. We are seeing a shift more towards capital, particularly hospitals that may have been using our device for a while and are paying higher recurring revenue per use are switching over in some cases to capital purchase and thereby reducing their per use number. So I think that overall that trend seems to be taking place.

Matt Miksic - Piper Jaffray

The reason for that other than just the favorable economics, I mean is there some broader preference for capital, is there maybe broader use of this happening in centers that are getting into the sort of 50, 60, 70 per year run rate that had decided to make that change?

Arun Menawat

No, I think that there are a couple of reasons. One of them is that now that the hospitals have been using the technology and the surgeons are consistently using in the hospitals are finding it better in terms of economic systems they acquire and the device, and reduce their recurring revenue.

The other reason is that we think that as more surgeons begin to use the same device and the hospitals begin to see value in more than breast reconstruction, I think they can start to project the usage, and thereby it becomes even more attractive from the economics perspective.

Matt Miksic - Piper Jaffray

And then, I wanted to also get -- and again, I'm assuming that we'll get into some of the detail of the endometriosis trial in the next stage of PILLAR, some of the wound and esophageal reconstruction studies that you've talked about during the analyst meeting. But I wanted to also maybe try to get some color, as to where you're having success in terms of PINPOINT and LUNA? Are you seeing this within the user base of SPY Elite? Are you seeing it among wound care clinics?

And I guess LUNA maybe a little bit differently than PINPOINT, a lot of those numbers were a bit better than we were expecting also. And just in Q3 quarter, that's not typically a strong capital quarter, I'd love to get a sense of where you're seeing success in your direct effort?

Arun Menawat

I think we started with the hospitals, where they are using FIREFLY or SPY. And I think that those hospitals as soon as we discuss with them that we are the company that produces those devices, we get creditability at a pretty rapid pace. And as I mentioned to you in the previous quarters, we started with providing evaluation. So I think at this point the evaluations are coming along well.

And generally, once the surgeons, once the hospitals begin to see that this, what we are talking about as the ecosystem that now the device is available for non-robotic minimal invasive surgeries, I think that is certainly resonating. So although the initial purchases are coming from sites or evaluation are coming from site that are familiar to the technology, I think we are actually starting to see even new centers come in. So overall, Matt, I think it's very positive.

Operator

Our next question comes from the line of Jason Mills with Canaccord Genuity.

Jason Mills - Canaccord Genuity

So clearly clinical data last year, earlier this year, rather when the initial PILLAR II data was released, clinicians took notice, investors also took notice. So it'd be helpful perhaps if you could take a minute and just give us some additional thoughts to add on to what you said in your prepared comments with respect to the trials that you have currently ongoing, the ones that perhaps you expect to launch in the next three or six month.

And then maybe that cadence of clinical data release that we may see over the near and medium-term, call it next 12 to 18 months, given again that both clinicians and investors seem to take that data as important press among the most important news flow that comes out of the company?

Arun Menawat

So overall, we are continuing to expand our clinical strategy. And for PINPOINT, right now, for example, we are planning a PILLAR III trial, which will be a randomized multi-center study. It should be on a clinical trial data within the next 60 days, maybe worse case, by end of this year. And it should begin enrolling in the first half of next year.

And the idea there is that we would look for a comparison, we will look for a Phase III type, a full study where we can clearly demonstrate improvements and outcomes. That would be the primary endpoint that we would be looking for.

The second one we are working right now in endometriosis, which we'll begin with three centers. And it is really primarily designed to increase detection and yield off the endometriotic lesions. So that's pretty easy -- that's a pretty straightforward trial, because the current standard is white light and we're looking for the PINPOINT mode improve the detection.

In lap chole, we are working to do a validation study right now at 1 KOL site. And if that study looks good, we will expand that into a multi-center study. And then we're doing an esophagectomy. We're doing a confirmatory study also, which is at two centers at this point.

On LUNA, we are looking at two center KOL study. We have quite a bit of activity in planning stage, but certainly the diabetic foot ulcer comparative study is the first one that we are working on right now. And then for lymph nodes we are working on registration work right now, but I think you should expect that at least one significant publication early next year, which will have a comparative patient data in at least triple digits. So that's just a summary and certainly we'll go over the details on the Analyst Day.

Jason Mills - Canaccord Genuity

Do you expect that we'll see data release going forward more or so in published journals or will there be a mix of that coupled with how the original cohort of PILLAR II data were released at the stages meaning earlier this year. How will investors and I guess most importantly clinicians, get this data from the company and investigators running these trials?

Arun Menawat

Jason I think you will see more and more multi-center, more and more randomized studies that will actually be published in journal. So PILLAR II, for example, will be published in a very respected journal, it should come out in Q1 next year. And I think you'll start to see much more robust, much more organized clinical studies from us, now that we kind of understand which are our primary markets and exactly what endpoints we are looking for. We also understand what value the product brings and we will continue to focus on providing outcome-based data to the extent we can.

Jason Mills - Canaccord Genuity

Let me ask just a few quick housekeeping follow-ups and I'll get back in queue. The first is David mentioned the study on the ab wall reconstruction and relative to our market model that's a new potential indication as is esophagectomy. If you look at the number of surgeries performed just in the United States for both of those, what sort of incremental market opportunities does that provide the company? And given what David said about the LifeCell's work in that area and been good in those areas. What does that mean do you think for the continuation of that relationship beyond the September 2015 timeframe, which I believe is the current end date of that agreement?

Arun Menawat

So Dave, maybe you could answer the clinical question first.

David Martin

So the market opportunity in ab wall, certainly there are a lot of hernia surgeries, hernia repair surgeries that are done each year. In the U.S about a 100,000 of them are the ventral complex hernias and that's where we believe the market is. And there is about a 100,000 surgeries that use the tissue that LifeCell sells and a number of other companies sell.

And it's there where the tissue is so expensive, you certainly don't want to be sewing it into tissue that's not perfused because the repair will fail shortly after the surgery, so we believe there is value in that application. And sorry, what was the second application, Jason?

Jason Mills - Canaccord Genuity

The esophagectomy and esophageal wall reconstruction, sort of generally speaking?

Stephen Purcell

That's a smaller market. There is probably around 15,000 esophageal cancers each year and about 10,000 other reconstructions for other reasons. But much like the low anterior colon, they are prone to leaks. The leaks are to perfusion deficits and the leaks are catastrophic. So I think the clinical value is high there. The market is relatively small, but it is an important one.

Jason Mills - Canaccord Genuity

And last question for me and I'll get back in queue. Arun, simply corner all the way around, one of the things that jumped out, obviously was the capital placement number, but also the kit sales number up nearly 40%, that there is a delta there this quarter between the growth in the kit sales and the growth in recurring revenue. And you mentioned it in passing, but could you just give us a sense for that delta?

And then it seems like it was somewhat of an anomaly relative to maybe what we'll see going forward, maybe those numbers are a little bit more closely aligned on a go-forward basis, all things equal, understanding there is mix in the business and the different price points at different kits across the four platforms, but could you give us a sense for that because that kit percentage growth number was certainly quite impressive?

Arun Menawat

Let me repeat that number, Jason. So we did more than 5,900 patients in the third quarter. And it basically met the expectations we had. And I think that I have talked about this before also, the difference in the revenue number and the kit number is that we are starting to see that trend where more hospitals are acquiring devices. And when they do so, the revenue actually drops. So as you can imagine, these are hospitals that have higher volume, so the drop in revenue is little bit more than there would be on a linear one device per basis.

And the second reason actually is that our partners are doing a much, much more controlled on inventory management, which we are very quite frankly very pleased with. And so there is a gap in terms of what the inventory was at this time last year versus what the inventory is at this time this year. And those were the two reasons. But as I said, we continue to feel very good about the utilization. I think that clinical data continues to be stronger, and the fact that hospitals are actually buying are also all pretty good indicators that utilization will continue to be fast.

Operator

Our next question comes from the line of Rick Wise with Stifel.

Matt Blackman - Stifel

It's actually Matt Blackman here for Rick. I just want to make sure I'm understanding the progression in LUNA and PINPOINT placements. I think in second quarter you quoted double-digit placements and now you're talking about in the third quarter having sold about 21, so that am I right in assuming you've got about 30 or so revenue generating LUNA and PINPOINTs in the field?

Arun Menawat

Yes, it does -- but, yes.

Matt Blackman - Stifel

And so you've got 30 and then there will be another 30 that would be clinical in the sort of evaluation period, is that the way I should break it out, it's about 50-50 between evaluation and commercial?

Arun Menawat

Matt, I think the evaluations are little bit more right now, but overall you are in the right ballpark.

Matt Blackman - Stifel

And then you mentioned you sold 21 PINPOINT and LUNA, is that the right number to think about as we sort of model forward on a quarterly basis or do you think it grows off of that base? Just help us think about how we should think about placements of LUNA and PINPOINT in the coming quarters?

Arun Menawat

Both LUNA and PINPOINT were about equal at this time. And I think that the way we think about it is that both of the products are well received in the market. I think in terms of the future, I would say we feel certainly very confident about the fourth quarter for this year in terms of overall for the year, meeting or exceeding the 40% growth target. And I think for next year, I think what we are doing, working really hard to look at the pipeline really, given that we are in that inflection point stage.

I would say, let's just wait till next February when we have the fourth quarter under our belt and we can discuss the 2014 expectations. I would say right now that the best I can tell you is Q3 certainly is good. I think that we remain comfortable with the new cohort and beyond that I would say let's wait till February.

Operator

Our next question comes from the line of Steven Crowley with Craig-Hallum.

Steven Crowley - Craig-Hallum

In terms of just picking up on the esophageal area, which looks to be a really intriguing area for you, you talked about the number of procedures, how big a target population of surgeons are there for that procedure or those procedures?

Arun Menawat

So Steve, it is a very specialized procedure. And I don't believe that more than 500 or so surgeons in U.S. will perform this type of a procedure, but it is a very high-value application for us. And the reason being that, affectively what they do is in these esophageal camps are they remove most of the esophagus and they simply bring the stomach up and sew it together. And what they are saying is that they are actually changing the procedure.

And instead of connecting, doing that anastomosis in the esophagus, they actually look for the most perfused region of the stomach and connect the esophagus section over to that section, which then increases the likelihood of success. And as you can imagine it's a life threatening procedure. So I think in terms of the size of the market and the number of surgeons doing this, it's relatively small, but in terms of value it brings to the patient and to the pair because of complication costs, it's a very high-value application.

Steven Crowley - Craig-Hallum

And it also sounds like they are probably pretty straight forward to target this audience with your sales force. Now in terms of your sales force that's been growing very smartly. How is the profile of an ideal sales force candidate evolved, if it all for you guys as you've gone from a standing start to 40-some people overhead.

Arun Menawat

So Steve, sales team and building a world-class sales team is most certainly our number one priority right now and we started with bringing relatively experienced people into the sales team. And what we are recognizing is that the value proposition of our product is not about the device, not what it looks like, how to use it and all that, that's pretty straight forward. The value proposition really is how the product helps in surgery, how does it help improve clinical outcomes, what does it mean to the administration in terms of bottomline and/or repairs and what does it mean in terms of reimbursements and so on.

So what we are recognizing that there are very few sales teams that do that on a routine basis. And so the model that we are settling into is really we're looking for people who are quite frankly, bright, have some clinical experience and are very hungry to go into this field. And we're spending a lot of time training them.

So as I mentioned that we've just finished a education program for surgeons and physicians over this last weekend, we also had most of our sales people there and we also spend about two days in training our own sales team. So the methodology we're really focusing on is building it by finding the brightest people we can find, the hungriest people we can find and people who have enough of a technology background to make sure that it's safe. That they can focus on a clinical sale.

Steve Crowley - Craig-Hallum

Now in terms of the theory you had around LUNA and the concentration of customers or the ownership of those customers and it being a relatively efficient path for you to tackle that marketplace. Are you seeing that playout in reality that there are opportunities for multi-unit sales because of that concentration of ownership? And how are you doing down that path?

Arun Menawat

I mean, initially we are selling one devices at a time, right now. I would say, certainly the question is coming up with respect to how many devices we need. But at this point, Steve, I think most of them are single. I would say we're probably a year or so maybe, a little more away from being able to go to multiple devices at a time.

Steve Crowley - Craig-Hallum

And in terms of the value proposition that you're bringing with LUNA, can we talk about in practice how that is playing out on a reimbursement front for these out patient wound care clinics?

Arun Menawat

Yes, most certainly. So in with respect to LUNA, the first thing that is really critical that has happened is that I think the podiatrist and the vascular surgeons, who tend to work in tandem are certainly seeing very strong clinical value in the product, and we are very, very pleased with that. We had four, five physicians and surgeons present at this conference and all spoke very, very highly of the clinical value.

The second thing is that we have been discussing the concept of what is the workflow in the wound care clinic. So perfusion is a core element of treating these patients, because it's pretty simple, if you have blood flowing into the wound area or into the limbs, you can treat the patient. If you don't have blood flowing, you got to first figure out how to get the blood over there before you can do anything in terms of predicting.

So what we are really working on is what's the workflow. And typically most hospitals are getting to what they called a LUNA-day where they bunch up the patients and over half a day they will get about 10 to 15 patients in. And then based upon that LUNA-day, they will bring the patient on the later day to perform the actual treatment or write the course of action that they need to do. So it's going to involve a little bit of change in the workflow and on that basis the reimbursement is also quite attractive for them.

Operator

Our next question comes from the line of Doug Miehm with RBC.

Doug Miehm - RBC

And then just with respect to what's going on in terms of international markets or potential partners for the various devices, are we moving along with that? Maybe you could give us a little guidance?

Arun Menawat

Doug, we started with assessing our opportunities in international markets earlier this year and we are actually getting some very good reception. And I do think that we look to complete and announce something, at least in Asia-Pacific in the near future. But I think that we are looking at all the BRIC nations right now. We're also looking at Europe and Japan. Certainly the conversations with distributors and potential partners are going well.

I think that you will begin to see international revenues from us very, very quickly overall. But I would say certainly in February, I'll describe it in more detail as we get some more concrete things. But I think international revenues have been seeping in overall over the last few quarters a little bit, but I think you will start to see more as we go into 2014.

Doug Miehm - RBC

And then take the companies that you might end up working with, would they qualify as very top-tier or you're looking for more aggressive middle-tier groups. Could you give us any information around that?

Arun Menawat

Generally, I would say these are top-tier. And the markets in international are more socialized in that. So the sale is more based up on conversation with administration. And even companies that distribute imaging equipment, where capital equipment is very routine to sell, I think those are the kinds of companies that we're discussing with.

And they are finding that, overall there are far fewer diagnostic imagining devices internationally. And that in many cases they can, in fact not acquire as many diagnostic devices and simply go straight to the imaging for surgery, which is where I think the value proposition in international markets appears to be pretty strong.

Operator

Our next question is a follow-up question from Jason Mills with Canaccord Genuity.

Jason Mills - Canaccord Genuity

Just briefly, how much do you want to talk now about the products that are in the pipeline or will you discuss those products at your upcoming Analyst Meeting? Obviously, you bought the Trapper Surgical Imaging Technology. Last quarter you talked about some additional acquisitions, product and IP acquisitions. This quarter, I'm just curious as you get into the latter part of this decade, I think you mentioned last quarter that Trapper could start to contribute to your model in 2015 on a modest basis and then continue beyond that?

I'm just trying to get a sense for things that really aren't in people's models at this point in time. Even those of us that model out a couple of years beyond 2015, 2016, if they're not in them, just trying to get a sense for the opportunity that really isn't baked in, just for your expectations, how much you're willing to talk about now? And then perhaps how much you're going to talk about at the Analyst Meeting next month?

And then second question, I'll slip in here, just a housekeeping item. You mentioned service revenue, but I'm wondering what TMR product revenue was in the quarter just to cleanup our model to make sure we have that accurate?

Arun Menawat

So let me answer the first question and then Steve can address the TMR product revenue. So Jason, I think the most important thing is that the idea of the imaging to visualize the physiology or functional imaging, as we call it sometimes, is definitely taking hold. And our goal is to maintain our first mover advantage and continue to be leaders in the space. And so I think what you will see is we're going to stack up new products every couple of years. Hopefully, new products will show up, because the potential in this space is we think can be very, very big and move along for several years.

So I think that the Analyst Day this year as compared to last year is going to focus more on the newer technologies and not necessarily as much on the current products, only because I think, as I said, it's important for everyone to see the future possibilities. So in this quarter, the assets that we acquired, the Trapper or the radiopharmaceutical assets, we will get into clinical trials sometime by the middle of next year with the expectation that within 12 months of that, sometime middle of 2015, we would begin the commercialization process.

The second one that we acquired is actually a work that was done at Stanford, some fellow surgeons at Stanford, where they have a very interesting pen that allows them to mark the different sections where they could see lack of perfusion for example on the patient's body and thereby remove the camera and see those marks. And thereby, they can be much more accurate in what parts of the tissue or the patient's body is compromised and either fix it or remove it.

We also acquired some technology from University of Rochester, which related to lymphatics, which we think will allow us to maintain or build the lead in the lymphatics area. And then there is some interesting technology where we think we can visualize erythrocytes over time, which will probably be in 2016, 2017 time project.

So I think that you will see more of these things on the 18th, but generally we are in the market to look at technologies and we'll continue to be very strategic and obviously, very disciplined, but we're definitely going to be aggressive. I think that the management team is executing very well. And I just want to make sure that we continue to take advantage of all of these opportunities because of that.

Jason Mills - Canaccord Genuity

Just on the TMR product question as well as this will finish up for me?

Stephen Purcell

For the quarter, the TMR product revenue was about $630,000. And of course, the TMR service as shown on the results, were about $212,000.

Operator

And our final question is a follow-up question from Matt Miksic with Piper Jaffray.

Matt Miksic - Piper Jaffray

Just a couple of things that I wanted to make sure we got here and just with all the good things going on, that these you overlooked, things like the potential tipping of the breast indication towards standard of care. You've ticked up to 16%, just in terms of market penetration now. And Arun, if you could just give us an update as to what additional steps, papers, events, trends you think advance that further into something that looks more like standard of care. And then I do have a couple of other just quick kind of question here.

Arun Menawat

Sure, Matt. No, I think on the breast side, there are couple of things that we were looking for this year related to the economic study that got published in the second quarter and also the MD Anderson paper on comparison with or without use of SPY. That results are pretty positive and conclusive. And so at this point most certainly, I think we are getting the attention from the key opinion leaders. And my guess is some times next year, you will see a drive towards driving that towards standard of care.

Matt Miksic - Piper Jaffray

And then one follow-up on PINPOINT. We talked a lot about the systems in evaluation and now hospitals going ahead and purchasing those systems. I'm not sure if you mentioned, maybe just some sense of what they're using? What clinicians are focused on, types of procedures, is it just all sort of colorectal as we'd expect? Is it other general surgery, just some to color on that?

Arun Menawat

I think that certainly we're seeing colorectal, because that is driven by the results of the clinical work, but the excitement I think in gynecology and the concept of using it for endometriosis, the concept of using it for hysterectomy and also for lymphatics in GYN surgeries is I think where we're seeing quite a bit of excitement.

Matt Miksic - Piper Jaffray

And then, finally on international. That's encouraging to hear that you're maybe on the verge of starting to actually record some sales and certainly some interest there. Can you give us an idea of what in the future it looks like for, like of a better analogy, and with the first areas of interest or adoption, is it going to be breast, is it going to be colorectal, what are your expectations so far?

Arun Menawat

So I think first of all I'm very excited about international. And we have had some international, not material, but some international revenues seeping in, but certainly, I think you will see more in the future. And my guess is that we will probably start with PINPOINT more aggressively there because minimally invasive surgeries are more common internationally and that you will begin to see that in general surgery procedures.

And I think that the LUNA will probably come right behind that. As you know, diabetes is an epidemic, not just in U.S., but in Asia. And they are number of wound care clinics and we are beginning to talk about that also. So I would say priority is probably PINPOINT first and LUNA second.

I would like to thank everyone for your participation, again today. And I would like to reiterate that we will have the Analyst Day on the 18 November. We look forward to seeing everyone there. And I guess our next fourth quarter conference call will be sometime in February. Thank you so much.

Operator

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day.

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