Phil Nalbone – Vice President, Corporate Development
Howard Root – CEO
James Hennen – SVP Finance & CFO
Tom Gunderson – Piper Jaffray
Ben Haynor – Feltl and Company
Larry Haimovitch – HMTC
Vascular Solutions, Inc. (VASC) Q4 2013 Earnings Conference Call February 4, 2014 4:30 PM ET
Ladies and gentlemen, thank you for standing by. Good afternoon and welcome to Vascular Solutions’ Fourth Quarter Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session (Operator Instructions) As a reminder, ladies and gentlemen, this conference call is being recorded today Tuesday, February 4, 2014.
I would now like to turn the conference over to Phil Nalbone, Vice President of Corporate Development at Vascular Solution. Mr. Nalbone, you may begin.
Thank you, Matt. Good afternoon everyone and thank you for joining us. This afternoon we issued our press release with financial results for the fourth-quarter and full-year of 2013. On today’s call, our CEO Howard Root will review the topline results of the fourth quarter and year and discuss the performance of several of our key products and provide you with his outlook for the current year and beyond. Then our CFO, James Hennen will go through the financial details of the fourth quarter and provide financial guidance for the first quarter and full year of 2014. After that, we’ll open the call to your questions.
Before we get into the details, I’ll read the necessary preamble. This conference call is being webcast to the public and is completely open to members of the media, Vascular Solutions’ shareholders and other interested parties. Today’s conference call is a proprietary Vascular Solutions presentation and is being recorded by Vascular Solutions. No other recording, reproduction, transmission or distribution of today’s call is permitted without Vascular Solutions’ consent. This call is being audio simulcast on the Internet via our company website at www.vasc.com. A replay of the conference call will be available on the Internet shortly after this call is concluded through Tuesday, February 11. To listen to the replay, visit the Investor Relations section of our website.
Forward-looking statements made in the course of this conference call and webcast are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements can be identified by words used such as may, will, expect, continue or other similar expressions. There are certain important factors that could cause the company’s actual results to differ materially from those anticipated by the forward-looking statements as described in our Annual Report on Form 10-K and other recent filings with the Securities and Exchange Commission. Forward-looking statements are made based on our analysis as of today’s date and we undertake no duty to update the information provided on this call.
I’ll now turn the call over to Howard Root.
Thanks, Phil. Q4 was another excellent quarter for Vascular Solutions and it completed an outstanding year. We’re very proud of the company’s achievements in 2013 and as we begin 2014 we are excited about our outlook, not only for this year, but for the next several years.
Our new product pipeline is full with several substantial new products scheduled to launch in 2014 and we expect our current business model to allow us to continue to deliver double-digit revenue growth and ongoing earnings leverage.
In 2013, we achieved our 10th consecutive year of double-digit revenue growth. We met our goal of restoring growth to our hemostat products business and as a result, we grew sales of all three of our product segments. We generated a record $19.4 million in cash from operations. We ended the year with nearly $31 million in cash and no debt and we continue to fully invest for our future growth.
In the fourth quarter, we grew revenue by 15% to a record quarterly level of $29.1 million, which exceeded the top end of our guidance. Our geographic mix was 85% U.S. and 15% international with both our U.S. and international sales teams turning in strong results.
Our U.S. sales grew by nearly 16% while our international sales grew by 12% over the 2012 fourth quarter.
In our largest product category, that is catheter products, fourth-quarter revenue increased 14% to $17.9 million led by sales of our GuideLiner catheter which continued to demonstrate outstanding clinical and financial results. Fourth-quarter sales of GuideLiner increased 36% to $5.6 million. The GuideLiner catheter continues to gain acceptance as physicians around the world recognize the clinical benefits of this breakthrough device in challenging procedures.
When we launched the GuideLiner four years ago, we created the important clinical technique of rapid exchange guide extension and the GuideLiner last year became our largest selling product. We’ve continued to innovate and during 2013 we successfully completed the launch of our third-generation device, the GuideLiner V3 with very favorable customer reaction.
We recently had two very important developments for the GuideLiner that will positively impact 2014 sales. First, in December, we received Shonin approval from the Japanese Ministry of Health, Labor and Welfare to sell the GuideLiner in Japan with a favorable reimbursement designation that took effect January 1. We have now completed initial training and have launched the GuideLiner in Japan through our distribution partner Japan Lifeline.
I’ll note that at the same time received Japanese regulatory and reimbursement approval for the GuideLiner. We also received Japanese regulatory and reimbursement approval for our Supercross FT Microcatheter, which is another important device used in challenging interventional cases and we have recently launched the Supercross FT in Japan as well.
The second recent development for GuideLiner is that in January the Federal Circuit Court of Appeals denied Boston Scientific’s motions to stay the previously issued preliminary injunction that prohibits Boston Scientific from making, using, offering for sale or selling its competing Guidezilla catheter in the United States during the pendency of our ongoing patent infringement suit, which is currently scheduled to be ready for trial on or after March 2015.
The preliminary injunction took effect on January 13 and remains subject to an appeal filed by Boston Scientific with the Federal Circuit Court of Appeals that is expected to be decided in the second quarter. But for now the only competitor to GuideLiner is off the U.S. market which will continue until and unless Boston Scientific wins its appeal.
Also within the catheter products category, sales of our Pronto extraction catheter were $5 million, once again stable on both the sequential and year-over-year basis. In fact, this marked 9 quarters in a row of steady sales for Pronto. We are very pleased with maintaining our dominant position in such a highly competitive and price-sensitive extraction catheter market.
Other catheter products that contributed significantly to our strong fourth-quarter performance were specialty catheters for interventional procedures which grew 46%, the LANGSTON dual lumen catheter for measuring blood pressure at the aortic valve, which grew 17%, the SmartNeedle vascular access device which also grew 17% and our Micro-Introducer kits, which grew 16%.
The Venture Catheter, which we acquired from St. Jude Medical during 2012, was re-launched in the U.S. in April 2013 and in overseas markets in August. During the fourth quarter, Venture contributed nearly $500,000 in sales.
Our second largest product category is hemostat products, which includes D-Stat Dry, D-Stat Flowable and Vasc Band. During the fourth quarter, hemostat product revenue increased 10% to $6 million with growth driven by sales of two new devices in the rapidly growing radial artery access market in the U.S. that is the Vasc Band radial hemostasis device and the Accumed wrist positioning splint. Combined, these two devices contributed nearly $1 million in sales during the fourth quarter and they were responsible for allowing us to achieve our goals for the year of restoring our hemostat products segment to sustained growth.
Looking into 2014, this week we are launching new versions of the Accumed wrist splint that we believe will broadly appeal of this already successful radial product. The market for radial access products in the U.S. continues its impressive growth. As recently as 2009, fewer than 2% of all cardiac catheterizations in the U.S. were performed using the radial artery as the access site.
Now reliable data indicate that this has increased to between 16% and 20%. We still have a long way to go to match the radial penetration rates of other developed countries. For example, Canada is at more than 50%, Japan at 60% and the average for Europe at more than 40%. But we’re getting there and we expect the number of radial procedures in the U.S. to double over the next two years.
Vascular Solutions was early to identify this trend and to adapt our product strategy accordingly. That focus has already been paying off for us and over the next couple of years we plan to launch several additional products that will allow us to benefit from this big pocket of growth in the cardiac Cath Lab market.
Our third business segment is vein products and services. Here fourth-quarter revenues increased 24% to $5.1 million. The main growth driver of sales was reprocess ClosureFAST radiofrequency ablation catheters. ClosureFAST reprocessing generated fourth-quarter revenue of $2.9 million, an increase of 73% from the fourth quarter of 2012.
For the full year 2013 reprocessing contributed $8.2 million to our revenue, up from $4.4 million in 2012 as a growing number of vein clinics acknowledged the reliability of reprocess ClosureFAST catheters and embraced the opportunity to significantly reduce their costs and medical waste. Since launching the ClosureFAST reprocessing service in January of 2012, our reprocessing partner has established an excellent record of safety with nearly 45,000 successfully reprocessed catheters and no serious adverse patient events reported.
Currently, approximately 500 vein clinics have contracted with Vascular Solutions to utilize reprocessing of their ClosureFAST catheters. With more than 2,200 U.S. vein clinics performing reprocess ClosureFAST procedures we still have a very big opportunity to expand our ClosureFAST reprocessing business further in 2014.
Overall, reprocessing is one of the fastest-growing segments of the medical products industry and with the success of our ClosureFAST reprocessing program, during 2013 we began collaboration with our reprocessing partner toward the launch of a second product to reprocess.
We will not identify that product until we launch but for now we will simply reiterate what we said on the previous call. That is, it’s a current commercial U.S. device that fits our customer call points and we believe the revenue opportunity for this new product is larger than our ClosureFAST reprocessing program, which is currently annualizing at approximately $12 million in revenue after only two years on the market.
Our 2014 guidance that James will provide does not include any revenue from this additional product reprocessing service, although we still expect to launch it before year end and it is obviously expected to be a material revenue driver for us in 2015.
Turning to one item [ph] on expense side of our fourth-quarter performance. As announced in a press release this afternoon we recently agreed to settle the QuickCam [ph] civil lawsuit that was initiated in 2010 and intervened and by the US Attorney’s office for the western district of Texas involving allegations of off label promotion of our Vari-Lase short kit endovenous laser product.
Under the terms of the settlement, Vascular Solutions has agreed to make a one-time payment of $520,000 and make no admission of fault or liability and the US Attorney’s office has agreed to dismiss the civil lawsuit with prejudice and release all civil claims that were or could have been, brought against the company in the civil lawsuit.
We recorded the 520,000 payment which is expected to be made in February as litigation expense during the fourth quarter. The settlement of the civil lawsuit will have no effect on the related criminal investigation which the company expects will continue.
To provide just a little more context to this matter, we’ve been selling the short kit which is just one of the many versions of our Vari-Lase procedure kits since 2007 under a FDA 510 (k) clearance for the treatment of incompetence and reflux of superficial veins in the lower extremity. During that entire year period, our total sales of the short kit has been less than $500,000 or about 1% of our total U.S. sales bring that time.
Furthermore, the short kit has never been the subject of any recorded serious adverse clinical event.
Finally, regarding the products as we begin 2014 I’m happy to be able to say that our new product pipeline continues to be full. Our goal during the past few years have been to launch around 10 new products each year and right now we have approximately 40 new devices in various stages of development. Currently we’ve identified 12 new products that we intend to launch this year all from our internal pipeline.
On January 21, we announced our first new product launch of the year. That is ThrombiDisc, a thrombin-based topical hemostat that was designed specifically to control bleeding at vascular access sites around indwelling catheters. We believe there is currently a $100 million annual U.S. market for such products and the use of thrombin gives our product a distinct advantage in controlling bleeding. The ThrombiDisc will be a gradual launch in 2014 as we confirm its utility and develop a clinical record for the product that we can then promote.
In addition to the strength of our internal product development programs, we remain well-positioned to augment our growth through acquisitions and distribution arrangements. Our large direct sales force in the U.S. and our network of distributors in nearly 50 countries makes Vascular Solutions a sought after distribution partner. Our strong balance sheet and working capital position allow us to pursue tuck-in acquisitions as attractive opportunities arise and we expect to acquire or distribute new products in 2014.
Having said that, our 2014 guidance is driven by existing products and internal product launches, a continuation of the business model that has served us so well for the past decade.
Our next milestone for the company is $200 million in annual revenue and we believe we will get there without having to change our business strategy or having to deviate from our established call point or tampering with our underlying cost structure. The largely fixed cost structure associated with our 91 employee direct sales force in the U.S. and our internal -- our international distributor network is firmly in place and we do not expect to need to make substantial additions in order to reach our goal to $200 million in annual revenue.
Therefore we expect to continue to drive significant operating leverage as we add more products and from our adjusted operating margin of 16.5% in 2013. Our objective is to drive our operating margin to be 23% to 25% level when we have reached that $200 million in annual revenue milestone. We are proud of the successful business that we have built at Vascular Solutions over the past decade with our multiple product strategy and we remain deeply committed to bringing important clinical solutions to market for the treatment of vascular disease. We’re confident of the sustainability of our business model and therefore we are very excited about our outlook for 2014 and for many years to come.
So with that, I’ll turn the call over to James to review the financial performance.
In the fourth quarter, our gross margin was 66.5% compared to 67.2% in the year ago quarter. Gross margin between quarters varies based on product selling mix and was impacted by the substantial growth in the most recent fourth quarter of our processing service, which carries a relatively lower gross margin. For the first quarter as well as for full-year 2014 we expect our gross margin to be between 67% to 68%.
On a GAAP basis, our fourth-quarter operating income was $4.7 million representing an operating margin of 16%. On an adjusted basis, excluding the $520,000 civil litigation settlement expense, our operating income was $5.3 million representing an operating margin of 18%. Without the impact of the federal medical device excise tax that took effect on January 1, 2013, our operating margin would have been 19.2% in the fourth quarter. This compares to the operating margin of 18.5% in the fourth-quarter of 2012 when the medical device tax was not in effect.
Looking forward our first quarter of each year typically carries a disproportionately high level of operating expenses, principally due to our annual world sales meeting and stock based incentive compensation and tax expenses. As a result, we expect our operating margin to be approximately 60% in the first quarter and then make gains throughout 2014 resulting in at least a 17.5% operating margin for the full year of 2014 compared to an adjusted 16.5% operating margin in 2013, a full 100 basis point improvement in 2014.
Sales and marketing expenses were $6.9 million or 23.8% of revenue compared to $6.5 million or 25.7% of revenue in the year ago fourth quarter. Sales and marketing expenses remain a key Laverty [ph] point for improving our operating margin over time as more products are added to the relatively fixed cost structure of our U.S. sales force and international distribution network.
At the end of the fourth quarter we had 91 field sales and sales management employees in the U.S., a level that has remained quite steady since the beginning of 2008. We estimate that sales and marketing expenses as a percentage of revenue will be approximately 26% in the first quarter and approximately 25% for the full year.
U.S. product revenue generated per field sales employee was approximately $300,000 in the fourth quarter or $1.2 million annualized. This $3000 of revenue per employee represents an increase of 15.6% in productivity compared to the $259,000 in revenue per employee in the fourth-quarter of 2012.
Research and development expenses were $3.2 million or 10.9% of revenue compared to $2.9 million or 11.5% of revenue in the fourth-quarter of 2012. For the first quarter and full year we expect R&D as a percentage of revenue to be approximately 11% to 12%.
Clinical and regulatory expenses were just over $1.1 million in the fourth quarter or 4% of revenue compared to $1 million in the year ago quarter or 4% of revenue. We expect clinical and regulatory expenses as a percent of revenue to remain relatively constant at around 4% in each quarter of 2014.
General and administrative expenses were $2.1 million or 7.3% of revenue compared to $1.5 million or approximately 6% of revenue in the year earlier quarter. The higher level of G&A spending reflected higher costs associated with litigation. We expect G&A to remain at approximately 7.5% in the first quarter and then to average approximately 7.0% to 7.5% for the full year subject to variability in litigation developments.
Amortization expense in the fourth quarter was approximately $410,000, an increase from $361,000 in the year ago quarter. We expect our amortization expense to be approximately $412,000 in each quarter of 2014. Income tax expense was $1.2 million and pre-tax income of $4.79 representing an effective tax rate of 25%. In a year ago fourth quarter our income tax expense was $1.6 million and pre-tax income of $4.7 million reflecting an effective tax rate of 35%. The reduced effective tax rate was primarily due to the higher than normal stock option exercises and the annualized effect of the impact of the domestic manufacture reduction which had been limited in prior years by alternative minimum taxes.
For both the first quarter and full year of 2014 we expect income tax rate to be between 34% and 36%. For the full year we expect our income tax expense to be between $7.5 million and $8 million. Of this, we expect to be able to utilize $3.5 million of deferred tax assets to offset our tax payments resulting in the use of between $4 million and $4.5 million in cash to pay state and federal taxes in 2014.
On a GAAP basis, fourth-quarter net income was $3.5 million. On an adjusted basis, excluding the litigation settlement, net income was $3.9 million, an increase of 29% from $3.1 million in the year ago quarter. On a GAAP basis, earnings per fully diluted share were $0.20. On an adjusted basis we earned $0.22 per share which was above our guidance range of $0.19 to $0.20 and an increase of 22% from the year-earlier $0.18 per share.
Turning to the balance sheet and cash flows: During the fourth quarter, we generated $5.7 million in cash from operations. We used cash of approximately $750,000 for capital expenditures and $320,000 to acquire a small vein product that we have been distributing for a couple of years. For the full year we generated cash from operations of $19.4 million, a record level for us.
For the full year we used cash of $4.2 million for capital equipment and $820,000 for product acquisitions and licenses. In 2014, we expect to generate cash from operations are between $23 million and $24 million. We estimate the capital expenditures for the year will be approximately $5 million.
Our days inventory in hand at December 31 was 141 compared to 150 at the end of September. We expect our days inventory in hand to remain at around 140 days in 2014 with a projected inventory balance of approximately $15 million at the end of this year.
Accounts receivable days sales outstanding was 48 at December 31 compared to 49 at the end of September. We expect our days sales outstanding ratio to remain at this level for all of 2014.
Now I will turn to financial guidance. Starting with the full year, our revenue guidance is between $121 million and $125 million. At the midpoint of that range our growth will be approximately 12% over the $110.5 million of net revenue we reported for 2013.
Our full-year earnings per share guidance is between $0.79 and $0.83 per share which at the midpoint would represent growth of nearly 25% over the GAAP EPS of $0.65 in 2013 or 11% over the adjusted earnings-per-share number of $0.73.
We are projecting a 35% income tax rate in 2014 compared to 31% last year. Effective [ph] tax rate in 2013 was a result of several factors: high-level stock option exercises, a domestic manufacturing reduction that had been limited in prior years by alternative minimum taxes, recognition of R&D tax credits that have been deferred due to congressional delay at the end of 2012 and the recognition of Ireland R&D credits.
If the tax rate for 2014 were constant for 2013 our EPS growth would be 18% at the midpoint of guidance over the adjusted 2013 earnings per share. Included in our earnings-per-share projections for 2014 are $3.5 million in non-cash stock-based compensation, $1.69 in amortization of intangibles and between 1.4 million and 1.5 million of U.S. medical device excise tax.
For the first quarter we expect net revenue of between $29.5 million and $30.5 million. At the midpoint that represents growth of 15% compared to the $26.1 million reported in the first quarter of 2013. Our EPS guidance for the first quarter is between $0.17 and $0.18 per diluted share. Again at the midpoint our earnings growth will be more than 35% over the GAAP EPS of $0.13 or 9% over the adjusted earnings-per-share of $0.16 reported in the first quarter of 2013.
Our first quarter 2013 adjusted EPS includes $0.015 of R&D tax credits that have been deferred at the end of 2012. Our Q1 2014 earnings growth rate would be 21%, excluding the double R&D tax benefit experienced in the first quarter of 2013 due to the Congressional delays.
Included in the EPS projections for the first quarter are $1.2 million of non-cash stock-based compensation, $400,000 in amortization of intangibles, $350,000 for the U.S. medical device excise tax and a 35% tax rate.
With that, I will turn the call over to the operator for the question-and-answer portion of our call.
(Operator Instructions) We’ll take question from Tom Gunderson with Piper Jaffray.
Tom Gunderson – Piper Jaffray
Hi, good afternoon. So the first broader big question would be, Howard, on international sales 15% is a little below your peers, probably little below where you want to be. I am curious as you go into 2014 and 2015, what your growth strategy as to expand international if there is one. And then just as a little question within a question on that one, how much of international sales is coming out of Japan and how much from ROW?
Thanks, Tom. Little bit on our international strategy. So you are right, it’s about 85% of our sales are U.S. and 15% is international. If you look at the bigger companies and us, generally it’s the higher percent on the international. But we sell through distributors everywhere. We don’t have any direct operation outside the U.S. So if you do it on a unit basis it’s closer to a quarter or a little over a quarter of our units are sold international versus 75% in the U.S. And we’ve done that, we’ve chosen not to go direct, one because we’ve got a great distribution network internationally. But second, on a bottom line basis, it doesn’t make sense in the current environment to start spending a lot of money and extending international direct operations.
So then when you look at our growth and the growth has been and we’re really happy with the fourth-quarter growth on the international side because we got it back up. Third quarter is a little -- year-over-year was a little bit slow, fourth quarter came back up and you have to look at it product by product. So in the last year, a couple of our growth drivers are big international products, a couple of them we don’t sell internationally. So reprocessing of ClosureFAST is only a U.S. service, so we won’t get any international revenue off that. Vasc Band for the radial is only a U.S. product for us, we distribute that product made in China in the US, in North America, Canada as well. But that doesn’t have a substantial international component.
Counterbalancing that, the GuideLiner has been a big international product. It’s the biggest growth driver internationally and it’s growing even faster I think internationally than it is of the U.S. at this point because we are still adding a few more countries on to that. And most notably the GuideLiner is really Japan, because we had zero sales of GuideLiner in Japan in 2013 and now in January we’ve already trained our distributor who has already done the first cases and we’re getting going with that. Following on the heels of that is a Supercross FT in Japan, we think that will be a material growth driver for us in 2014 as well.
Keeping in mind Japan, you know this well, it’s not only the actual approval, it’s also the reimbursement. So sometime people overlook what is the reimbursement level for a new device and at the same time we got approval for the Supercross FT and for the GuideLiner in Japan, we got the favorable reimbursement designation. So that allows our distribution partner to make money off of it, allows us to make money off of it, allows the hospital to come in Japan. I think that’s going to be our big driver. But given that we’re not a direct operation, we’re not going to be at the same level that some of our competitors are at percent international sales. But we could get that to 20% given it is, to get a 25% would be great and also depends on the product somewhat. But I’m perfectly happy with the performance now and having Japan I think will give us a good growth driver in 2014.
Tom Gunderson – Piper Jaffray
Got it. Thanks. And the second question then would be on the secret reprocessing product, I understand keeping that under wraps but it seems at least in our impatient way that we look at companies and stocks, but it’s taking a while to get what I assume as a 510(k) product though and get you comfortable that you can launch the product. That said, is there another one behind such that you can start to move these through a little -- with little bit more cadence or shorter cadence, but to them we can see more reprocessing in the future?
Well, the trick with reprocessing if you look at all the devices sold into our call points, I would say probably best estimate 95% of the devices they buy are not subject to reprocessing for practical reasons. Obviously you can’t reprocess a pacemaker, to fibrillator or drug eluting, any implantable devices isn’t going to be there. But then also if you look at the lower-cost items anything that’s the $100 to $200 this isn’t a really good as the new price, is not a good target for us to be reprocessing. Then you also want to look at the competitive dynamics and they show the stable positions so that you don’t have something where you get approval and then it shifts away from you so that the new product you’re always chasing that.
So it’s a got to be stable product as well. The ClosureFAST hit that perfectly for us. It’s our call point, it’s a buy stat that is reusable, it is certainly isn’t implantable and it has a relatively high ASP in that market. The next product we’re even more excited than ClosureFAST but we’ve looked at how with 10 other devices that didn’t make the break and that’s why we got to where we are on the second product. So I have to say honestly, we don’t have a third product in the pipeline now for reprocessing but we’re still looking at things that are going to be going beyond that.
As far as the timing and how long it takes – given my ClosureFAST took our reprocessing partner about three years and that was the first one going through, had to set up everything from scratch. So they were already into this process in 2013 on the second product. We are adding our regulatory expertise to our reprocessing partners’ expertise and reprocessing in their own internal expertise they have generated through ClosureFAST. This one is moving on schedule, we always said by the end of this year – at the end of 2014 expected to launch it and just being conservative we’re not adding any revenue in 2014 guidance based on this product but we do think it will material driver in 2015.
It’s also important that reprocessing is not the stumble. One bad mistake would really take the wind out of our sails. So we’re more cautious with this than we are with our other products, we can come up with a new white idea new device get it out there, see how it works and start expanding it out there with reprocessing when you hit it for obviously for competitive reasons we don’t tell our competitors -- the competitor who is making this device that we are coming ack. But when we hit it, we have to hit it hard, we have to be right on that, we have everything online otherwise it could be a big stumble and that we do that extremely well with ClosureFAST. And now they were doing it for second time we expect to do it just as well with the next product.
Tom Gunderson – Piper Jaffray
Got it, thanks Howard.
(Operator instructions). Next Jason Mills from Canaccord Genuity. Jason are you there or it – [Indiscernible].
Yeah, hi this is Jeff in for Jason, sorry about that, congratulate you on a great quarter. And a great year.
Moving, just kind of following with Tom’s question about the reprocessing service. In your prepared remarks, James, you mentioned these types of acquisitions generally tend to carry lower gross margins. And I was wondering if you could little more in depth about your current infrastructure that allows you to take on these types of reprocessing service agreements and to grow margin?
So reprocessing is a different thing, you sort of modelling and thinking is certain about it. The customer sends their use catheter into our reprocessing partner reprocessing partner. The reprocessing partner re-processes it and sends it back in. There’s some substantial financial advantages to us in that area. First off, there’s no inventory. We don’t have any inventory, we don’t buy any components. We don’t have any manufacturing of it with the sales force to get it set up and then the catheters go back and forth without touching ourselves. Now we’ve added something else where we actually buy used catheters, get them reprocessed and sell those catheters as reprocess catheters. That’s the second part of the system but it’s a general matter on our inventory cost, on a component cost and obsolescence costs. It is a substantial advantage to do that.
The trade-off of that is the gross margin is lower, as you would expect there is two hands in the pie. There is our reprocessing partner who is doing the reprocessing and there is us doing the selling of the service. And so both are cutting off parts of that margin. So we don’t expect to get our normal 67%, 68%, 70% gross margin that we would get with the product that we design internally. On top of that, we’re not the responsible R&D partner. So there’s -- you could take out the R&D costs on the reprocessing that are there as well. So when you look at on a net, net basis and James could give more of the numbers if you want them, but on a net, net basis reprocessing drops as much if not more to the bottom line than our proprietary products that are getting margins substantially higher. And so we’re very happy with that.
So we’re not going to be a slave to the gross margin -- you followed us for a long time. You know that what we pay attention to is putting money in the bottom line and how we get there whether higher gross margin and more expenses both R&D, regulatory and inventory or a lower gross margin and no R&D, no regulatory, no inventory costs. We’re agnostic that way, and I think we’ve done a great job of taking every new product and saying does this fit with our call point? Does this make sense for us clinically? Does this make sense for us financially? And then you add each one of those in and then grow a substantial business that way.
Yeah, I guess [indiscernible] add to that, 50% gross margin, as Howard said there is no R&D. That’s roughly 10% for us, we’re not much in clinical and regulatory, that’s 4%. So they are down in the sales and marketing at 25%, and then a little bit of G&A. So when we model it out, we get about 20% to 25% operating margin off of our reprocessing business at current and what we model going forward.
Okay, great that will be very helpful. And my final question. I was just wondering if you could talk a little bit more about your progress with Joe Road [ph]. We haven’t heard much about that in the past few calls. Just wondering if that’s still on track for some time this year or next year?
So as you know we talked a little bit about our what we call transformational products. These are the big swings. I think we do a lot of singles and doubles out of those 40 devices we have in the pipeline, of a 35 of those roughly are the clinical niche devices that we’re known for. But there’s four or five of those that are the big swings for the fences and you can’t do all those in the same time. We don’t want to turn this into a company that’s betting on one product to make it all happen. So we have to layer those in sequentially and then take the top product and move that along. And keeping in mind as everyone knows the bigger the product the bigger the risk of failure, the bigger the chance of – you’ve got to make sure that you’ve got it right before you go forward.
So I got a little ahead of myself about a year or two ago talking about things before we probably should have publicly and we pulled back and our new rule is that until we’re in human clinical trials we’re not going to talk about those transformational products. In fact, we’re not going to give any flavor on these, the clinical niche products as well until we launch them, because it just competitively is the bad thing to do and it’s really not the focus of the company. We look at growing our sales and adding these things in a numbers basis. But one, clinical nice product isn’t that material to us in terms of launch until it’s on the market and we start growing sales.
So I will say this about Joe Road [ph] is still a project in our development pipeline. We are strong -- strongly positive on that. We have made an improvement to it that we talked about last year. We are in the process of confirming that out and as soon as we’re in human clinical trials we will announce it and then we will start talking about the timeline from there. But until I get into human clinical trials I would be first in human outside the U.S., I am just not going to give an update on where we are in the pipeline with it.
At this time, we’ll move to Ben Haynor with Feltl and Company.
Ben Haynor – Feltl and Company
Just a couple of quick ones here. You mentioned about the reprocessing of the new devices on schedule. If everything goes to plan, or maybe even a little bit better than planned, what could you see as the earliest that something like that could launch?
Well, I am going to graciously decline to answer that. I think we just want to stick with one message which is we expect to have it launched before the end of this year. And other than that I’m not going to give any specific dates about the best case or the worst cases. But when you look at our guidance, we’re figuring in zero for sales for 2014 for that new thing so that if we get it on the market by the end of this year that will match our expectations based on our financial guidance. And let’s just stay there, not try to get ahead of ourselves on how good this could be.
Ben Haynor – Feltl and Company
Okay and then one more that you probably won’t want to answer as well. When it comes to those four or five that are in the pipeline for, that could be transformational type opportunities. Are there any of those that might be slated for this year?
There is none that we have in our estimates for this year and there’s none of those that would – I could – it’s pretty obvious if we don’t have human clinical trials going on this basis, they are not going to launch this year. The one thing caveat I would say to that is on top of that we are always looking at acquisitions and distribution opportunities. So far those have been relatively small, when we did in the last quarter was a real small product when we were already distributing in vein products and we just acquired the whole product and captured the margin and I think push it harder with a lower cost, which is what we’ve done with a couple of other products.
There is the Guardian in that category. But we’re also looking at some bigger products and we have looked at those last year. We just weren’t able to put something together and we’re looking at some other ones right now. So there’s always that possibility of having a transformational product coming in from the outside that would fit our model whether through acquisition or through distributions through our direct sales force in the U.S. But obviously we can’t tell you what -- our model of those until we actually sign it and launch the product.
Ben Haynor – Feltl and Company
Okay, that make sense. That’s all I have, thanks for taking the questions.
(Operator Instructions) At this time we will take a question from Larry Haimovitch with HMTC.
Larry Haimovitch – HMTC
Good afternoon gentlemen.
Larry Haimovitch – HMTC
On Venture, you said you had, I think, $500,000 of sales in Q4. Was that kind of in line with your thinking and to what extent was there pipelining or any inventory build in that and how should we think about Venture in its contribution for around for 2014 and maybe ‘15 as well?
Right, when we acquired it, it had been off the market for a little while and I think the top year St. Jude Medical did somewhere around $3 million for that device. So we were kind of looking at $2 million as being a good number in the first full year on the market and doing $500,000 fourth-quarter obviously is right in line with that. I think the third quarter had a little bit of stocking up, restocking our distributors, the second quarter is little stocking in U.S. because it was off, people were actually -- interesting devices where people were hoarding their last devices knowing they weren’t going to get anymore to use it on their check [ph] cases where they really needed it. So that when we came on the market there was a little bit of a tussle for the first lots coming off the line between different interventional cardiologists, how they were going to get their sales restock.
Fourth-quarter was not still little bit of that full stocking particularly international but getting more toward an annual re-order rate. First-quarter we’re not going to get a big bump up from that – this first-quarter now we’re not going to see any restocking. It’s really re-orders going forward but the other thing that adds in is, the first we wanted to do was get it made and then we wanted to get to people who’d use it before to get it back in their hands. And now in 2014 we’re going to start actually selling it because St. Jude Medical admit, I mean they weren’t doing a lot with that device. It did a push and then they were maintaining it. But we can now take that product and sell it to people who hadn’t used it before because it has a very good clinical niche need.
And on top of that, the challenging interventions where that’s often used have grown. I mean there is more of these challenging interventions being done today than they were four, five years ago and in those cases Venture has the best clinical utility. So in 2014 we think this has got good potential. I think ultimately this should be definitely a $5 million product. This could be a $10 million product, it’s going to take some years to get to but I think 2014 is our push to get that growth restarted on new customers, not just on the existing old customers that St. Jude Medical had.
Larry Haimovitch – HMTC
So it’s possible from what I am taking away, Howard, that you could in subsequent years go way beyond St. Jude’s peak because of what you’re planning?
Absolutely, for two reasons. It better fits our sales force because our guys that’s $3 million to $4 million product is what they make their money off of for a St. Jude Medical it’s Angio- Seal, it just couldn’t be a big part of their bag. And the second reason is the market for this product has grown and will continue to grow as more challenging interventions get done.
Larry Haimovitch – HMTC
Yes. And just to give you little brief, I was so excited expecting to hear about the next reprocessing product on this call. Now I only have to wait.
Well, it’s good to wait for good news right, it’s always something possible.
Larry Haimovitch - HMTC
And the reprocessing business has been tremendous, I am sure I even think it exceeded your expectations.
Oh, it clearly exceeded our expectation.
Larry Haimovitch - HMTC
I think at the beginning of the year, I am trying to remember what your guidance was. I seem to remember about 6 million to 7 million, or 6.5 million or something like that in the beginning of the year?
Exactly right, correct.
Larry Haimovitch - HMTC
So you blew right through that?
Yes, right and continuing to go forward. I think there’s still a lot of room to run. With our -- you look at GuideLiner, you look at our real successful products, D-Stat Dry back in a day, Pronto in a day GuideLiner, it’s that second and third and fourth year where we really see the sales being the material growth driver for us. The first year you’re just getting it started. The second year you’re getting traction. Hopefully it’s a successful product like these are and in the third year, fourth year, you really get your established position and then it becomes more mature after – depending on the product.
GuideLiner, we’re still having great growth, Pronto being more mature and obviously D-Stat Dry being mature but it’s the beauty of our strategy. We’ve got products that mature, products that are on the growth cycle, products that are in the introduction stage, you add them all together and you get 10 consecutive years of better than 10% revenue growth. And that’s just unheard of in this market over the last 10 years for medical device companies. That’s what makes I think Vascular Solutions unique.
Larry Haimovitch – HMTC
Yes, great. Keep up the good work. Thanks.
At this time, I am showing no further questions. Mr. Root, please continue with your closing remarks.
I want to thank everyone for joining the presentation. I’m very pleased with the progress we’ve made not just over the last quarter but the last year and the last decade for Vascular Solutions. And I look forward to reporting more of these type results for many quarters to come. Thanks.
Ladies and gentlemen, that concludes your conference for today. Thank you for participating in Vascular Solutions’ fourth quarter conference call. You may disconnect.
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