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Spectranetics Corp. (NASDAQ:SPNC)

Q1 2010 Earnings Call

April 28, 2010 11:00 am ET

Executives

Don Markley - Lippert/Heilshorn & Associates

Emile Geisenheimer - Chairman, President and CEO

Guy Childs - CFO

Jason Hein - SVP for Sales & Marketing

Analysts

Jason Mills - Canaccord Adams

Amit Bhalla - Citi

Joshua Zable - Natixis

Suraj Kalia - Rodman & Renshaw

Josh Jennings - Jefferies & Company

Spencer Nam - Summer Street Research

Tom Kouchoukos - Stifel Nicolaus

Charley Jones - Barrington Research

Operator

Welcome to the Spectranetics first quarter 2010 fiscal results conference call. At this time, all participants are in a listen-only mode. Following management's prepared remarks, we'll hold a Q-and-A session. (Operator Instructions) As a reminder, this conference is being recorded today April 28, 2010.

I would now like to turn the conference over to Don Markley. Please go ahead, sir.

Don Markley

Thank you. This is Don Markley with Lippert/Heilshorn & Associates. Thank you for participating in today's call. Joining me from Spectranetics our Chairman, President and Chief Executive Officer, Emile Geisenheimer; Chief Financial Officer, Guy Childs; and Senior Vice President for Sales and Marketing, Jason Hein.

Earlier today, Spectranetics released financial results for the quarter ended March 31, 2010. If you have not received this news release or if you'd like to be added to the company's distribution list, please call Lippert/Heilshorn in Los Angeles at 310-691-7100 and ask for Noreen.

Before we begin, I'd like remind you that management will make statements during this call that includes forward-looking statements within the meaning of Federal Securities Laws. These statements involve material risks and uncertainties that could cause actual results or events to be materially different from those anticipated.

For a list and description of those risks and uncertainties, please see the company's filings with the Security and Exchange Commission. Spectranetics disclaims any intention or obligation to update or revised any financial projections or forward-looking statements, whether as a result of new information, future events or otherwise. Furthermore, this conference call contains time sensitive information and is accurate only as of the date of the live broadcast April 28, 2010.

I'll now turn the call over to Emile Geisenheimer. Emile.

Emile Geisenheimer

Thank you, Don and good morning to everyone. Thanks for joining the call. I'd like to begin this morning call with the review of some of the highlights in Spectranetics first quarter accomplishments, before I turn the call over to Guy, who will discuss the first quarter financial results.

Overall, I'm pleased with the accomplishments of the quarter, which include setting a new record, a worldwide disposal sales of $25.4 million, highlighted by continued high rate of growth of our Lead Management business, which grew 21% compared with last year's quarter and the successful launch of our Turbo-Tandem, which led our peripheral atherectomy business to a year-over-year growth of 6% and 14% sequential growth rate. Notably, this is the first time and we've reported growth in our peripheral atherectomy business in six quarters.

Finally, I am very pleased that we demonstrated progress towards our goal of sustained and growing portability by reducing our pre-tax loss by 68% from the prior quarter. Lead Management revenues totaled at $9.9 million during the first quarter, which represents a strong year-over-year growth of 21%.

We look forward to this Heart Rhythm Society, which will take place a couple weeks here in Denver. This meeting is a meeting in which we showcase our Lead Management products, for first time this year we'll be providing hands-on computerized simulator training at the important meeting. I'm pleased that we continued to enjoy a strong leadership position in the Lead Management business.

At peripheral atherectomy business benefited from the successful launch of Turbo-Tandem. We initiated an initial market evaluation of Turbo-Tandem in February at 19 accounts. I received very positive feedback on the products ease of use in clinical performance from position to participate in the initial marketing evaluation.

We didn't commence the limited commercial launch of the product beginning at last week of February. Each sales rep was permitted to open a single initial account and was required to provide training in clinical support during the first three Turbo-Tandem procedures.

Once the initial cases were completed, a sales rep could introduce Turbo-Tandem to second account with the same level of support was required. As of March 31, we'd opened 94 Turbo-Tandem accounts, including the accounts that participated in the initial market value. Turbo-Tandem generated $1 million of revenue the bulk of which occurred during the later part of our quarter. We're pleased with both the penetration rate and reorder rate in Turbo-Tandem so far and are happy with the feedback, we're getting from our physician customers. To recall that we've been working with FDA in an effort to define, an FDA could have regulatory pathway to receive clearance for Spectranetics to market its devices for the treatment of in-stent restenosis.

Now, let me give you an update. In May of '09 we filed Pre-IDE with FDA, which included bench test data and interim data from PATENT study, which is on going in Europe. We didn't file the 510(k) application in September of 2009. We received questions and request for further information from FDA in December.

The 510(k) application remains open and we planned to respond FDA's questions with a fairly of a new Pre-IDE in a week or so. This new Pre-IDE will propose clinical and safety end points and outline to plan of statistical analysis for the PATENT data. We will also respond FDA's questions and request on other matters, including a request for additional stent testing. When this is complete, we'll submit our response to the FDA 510(k) questions.

Lastly, I'd like to comment on our progress towards the sustaining and growing profitability. Last year, we announced that was our goal to move Spectranetics toward sustaining and growing profitability. You may recall, we announced restructuring of organization, which took at $1.6 million in recurring overhead expense and we also began to impose much stronger expense management disciplines in the company.

I'm pleased and we're beginning to see the results of these actions as we reduced our pre-tax loss by 68% year-over-year. It is notable, that our operating expenses grew at lower range than our revenue growth rates. Including operating results, we're also aided by expansion of our gross margin compared until last year's quarter.

In conclusion, I am pleased with our continued growth of our disposable business notably continued at strong growth rate in our Lead Management business and the renewed growth of our peripheral atherectomy business. I am also pleased with our progress towards building a profitable company.

I'll now turn it over to Guy to review the financial results of the quarter.

Guy Childs

Thank you, Emile and good morning to everyone. Today we reported revenue of $29 million for our first quarter ended March 31, 2010. This represents an increase of 6% compared with the same quarter a year ago. Vascular Intervention's revenue during the quarter was $15.5 million, up 1% compared with last year, and up 2% sequentially. Within Vascular Intervention are three product categories: atherectomy, crossing solutions and thrombectomy.

Atherectomy revenue of $8.8 million, which includes coronary and peripheral atherectomy, increased 2% compared with last year and was up 9% sequentially, on the strength of our Turbo-Tandem launch. This quarter's performance in atherectomy is the first quarter of year-over-year growth and for second quarter of 2008. We expect that growth to continue.

Peripheral atherectomy, which represents nearly 90% of this product category sales increased 6% compared with last year and was up 14% sequentially. We encouraged by the initial results for the Turbo-Tandem launch however, it will take two to three more quarters to access the products ongoing utilization rate.

Crossing Solutions revenue, which was impacted by recent competitive product launches decreased by 1% on year-over-year basis and was down 5% sequentially, we anticipated these competitive threads and have launched new products and certain other marketing programs to preserve our market leadership position.

Thrombectomy revenue increased 7% compared with last year and was down 9% sequentially, due to a slow start on the international front, international thrombectomy sales accounts for nearly 60% of our thrombectomy product sales. Lead Management continued its strong performance, generating growth of 21% versus last year and down 1% off of the seasonally strong fourth quarter.

To round out the discussion at revenue performance, laser equipment revenue was $1.3 million during the quarter, down 9% from last year and 34% sequentially. We did not book any laser sale during the quarter, but had several in the pipeline for the second quarter. Laser rental revenue, which is the largest component of laser revenue increased 19% on a year-over-year basis and was up 5% sequentially. Service and other revenue totaled $2.3 million, a decrease of 5% compared with last year.

Breading down our revenue geographically, U.S. revenue totaled $24.9 million, up 6% versus last year and up 2% sequentially. International revenue of $4.2 million increased 10% on a year-over-year basis and was down 22% sequentially. The sequential decline was due to low laser sales and disposable product sales compared with a very strong fourth quarter.

Gross margin was 71.2% compared with 69.7% during the prior year quarter and 70.9% during the fourth quarter of last year. Gross margin was inline with our expectations for the quarter and we continue to be comfortable with the 71% to 72% range for the full year 2010.

Selling, general and administrative expenses totaled $17.6 million during the first quarter, an increase of only 1% or $1.4 million. The modest increase reflects the significant activities undertaken in the last several quarters related to the expense management, which include the restructuring that Emile mentioned, limiting the growth of our field sales organization, which totals of 125 individuals at March 31, this is the same level as December 31 of 2009. On going discipline throughout the organization are limiting the growth in operating expenses.

Research, development and other technology expenses totaled $3.7 million, which represents an increase of 13% primarily due to increase product development activities as compared with last year. The pre-tax loss for the first quarter of 2010 was $924,000, compared with a pre-tax loss of $2,899,000 for the comparable quarter last year.

The pre-tax loss during the first quarter of 2010 includes $353,000 at costs related to the federal investigation. The pre-tax loss during the first quarter of last year includes $1,373,000 of cost associated federal investigation. Excluding these special items in both periods, adjusted pre-tax loss was $571,000 in the first quarter of 2010, compared with an adjusted pre-tax loss of $1,526,000 in the year ago quarter.

A further description of these special items and a reconciliation of these non-GAAP financial measures, the most directly comparable financial measure calculated in accordance with GAAP is provided in our press release issued earlier today.

Turning to the balance sheet, our cash, cash equivalents and current investment securities totaled $21.1 million at March 31, 2010, compared with $19.1 million at December 31, 2009. Cash flow during the quarter reflects proceeds from the sale and partial redemption of auction rate securities totaling $3 million. I will close with some commentary on our outlook for 2010, which is unchanged from the outlook provided in earnings call held in February of this year.

The company continues to expect revenue growth during 2010 in both the Vascular Intervention and Lead Management business units and expect higher growth rates internationally then in the United States. Excluding any impact of the Turbo-Tandem product launch of Vascular Intervention growth rate is anticipated to be in a low to mid single digits during 2010, as compared with 2009. Including the impact of the Turbo-Tandem product launch to Vascular Intervention's growth rate is anticipated to be in a high-single-digit to low teens.

The Lead Management revenue growth rate in 2010 is anticipated to be in the mid-teens. Laser equipment revenues and service and other revenues are expected to grow in the low to mid-single digits during 2010. Gross margin is expected to be in the range of 71% to 72% for the full-year and management expects a pre-tax profit for the year ended December 31, 2010.

Operator, we are now ready to take questions.

Question-and-Answer Session

Operator

(Operator Instructions).Our first question comes from the line of Jason Mills with Canaccord Adams; please go ahead with your questions.

Jason Mills - Canaccord Adams

I wanted to go back Emile and Guy, to the commentary you made on your 2010 goal in February. Specifically, first focusing on the atherectomy business and I have a question on Lead Management, but a couple of things in the VI business. You talked about your bullishness as it relates to prospects then and now to reignite growth in atherectomy.

You started to see a little bit of that this quarter, but Guy you mentioned it may take a couple of quarters to see the utilization patterns. Looking into your crystal ball, what are you focusing your sales force on, and sort of what do you think when the market opportunity is for Turbo-Tandem, and within what sort of market growth would you expect to be participating this year?

Then Emile, on a similar note on the ISR update, you mentioned last quarter that you expected you would be doing a post-approval trial. Is that still your expectation, and I understand the FDA is an even tougher place than any of us have ever seen before. Do we still expect to have an indication at some point this year, or do you think that is pushed out to next year? Thanks, guys.

Guy Childs

Thanks Jason, good questions. First on Turbo-Tandem, I think to takeaway we have from our first quarter results there is that we've had a successful launch that in some ways exceeded our expectation. We're pleased with where we can see in terms of reiterate and take-up rates on the device. I think we've cleared what you might pose as being the product hurdle, and what's before us is execution.

So we've shared the challenges ahead of us or marketing in sales execution. In a particular with respect the Turbo-Tandem, we called that majority of our peripheral atherectomy business has been because of a lack of Turbo-Tandem directed as below the knee in the treatment of Critical Limb Ischemia, and many of our customers, physician customers are focused in this area and most of them are interventional cardiologists and we do have a significant number of vascular surgeons as customers, and those vascular surgeons dominate the treatment of above the knee.

So as we move forward, in executing our marketing in sales plans of Turbo-Tandem, the challenge would be there to address that call point with the vascular surgeons, as well as sort of our existing customer base, which of course we were doing with a high priority. So I think that just want to give you some field for to Turbo-Tandem, the execution challenges are in front of us and I think the product questions are behind us and we're pretty bullish about it, but it will take a couple of quarters for us to have a better handle on our ability to execute in sales and marketing.

With respect to in-stent restenosis, I think we only had protecting the timing of events with the FDA as an art that I don't tend to have any unique expertise there. I can only say that, it couldn't takeaway here is that we are diligently pursuing regulatory pathway for this important indication. We think it's extremely important to patients and we will at the end of day provide FDA was whatever is required by the agency, within the comfortable with the safety and efficacy of the device. How long that will take is going to be is just very hard to predict. I hope that addresses your questions.

Jason Mills - Canaccord Adams

Yes and just my follow-up relates to the VI business, I guess and I'll get back in Q4 for Lead Management, but could you give us some color, Emile, on what you think is going on within the peripheral atherectomy market or maybe the PAD procedure market more broadly, how that relates to what you saw late year? Are you've seen improvement, or is it about the same and also, you've commented in the past about productivity among your sales force.

Maybe give us an update, Guy on how your productivity worked within that VI sales force this quarter? I think you feel like, you have some room for improvement there, and I would like to know sort of an update on that front as well.

Emile Geisenheimer

Guy, I want to you that last one first, I think you have some numbers on productivity.

Guy Childs

Yes, absolutely. We look at productivity as focusing right now on the U.S. and we take our disposable products revenue divided by the territories that we have in the field and we historically disclose that on an overall basis. So let's combine Lead Management and VI.

That number is 1,114,000 on an annualize basis based on first quarter results that includes the total of 78 territories just you have that data and that's an improvement over the year ago quarter of 5%. So we're making progress there and it continues to be an ongoing focus and more progress will made.

Emile Geisenheimer

I think that's a key part of the overall exercise which is frankly non-rocket science, if you can add your sales growth faster than your expenses we'll move towards profitability and we're doing that and that's one of the methods by which we're doing it. To go back to earlier question about VI progress this year, I think Guy reiterated on our guidance in that area of we do expect growth in our VI business. We are facing increased competition in our Crossing Solutions business that market continues to grow and I can tell that the best surrogate for measuring overall PAD, market growth is a growth in Crossing Solutions.

So that market is growing, we are facing at least four new competitors within the last 12 to 18 months, for years we had virtual a 100% market share in that business. It's reasonable for us to expect to lose market share because, indeed, there are competitors who have account coverage that we don't have. So our goal is to maintain our business and minimize our dilution of market share.

I think we're doing a fairly good job on it given four new competitors. So that's the crossing area. I think we've covered a bit of approval asset to mainly we are seeing our new growth and hope to sustain that both above the knee and return to growth below to be. We have our programs in place addressing both of those in addition to Turbo-Tandem launch and I'd love say the Turbo-Tandem launch was a considerable focus on our resources in the last six to eight weeks or so and are some of the sales force therefore energies were devoted quite heavily in this area.

Operator

Our next question comes from the line of Amit Bhalla with Citi; please state your question.

Amit Bhalla - Citi

I wanted to ask a couple of questions on Turbo-Tandem and then follow-up on Crossing Solutions and thrombectomy. First on Turbo-Tandem, could you maybe tease out about that $1 million that you've booked in revenue, how much of that was related to stocking and can you give us a current update on what the accounts are at for Turbo-Tandem? You said, it was 94 at the end of the first quarter.

Emile Geisenheimer

Yes, correct. We do not seek a lot of stocking orders. We wanted to just have three cases completed per account before that we met the sales force to move on to open our second accounts. So it's not very hard to know exactly what the consumption of those initial three where on account, but I can say that reorders indicate that people don't do the reorder until they've exhausted their initial orders. It tends to indicate that the utilization has been substantial, so I don't think we have a lot of stocking in that number. Amit remind me here of that crossing.

Amit Bhalla - Citi

I actually also wanted that update on the accounts. You said 94 the end of the quarter. I was just wondering, where are you today?

Guy Childs

It's higher than it was, but we're not prepared to disclose the number, but we continue to add accounts, there's long, long way to penetrating our account base and it's higher than 94. We'll give you an update on the next call in terms of where we're added at that time.

Amit Bhalla - Citi

My follow-up questions, one was on thrombectomy. You mentioned that you had a slow start internationally. Can you expand on that? What's happening internationally for thrombectomy, and will that be a growing product this year? On Crossing Solutions, given that there's a lot of competition, do you expect growth in 2010, or is that going to be a flat revenue line for this year? Thanks.

Emile Geisenheimer

Let me handle Europe first, probably the first quarter and many, many quarters that we've add this kind of result and Europe, it results basically from situation specific to two countries that are temporary. In Italy, the Italian government is going to reorganization of the hospital system, which delayed a lot of orders in Italy and this is the thing that we think it will resolve itself and relative to short period of time.

In England, we're going through a modification on our distribution and that's caused a little bit of slowdown and activity, which again we see as a temporary situation. Both of those affected thrombectomy in particular, because that's a significant part of sales in those two countries. We don't see anything permanent or lasting any other case.

Amit Bhalla - Citi

Then the crossing solutions question?

Guy Childs

I think your question was, “What should we expect from those businesses here?” Our outlook implies any where from a very low single-digit decline on a year-over-year basis to a very low single-digit increase on a year-over-year basis. So our outlook assumes somewhere in that range for 2010 and it's about where we were in first quarter. So there's nothing here that's really out of that with our expectations and obviously we're going to be focusing on growing that business through various marketing activities.

Emile Geisenheimer

Let me just elaborate on that a little bit. So I think we'll give you a little color on the marketing situation there. We've continue to innovate product here as compared for our new product were our strategies to add new products that's counter their additions. The thing that's hard to counter is the accounts that we don't have peripheral businesses other than crossing solutions and our competitors are established.

So in those accounts, we think it's a big risk of losing business. We think on their head-to-head basis where we're really account, we're able to successfully defend, where we're getting over the transom business from accounts that we are not covering with other atherectomy business a little more vulnerable. So we continued to innovate products to defend, and we also have marketing and sales programs to defend this franchise and we expect them to remain the market share leader and exactly where it will settle out in terms of branches, as Guys says a range of possibilities and we're confident that we will maintain our leadership, but it's hard to predict the exact growth rate.

Amit Bhalla - Citi

Emile, I'll start with the second follow-up, but just based on what you just said, what percentage of your Quick-Cross accounts are strictly crossing solutions accounts? Is it 10% or 20% of that business or is it 50%? I'm just trying to get a feel for what percent of that business is vulnerable? Thanks.

Emile Geisenheime

Yes, we don't track that numbers. So it's going to be hard to respond to that. We won't start looking at that more carefully. I don't have it in front of me now so, sorry I can't really respond.

Guy Childs

Let me approach you from a different angle on it and may be this will be helpful. About over 1,100 accounts, about 500, about half of those are laser accounts and about half on it.

Jason Hein

I would add to it and you doesn't leave exposure of half of those accounts either, because several of those accounts are affiliated with our laser accounts. There could be a grouping of anywhere between two and 20 to 30 hospitals and a portion of those hospitals will have a laser, the others won't. So a lot of those others are still protected under contracts and other distribution agreements. So I think the percent of accounts as Emile alluded to that, say exposed, yet again a subset of that numbers.

Amit Bhalla - Citi

Okay. Thanks.

Guy Childs

That's why I wanted to be somewhat vary, because it's not that clear that it's not 50/50 in reality.

Operator

Our next question comes from the line of Joshua Zable with Natixis; please state your question.

Joshua Zable - Natixis

Just a couple of quick ones, every guys hit on some key points here. So first, I just want to kind of touch on the equipment and service revenue. I know you talked about rental, I mean, I'm just kind of wondering, I mean where guys kind of more focused on the Turbo-Tandem launch and on current accounts and placing more equipment, is it an environment thing? Again the service revenue was down. Just kind of curious sort of what's going on there, if that's a trend there, should see a pick up?

Guy Childs

Sure, Joshua the equipment sales decreases primarily related to just no sales during the quarter as I mentioned, there are various activity in the pipeline, it's a very small piece of our business, but did contribute to the decline year-over-year and sequentially more pronounced on a sequential basis, because the fourth quarter had over 700,000 of equipment sales in it.

The recurring piece of that rental revenue is benefiting from our increasing installed base, we're doing more straight rental agreements these days as opposed to the cap frees and that's driving year-over-year improvement there. I think it was up 19%, of relatively small base. On the service side, I don't think there is anything fundamental there; I mean the overall change on a year-over-year basis is about $150,000. So I don't believe there is anything fundamental there. We still continue to see that business in a low single digit growth position when the sunsets on 2010.

Emile Geisenheimer

Let me just to cover on the Lasers, a very minute that our strategy with respect to lasers changed last year and that strategy has bagged traction now. In the call, we said we wanted to focus more on of building volume per sales rep far of that is building volume for account. So we had deemphasized placing lasers that in places where we're not confident that we can reach a substantial volume in those accounts.

So we've reduced the number of lasers that we're placed on account-free basis. So we also reduced the number that we placed on a real basis, simply because we want to drive this productivity. So that affects these number and it's a deliberate thing.

Joshua Zable - Natixis

Just two quick follow-ups here, first of all, just relative to Turbo-Booster and obviously Turbo-Tandem here, can you just kind of give us some sense relatively how this is being accepted? Then the last question I'll get back here is, just can you just talk about Japan? I know, it's obviously hard to predict things, but maybe sort of what's going on if anything, if there's any update and kind of the opportunity there?

Jason Hein

I will comment on the Turbo-Tandem lines. We've talked about the Turbo-Booster product in the initial evaluation of Turbo-Tandem last year. I can tell you as an organization, we are very pleased with the Tandem launch this year rolling this out as Emile alluded to the phased approach, which will go on for several quarters, but the evaluation of those 19 sites, we are very pleased with.

As we look at entering in above the knee, do you have the feedback physicians, the feedback which I had from our sales team. It's been very impressive and they kind of went to the question of how do we account that $1 million, I think Amit, asked that, but we have limited the order rate, we're very pleased. The people are reordering and I think we're early with six weeks into this, but the initial feedback has been very good. So we're very comfortable for that coming out of game.

Emile Geisenheimer

With respect to Japan, we focused on reimbursement for SLS and we've pass the stage of question whether there will be reimbursement and now with the stage were their negotiations underway and it's a multiparty process in Japan and what the reimbursement level would be. As you may know, in Japan there are advocacy groups for patients from physicians and they advocate to the government authorities on reimbursement. So that process will play out and hopefully sometime in a near future will achieve the reimbursement. In fact in Japan on the SLS and therefore be the first major milestone there.

Operator

Our next question comes form the line of Suraj Kalia with Rodman & Renshaw; please go ahead with your question.

Suraj Kalia - Rodman & Renshaw

Now some glimmers of hope after an admittedly tough one and a half year. So, Emile or Jason, for that matter, when we look at the Turbo-Tandem, again for the amount that you've sold so far, if I just look at the Pareto Analysis, can you tell us what is the most positive thing clinicians have said? On the same token, what is the key negative feedback if I may categorize in that way?

Emile Geisenheimer

The positive feedback related to several things. First to the ease of use issues that the product was intended to address, have been address satisfaction of broadly of a cross section of physician and we're very pleased by that. So we've gotten no negative feedback in terms of positive feedback about the ease with which the device can be deployed and use.

Secondly, the physicians are pleased with the predictable outcome they're achieving and we will gain that they're getting in their cases. So the clinical performance is consistent with or exceeding our expectations with respect to achieving results. As to negatives, don't frankly, they had been a lot of negatives. No material negatives that come out of this and initial marketing evaluation deliberately selected, all physicians have had laser skills, but meaning of them were permanent users of alternative devices.

So we did that on purpose because we wanted to get feedback from users of competitive products. So we think we have some advantages in this product in terms of its speed from one thing and that we got comments about “Wow! This is best.” From users of other product and take more time to complete our procedure. So combination of ease of use, speed and clinical results, I think all both well from the product. That's what I said earlier, I think we pass issue of the product itself. Now we're in what's in front of us is the challenges of execution in sales and marketing.

Suraj Kalia - Rodman & Renshaw

Emile, when I look at in-stent restenosis, I mean again just for my own perspective, I do believe de-bulking is essential. Having said that, our due diligence suggests that a number of players are gearing up with drug-coated balloons for ISR and help me understand how are you internally strategizing against this oncoming competition, whether it's in clinical trials, whether it's in marketing strategies, whether it's in product differentiation, kind of walk me through what you'll see on the horizon in ISR, especially with your drug-coated balloons?

Emile Geisenheimer

The question on whether drug alluding balloons will either prevent in-stent restenosis or be affected in treating in-stent restenosis. More will be affected in treating into restenosis, is an open question and does pose a potential competitive issue for us. We are working on a development of our clinical trial pilot study in Europe, which hopefully we'll launch later in this year, in which we will compare with Ablation prior to drug eluting balloon, versus drug eluting balloon alone so that we can get a better handle on the differentiated results there. So, stay tuned, if that develops, we'll be talking more about that.

Suraj Kalia - Rodman & Renshaw

Finally gentlemen, when I look at the market fundamentals, just I look at the atherectomy market, how well you may want to define it? I'm talking on very aggregate terms right now. If I bunch all the players together, at least based on our numbers, it looks like the overall market is pretty much flat lining. Now, that our market share shifts, but it is sort of flat lining.

Emile, one, what your field troops helped you in terms of the overall market, is it a market share gain that everyone is pointing? Is there something fundamentally going on in the market that will either cause result in a new product launch, a new indication to jumpstart the curve? How could you see it, because our numbers indicate, it's essentially the numbers are moving around between people.

Emile Geisenheimer

Yes, interesting that you say that, our estimates indicate that the market has grown year-over-year about 12% range, so I think there is, of course, a market share gain always, but there is also underlying growth. I would also think that we've said for long time that there is the potential markets in the market served versus the actual market that you can measure based on the results of various companies.

The potential market is much larger than the actual market and I think that's a result of lack of strong clinical date in the areas to demonstrate the benefits of atherectomy over not using atherectomy. I think there are a lot of studies underway right now by other companies, and I'll get back to the question. I failed to answer that Jason asked earlier, we do intend I think Jason ask it and intend to do a post clearance study a randomized trial on, instead we're in the stenoses and in the preferring, hopefully we will be list out that this year.

So, I think the lack of data affects this and to extend data and an ISR Indication for example. We're forced to come about I think the market expansion rate could increase from historic rate.

Operator

Our next question comes from the line of Josh Jennings with Jefferies & Company; please go ahead with your question.

Josh Jennings - Jefferies & Company

Just a quick one on Turbo-Tandem, I mean you can get to a $1 million in the short us to a six weeks of this limited launch. I mean, how should we think about a run rate going forward into Q2? I know it's still going to be a limited launch, but you've already got a solid customer base of 94 accounts. Should we look at this as a sort of a $1 million per month run rate, or is that too hard to say right now?

Jason Hein

I'd say it is pretty early to tell we're six weeks end and we are very selective on these initial accounts like Emile said, we want to make sure we understood the product based on past discussions. We think we've checked that box and we do we have a very detailed plan obviously in our existing laser-based accounts, but like Emile said, we also have some of these new opportunities I think, which the interesting discussion as well, but I think in short it is six weeks and it is pretty early and we'll obvious have a much more detailed answer in the next call which, at that point we'll have almost 18 weeks data.

Emile Geisenheimer

I think it is too early tell, in the $1 million number, there are a couple of biases that we ought to knowledge, one. Clearly, the initial launch went to accounts that we know well. We understand the skills of the physician well et cetera, so that's a positive bias. At the same time, the bulk of the market is served by vascular sergons and that's challenge for us. As we've deal with that call point to much greater level than we have in the past. So I don't think you wanted to use the million dollars as a run rate number. As we get better visibility on reiterates and hoping new accounts will start sharing that data with you and you'll have a better basis forecasting.

Josh Jennings - Jefferies & Company

Then if you look at your peripheral atherectomy grew 6% first time in six quarters, which is a great performance. I'm just wondering in your base below the knee, the historical atherectomy business, excluding the Turbo-Tandem contribution. I mean how did that fare in the quarter specifically, and did that exceed or come in being below your internal expectations and then what are your expectations going on for over the next three quarters for 2010 for that base business?

Guy Childs

I think it was flat sequentially and that we've been declining sequentially, so we're sort of pleased with that. There are a lot of other externalities affecting the marketplace that would be important to note under our fair number of clinical trials going on and most of those clinical trials exclude the uses of ancillary devices or adjunctive devices.

So some of the market has been taking up there and that kind of in clinical trail and bias the market because they are temporary protocols there in place. We know for example, one of our competitors below the knee had a fourth quarter and we think it extended into their first quarter registry going on and that registries required the institution to do a number of cases sequentially, that device only and of course that's an artificial, it's not sustainable. So we hope that our programs are being very well with it. We have stabilized the below the knee business and we in tend to return that grow.

Josh Jennings - Jefferies & Company

Emile, just last question on gross margin, maintaining the guidance in the 71% to 72% range, if you look at what you guys were accomplished last year getting all your 510(k) products to your new facility. Just wondering sort of when you expect this consolidation, or restructuring, or your manufacturing to sort of impact the gross margin line, and just on your PMA products. Any timeline that you expected to have finish evaluating PMA settlements that you've filed for site changes there and lastly just the Turbo-Tandem expectation for impact to gross margins out through 2010?

Emile Geisenheimer

I'll give you a last one first and Guy is going to handle the margin question with respect to consolidation of manufacturing. Obviously, I think most of you know when we discussed many times, laser-based disposable product carry a higher margin than other disposable products and certainly a higher margin than our lasers and service. So when there's a mix shift towards disposable laser products, there's margin improvement that can be material. I think that's reflected in our first quarter results, primarily because of the launch of Turbo-Tandem, which enjoys a much higher margin than say atherectomy products.

Guy Childs

In terms of the facility comp consolidation Josh, frankly I think it's a product mix to the new reference and continued volume increases in our ongoing businesses more of a driver than consolidating facilities. Last year in the third quarter, when we completed the consolidation of the 510(k) products there, we roll it off the rest of the least and that's all, all behind us.

There's still half at least that is we spend a $100 to $150,000 a year on that, but we're incurring and that will go away once we complete the rest of the move, so it's incremental positive. I would say, but not as important as continued volume games and in terms of timing the FDA is reviewing our site change notification package for PMA products that was submitted in December. They have the six month review process and so we have at least until we ended this year and I think that gives us an appropriate question to get the FDA review completed and get move down by the end of this year.

Emile Geisenheimer

Yes, I think on the consolidation, I would say, that there is less a low hanging fruit then you might think, but there is a major benefit that will occur overtime and that is simply in productivity. We do incur a fair amount of wasted motion with people moving back and forth between two facilities that there several miles apart in that kind of thing, but it's not going to be in hard numbers that you might be looking for.

The big leverage in the business is to continue to grow our revenue at a faster rate than our expenses. We've reduced our operating expenses as a percentage of sales by material amount year-over-year Q1 to Q1, so if we continue to do that that's where we're going to have the leverage in our bottom line and we certainly intend to pursue that with vigor.

Operator

Our next question comes from the line of Spencer Nam with Summer Street Research; please state your question.

Spencer Nam - Summer Street Research

Just a couple of questions for you guys. As follow-up on this Tandem launch, I'm curious I know you only have six weeks of information, but outside of the potential customer target being broader and less experienced and all of that, is there anything else you guys need to really know or test to get a better confidence of how well this will be accepted amongst the users?

Jason Hein

During the IME we got to retest to the things we anticipated, so I'd say no, but I guess as we open up those new frontiers and as you mentioned and look at new opportunities, we're obviously experienced possibly some feedback during that, but right now all the things we have encompassed in the last year in evaluating and above the new product, I think we've addressed that initially, and we took a very objective look like Emile said, we looked at centers at various level of experience and also their bias towards other products, but and also there's specialties, which I do encompass that, so we feel pretty confident right now.

Spencer Nam - Summer Street Research

Then the lead removal business, sequentially it seems little flat, which as obviously it's Q1 versus Q4. So, I understand that there is stronger Q4 kind of pattern, but you guys are still feeling like it's the whole lead removal space is still on an upswing here instead of maybe you're hitting the peak, if you will?

Jason Hein

No, we still feel there is a lot of runway here as well as we did see as fairly flat compared to Q4, but we didn't expect that in Q1 and that's probably we prefer to see growth, but we're not surprised by that, but I think and things that are very strong this year make its very pleased with the next several quarters. We have greater focus on training we have some great impact in the professional arena in terms of that conferences with physicians. Some of work we done on simulation, a new product came out. We think although flat in Q1 compared to Q4 are very optimistic as we go forward.

Spencer Nam - Summer Street Research

Anything we should expect that HRS regarding the legal stuff?

Jason Hein

I think it's harder than meeting which is just a weak away that will be hosted in Denver this year. The things that will be different even if you look at history of that meeting with our company, we made a much greater impact on that. Last year was a very good meeting. This one should even be better, but things you should look at that there could be as many as 30 to 35 different events on the calendar that may address, Lead Management to some extent.

A couple of the bigger ones would be a large event on Thursday evening hosted by our Ohio State that should be several hundred people initiating compass, all the key top leaders in that discussion. So that would be a good event and as Emile said, we also look forward to showcasing our next generation of stimulation as could have focus on safety and training.

Spencer Nam - Summer Street Research

One final quick follow-up question, Guy, when should we take out the federal investigation charges on your SG&A? Do you guys have any idea when that's going to come off?

Guy Childs

It's really hard to predict. These charges relates more to our indemnification obligations to employees and ex-employees, who indeed in federal investigation as close with respect to the company, but there's elements that are still open and we have obligations under Delaware Law, under our charter and under identification agreements to provide legal counsel to individuals, who will still be involve either as witnesses or targets of the investigation.

Jason Hein

So it's hard to predict when that will reach closure because we can predict what the government is going to do with respect to that.

Operator

Your next question comes from the line of Tom Kouchoukos with Stifel Nicolaus.

Tom Kouchoukos - Stifel Nicolaus

I think most have been exhausted on the Turbo-Tandem side, but I did want to ask more of, I guess the housekeeping question. Guy, looking at the old Turbo-Booster product, I think you guys sold it as an add-on and in packages of maybe three to five catheters that came with that. How are you marketing Turbo-Tandem, and can you give an ASP for that product?

Jason Hein

Sure. There's still a handful of accounts that use the Turbo-Booster. We're still marketing and providing it to customers in order and obviously we respect it will continue to diminish as we launched the Tandem. In terms that ASP on the Tandem, it was right on $2900 for the quarter, so its premium to below the knee captors very comparative with other above knee devices that's were we're at now.

Tom Kouchoukos - Stifel Nicolaus

It sold as units of one instead of three, I guess?

Jason Hein

That's correct

Tom Kouchoukos - Stifel Nicolaus

Then there was a question about kind of the core below the knee business, and it looked like it was flat sequentially, which is a little bit of improvement. Kind of looking at the quarter, how much of a factor do you think was your sales force focusing on Turbo-Tandem and not the core business and then looking forward maybe it is too early to tell, but did you see any synergy between below the knee and above the knee as you did your cautious rollout?

Emile Geisenheimer

We did absorb and do expect to absorb that has as we bring the Turbo-Tandem at the market is going to have a beneficial affect on below the knee treatment as well, because physicians that are treating C&I in order to get to this anatomy after treat the SSA to choose the Tubo-Tandem, they're going to continue to use the laser to the guide catheter and will get some beneficial effect on a below the knee business as well.

Jason Hein

Tom, this is Jason. I would add that you would always argued below the knee, anytime you launch a new product may or may create a little distraction, but I think if even in positive discussion -- if your sales rep going and showing what solution you offer, now by having an above the knee product. You have stronger bagged tools and I think the reps now had a greater discussion when go to new account and I think we will see, we expect to see as positive effect on below the knee as we have a greater tool set to talk about.

Tom Kouchoukos - Stifel Nicolaus

Then one last one on the atherectomy side, I know this isn't focus for you, but you've seen a little renewed growth in the coronary side last year and then with CSI's ORBIT II announcement last night, do you expect that trial to maybe divert some business away from you as they start enrolling that?

Jason Hein

I'd say with announcement that coronary, it's nice like Emile said. There's absence of data so to speak in many of these discussions. So that will be welcome by some customers then when you look at number of cases they are talking about it should have negatively impact anytime new studies are started up there, their positive discussion in physician community, I think when you look total numbers at we're not anticipating a significant impact at all when you look in light of a total number of procedures that occur.

Tom Kouchoukos - Stifel Nicolaus

Then, Guy, one last one on the laser system kind of dynamics have already been hashed out, but I just wanted to make sure I was thinking about this right. Are you still pretty confident in getting a single digit growth rate in equipment whether it be rentals or sales for the year?

Guy Childs

Yes, I think so, we have a fairly robust pipeline of deals just opened and then closed in the first quarter. So when the year is over, I do expect single digit growth in the equipment business.

Operator

Our final question will come from the line of Charley Jones with Barrington Research; please state your questions.

Charley Jones - Barrington Research

I have quick ones here. Jason, did you see many cases where they were doing a combination of below the knee and above the knee procedure with Tandem? Is that possible like it was with Booster? What percentage of your above the knee cases do you think there will do a combination below the knee case?

Jason Hein

So we did see cases in that evaluation where they were using the laser both above and below the knee I don't have the data in front me we expect that to be it's a mix part of it is the physicians we're working with and now there is the experience with the laser, but we did see that during evaluation and we fully expect to see that going forward. In next part of the catalyst effect, we do effect as if we now have a tool set that rounds out, which may be instead of talking about a below the knee case and above the knee case, we may simply talking about our procedural case with the laser and that opens up some opportunity for us as well.

Charley Jones - Barrington Research

Do they still need to use maybe three catheters or I mean two or three, or can they really just usually get it done with one catheter when they're doing that combo?

Emile Geisenheimer

We have been recommending a large catheter to do a pilot channel before the Turbo Booster in cases where there is a absence of strong distal flow before the case has begun. So in tight stenoses or total occlusion we are recommending that the best clinical approach is used large as a large catheter to create pilot channel that creates distal flow before the introduce the Turbo-Tandem.

We have a pricing program that package prices which the large catheter from the pilot channel with the Turbo-Tandem and that pricing puts it competitive with alternative devices, so we do have a challenge with respect to a number devices used competitively. If they're going to treat below the knee, however, it does require an additional catheter and that's a smaller side.

Charley Jones - Barrington Research

Then just a quick housekeeping question for Guy, Is your pricing on peripheral catheters pretty much the same as what it was when you were giving us unit data?

Guy Childs

Yes, it was stable compared with prior period.

Operator

There is a follow-up question from the line of Joshua Zable with Natixis.

Joshua Zable - Natixis

Just two quick ones, on the PATENT data, I know you talked about sort of submitting that data. Do you have any idea of timing on when that study is going to be complete, or when you have data sort of incremental data, just so we have a sense on the timing there?

Emile Geisenheimer

Yes, I could give you some sense of that. Let me clarify what I was talking about. Recall that the PATENT study was not designed as an FDA study. So we submitted our information to FDA, further questions was, “Can you give us actual endpoints and then a statistical plan to evaluate the data against those end point?”

The answer we're going to provide them in this Pre-IDE we'll submit is yes, and we propose the end point and we will propose the statistical analytical plan that meets the endpoints. That plans of course, powers to study and that plan will say how many patients you have-to-have to have a statistically significant outcome with respect to the efficacy endpoint and how many patients we have-to-have to have a statistically significant outcome with respect to the safety endpoint.

We believe that we will have that data available. So that we could promptly follow approval of the endpoint and the statistical plan we could promptly submit the data. So we don't see a delay provided the FDA accepts our endpoint and accepts our statistical plan.

Joshua Zable - Natixis

So it's just about getting sort of a clearer plan with the FDA and then it's not an issue of -- or I should say and then you should have the data pretty quickly to turn around and say, okay, if you set the plan, we can turn around and present the data? Is that the right way to think about it?

Emile Geisenheimer

That's correct. I'm sorry I took the very simple question and gave you very complicated answer.

Joshua Zable - Natixis

No, that is fine.

Emile Geisenheimer

Your answer is actually correct.

Joshua Zable - Natixis

Then just one last question, just on the coronary, we heard through the grapevine people seem to be maybe using a laser or more accepting of it in the coronary. Is that a function of Turbo-Tandem? Is it a function of just people getting more excited about it? Is there any trend there or we just kind of pickup some random here?

Emile Geisenheimer

Well, it has nothing to do with Turbo-Tandem. It has to do within the number of interventional cardiologist who have been using the device successfully and word of mouth among our interventional cardiologists as spread with from physician to physician.

So it's effectiveness of the advice or the device in the hands of physicians who are using it that's causing the growth. I think that the lack of growth in the most recent quarter in the coronaries is result of our sales force being pretty much focused on Turbo-Tandem, so it had a negative effect not a positive effect.

Operator

There are no further questions at this time. Please proceed with your presentation or any closing remarks.

Emile Geisenheimer

Well, I'd like to thank everyone for dialing-in for the call, again I am pleased with the results of our first quarter and particularly pleased with our continued growth of our disposal products particularly our Lead Management business and renewed growth in our atherectomy business in the periphery and light of that we've enable to demonstrate progress towards a strong bottom line, which is indeed a high priority for the company. So I look forward to speaking with you again at our next call. Thank you very much.

Operator

Ladies and gentlemen, that concludes your conference call for today. We thank you for your participation and ask that you please disconnect your lines.

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