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Executives

Emile Geisenheimer - Chairman, President and CEO

Guy Childs - CFO

Jason Hein - SVP for Sales & Marketing

Don Markley - Lippert/Heilshorn & Associates

Analysts

Jason Mills - Canaccord Genuity

Suraj Kalia - Rodman & Renshaw

Amit Bhalla - Citi

Joshua Zable - Natixis

Thomas Kouchoukos - Stifel Nicolaus & Company

Josh Jennings - Jefferies & Company

Bud Leedom - Global Hunter Securities

Spectranetics Corp (SPNC) Q2 2010 Earnings Call July 28, 2010 11:00 AM ET

Operator

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

I would now like to turn the conference over to Mr. Don Markley. Sir, please go ahead.

Don Markley

Thank you. This is Don Markley with Lippert/Heilshorn & Associates. Thank you for participating in today's call. Joining me from Spectranetics are 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 three and six months ended June 30, 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 revise 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 July 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 a review of some of the highlights of Spectranetics second quarter accomplishments, before I turn the call over to Guy, who will cover the financial results.

Spectranetics reached a number of important milestones during the second quarter. Our highlights include, total revenue for the quarter reached $30 million driven by Lead Management revenue growth of 14% and peripheral atherectomy revenue growth of 8%.

We achieved profitability during the quarter of pretax profit of $124,000 compared to $2.3 million loss in the second quarter last year. Turbo-Tandem launch was a continued success in quarter and helped drive our peripheral atherectomy growth and remain [decisive] to conduct a randomized clinical trial for in-stent restenosis in the United States and expect to apply for an investigational device exemption from the Food and Drugs Administration.

We are also committed to a small randomized clinical trial in Europe comparing blood eluting balloons alone to laser atherectomy followed by drug-coated balloons and in in-stent restenosis. Importantly we received reimbursement approval in Japan for a laser assisted Lead Extraction device the SLS II.

The first product that we have received both regulatory approval and reimbursement approval in Japan and we look forward to commercializing this product through our distribution partner DVx. In the initial phase in its launch, we will focus on 10 training centers in Japan. Lead Management revenue totaled over $10 million in the second quarter and grew 14% compared with last year.

The Heart Rhythm Society meeting was recently held in Denver and proved to be a very big success exceeding our expectations. We showcased our computerized lead extraction simulator for the first time and went through extensive traffic to our booth. The results of our LExICON study in the new Heart Rhythm Society Lead Management guidelines continued to be subject of high interest at the conference.

I am pleased to report that the Turbo-Tandem launch is continuing its success. We've now opened over 200 Turbo-Tandem accounts in the United States. This is less than half of our current laser atherectomy accounts, so there is room for growth. You'd recall that our goal has not been to maximize immediate revenue growth but rather to carefully introduce Turbo-Tandem in a way that will maximize the likelihood of the device becoming your ongoing tool choice in each account.

We are carefully monitoring reorder rate and I am pleased to note that a very large percentage of accounts that have had the device for over 60 days have reordered. Equally important are the many case reports we're receiving from our physician customers who praises Turbo-Tandem's ease of use, case speed and most importantly their positive impression of the acute clinical results that they are achieving.

Revenue in the United States reached $26 million this second quarter, increasing 6% over the very strong second quarter last year. Our international sales declined from last year's second quarter by 11% and totaled $4 million.

The decline is due primarily to the $700,000 decrease in laser sales compared with last year's second quarter and we have often pointed out the timing of laser sales is difficult to control or predict. Additionally, changes in foreign currency exchange rate compared with last year had an adverse impact of approximately $115 million of second quarter revenue.

You recall that last year, we announced Spectranetics management has established a goal of reaching sustained and growing profitability. I am pleased that we are reporting a small pretax profit for the second quarter, which reflects the fact that many of the steps that we have taken in the past year aimed at building productivity in managing expenses are gaining traction.

We expect continued growth in profitability in the second half of 2010 and we expect to achieve pretax profit for the full year 2010.

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

Guy Childs

Thank you, Emile and good morning everyone. As Emile mentioned, we reported revenue today of $30 million for our second quarter ended June 30, 2010. This represents an increase of 3% compared with the same quarter a year ago.

Vascular Intervention's revenue during the quarter was $16.1 million, which is equal with last year and up 4% sequentially. Within Vascular Intervention revenue are three product categories: atherectomy, crossing solutions and thrombectomy.

Atherectomy revenue of $9.3 million, which includes coronary and peripheral atherectomy, increased 5% compared with last year and was up 6% sequentially, on the strength of our Turbo-Tandem launch.

Peripheral atherectomy, which represents 90% of this product category sales increased 8% compared with last year and was up 8% sequentially. We continue to be encouraged by the sales of our Turbo-Tandem product which totaled $1.4 million during the quarter.

In addition to strong Turbo-Tandem sales, our base Turbo Elite increased by nearly $250,000 over the first quarter of this year, which represents a sequential increase of 4%.

Crossing Solutions revenue decreased by 5% on a year-over-year basis but increased 3% sequentially. We anticipated the competitive entrance that contributed to the year-over-year decline and this quarter's performance was in-line with our expectations. We continue to believe that we will retain our market leadership in Crossing Solutions and are encouraged by the 3% increase compared with the first quarter of this year.

Thrombectomy revenue decreased 5% compared with last year and was down 6% sequentially. As a result of the voluntary of the QuickCat product and the allocation of the inventory at the end of the quarter, we had approximately $100,000 of product on back orders at quarter end.

Lead Management continued its strong performance, generating growth of 14% versus last year and was up 1% from the first quarter of this year. To round out the discussion on a revenue performance, laser equipment revenue was $1.6 million, down 19% from last year and up 18% sequentially. Service and other revenue totaled $2.3 million, an increase of 2% compared with last year.

Breaking down our revenue geographically, US revenue totaled $0.06 million, up 6% versus last year and up 5% sequentially. International revenue at $4 million decreased 11% compared with last year and was down 3% sequentially.

Foreign currency and exchange rate fluctuations compared with the same period a year ago, had an adverse impact of approximately $115,000 during the quarter. Despite anticipated foreign currency head winds in the second half we expect improving performance in the second half of 2010 internationally.

Gross margin was 71.6%, compared with 71.5%, during the prior year quarter. It is notable that the second quarter gross margin included $300,000 of costs associated with the voluntary QuickCat product recall. Given our performance in the first half we are comfortable with gross margins at 72% for the full year 2010, which is at the high end of the previously provided range of 71% to 72%.

Selling, general and administrative expenses totaled $17.9 million during the quarter a decrease of 1%, compared to with last year's second quarter. This decrease reflect the significant activities undertaken in the last several quarters related to expense management, which include a restructuring announced in October of last year that will eliminate the $1.7 million annually from our cost structure; limiting the growth of our field sales organization which totaled 126 individuals at June 30, 2010, this is consistent with the size of our sales organization at the end of 2009; ongoing discipline throughout the organization on cost management activities.

Research, development and other technology expenses totaled $3.6 million, which represents a decrease of 11%. We expect these costs to begin to increase as we initiate the ISR clinical trial during the fourth quarter of this year assuming FDA approval of our IDE submission.

We achieved pretax income for the second quarter of 2010 of $124,000 compared with a pretax loss of $2.3 million during the second quarter a year ago. The pretax income during the second quarter of 2010 includes a credit of $60,000 due to an insurance reimbursement of cost related to the federal investigation.

The pretax loss during the second quarter of 2009 included $982,000 of costs associated with the federal investigation and $170,000 of employee termination costs. Excluding these special items in both periods adjusted pretax income was $64,000 in the second quarter of 2010 compared with an adjusted pretax loss of $1.2 million in the year ago quarter.

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

Cash, cash equivalents in current investment securities totaled $21.9 million at June 30, 2010, an increase from $21.1 million at March 31st, 2010 and $19.1 million at December 31, 2009.

In addition, the company holds $6.7 million of auction rate securities at June 30, 2010, a decrease from $9.8 million at December 31, 2009, due primarily to the sale of one of the auction rate security positions during the first quarter of this year. These securities are included as investment securities non-current on the balance sheet.

I will close with our outlook for the year ended December 31, 2010. Due to our continued focus on productivity and expense management, an expectation that the second half revenue will be stronger than the first half in both Vascular Intervention and Lead Management. Management continues to expect a pretax profit for the year ended December 31st, 2010.

The Vascular Intervention revenue growth rate during 2010 is compared with 2009 is now anticipated to be 3% to 5% as compared with our previous outlook for a growth rate in the high single-digits to low-teens.

The growth rate for peripheral atherectomy, which is the largest product category within Vascular Intervention is anticipated to be in the range of 11% to 13%. Management reiterates its Lead Management revenue percentage growth rate in the mid-teens for 2010 is compared with 2009.

Laser equipment revenue and service and other revenue are now expected to decrease by approximately 5% as compared with our previous outlook for growth in the low to mid single-digits.

Gross margin is expected to be approximately 72%, which is at the high end of the previously provided range of 71% to 72% for the full-year 2010.

Operator, we are now ready to take questions.

Question-and-Answer Session

Operator

(Operator Instructions).Our first question comes from Jason Mills with Canaccord Genuity.

Jason Mills - Canaccord Genuity

Good morning. I will start with the peripheral market in general. What are you seeing in terms of procedures? You showed some growth this quarter?

Emile Geisenheimer

Jason, are you still there? Operator, I guess we will let Jason get back in the queue to finish his question. We will take the next question operator or else get Jason back.

Operator

Our next question is from Suraj Kalia with Rodman & Renshaw.

Suraj Kalia - Rodman & Renshaw

Emile, in terms of the Turbo-Tandem, how will you characterize the initial minimum purchase orders? Do you require hospitals to buy up 5 or 10 or whatever and how would you also characterize the amount of inventory that could be sitting on shelves?

Emile Geisenheimer

Good question. We don't permit that. We are very careful about that, about having the shelves over filled. The initial orders were from 1 to 3 units and that's it; we didn't do or go anything beyond that.

Suraj Kalia - Rodman & Renshaw

Emile, if I choose to use a snapshot of lets say the last three years, that means we can look bigger than that, but let's just use the last three years. In 2007, for the numbers I have, the total number of lasers placed, were about 110. In 2010 the annualized laser placements, they seem to be around the thirty units range.

Can you help us understand this dichotomy; it's almost down the number of units, the lasers placed is down about almost 70%. How should I look on the dichotomy between the lasers being placed and implied future growth rates?

Emile Geisenheimer

Okay, very good question, I think you may recall we have talked about this a little bit. We are focused on deriving revenue per account, so that we could drive revenue per salesman, so that we can become a consistently profitable company. It will be relatively easy for us to place over 100 lasers, in addition to what we are doing now, but utilization rate in the lasers would not be at a level that make a lot of sense, frankly.

So with the laser's that are installed, we are working to drive more and more case volumes through those lasers and more and more case volumes in those accounts with other products as well. So we gain productivity and efficiency. So this is a deliberate thing.

Now, we do expect increased laser volume in the future, as we open new accounts that focus on vascular surgery and begin to serve the Japanese market and other international markets etcetera. So stay tuned as those changes will manifest themselves in the future.

Suraj Kalia - Rodman & Renshaw

Then just a follow up to that, Emile. So if you all are going deeper into the accounts, how should I look upon specifically related to vascular intervention? Has your sales force developed some new set of skills or are they using new tools by which they are more effectively closing the sales in vascular intervention because now you are selling less amount or placing less amount of laser atherectomy revenue. I mean it's almost flat line.

Now I am just trying to understand the deeper account penetration. Are the sales guys saying, we have some better tools here, we have better clinical evidence or other competitors falling apart. How would you characterize the dynamics?

Emile Geisenheimer

I would say the focus is on building utilization in the account by making the account more and more self-sufficient. If I go back, to a snap shot about several years ago, in most of our accounts not all of them but most of them, if we were understanding all cases because with that [sales force] we didn't have a clinical support in all instances. Our staff wasn't as well well-trained to support the laser. They did pieces infrequently. So now our people are focused on getting those accounts, trained following from the support staff through multiple physicians, so that they can operate on their own without lot of handholding from our people.

Now that's work in progress. We began that and I think I first talked about it a couple of quarters ago. It is beginning to bear some fruit but it's got to have a fruit to be born from it as we go forward. So, if we compare five quarters, I'd rather have few lasers used hours a day everyday, than lots of laser used once a month. So, that's developed. Jason, you want to comment?

Jason Hein

Yes Suraj, this Jason, I would add to Emile's comments that as we talked about on prior calls, we fully anticipated the number of laser units that go out, to go down and that was by design. You are right we are annualizing around 30, but yet we're still seeing the revenue growth, the sequential record performance and again, we are seeing the profitability grows from that. This is all part of our plan.

The tool to do it and what you said obviously new products that kind of round out the portfolio we like to have some these centers only doing one of our multiple product lines to be [Q2 or Q3] and like Emile said we have much better outcomes when someone instead of dabbling is much more engaged in our laser technology and then you see not only a better clinical outcome but then you see the efficiencies as well.

So, we do see a reduced number lasers but that is by design and I think it does open the door as we talked about internationally with Japan, some of the vascular surgeons, I think. Hopefully we've been able to manage a well-oiled business. We are making some operational improvement on the base we have and then as we increase that base I think we will leverage both of those going forward.

Suraj Kalia - Rodman & Renshaw

Jason, I do appreciate the color there. So let me just add on to that. How deep can you or what remaining depth do you all need to penetrate in these existing accounts after which you can say okay, now we got to start placing more lasers and bring on the new guys on the block and then we see the next leg up. I'm just trying to understand currently is that 20% slack in the accounts, is that 30% slack, is that 50%? How we should we look at that?

Jason Hein

Yes, I don't want to put on it number right now Suraj. I can say though that we are very comfortable. We have examples of centers that are very active with the laser. We look at those based on their volume overall and we look at our base. There is quite a bit of room of upside here. We are not discouraged at all by the 30 units going up. This year we're actually very encouraged that we are a tighter business and we are proving that we can hit all of our other goals without having to rely on the units going out at the 100-110 rate that you mentioned. So I think there's a lot of bandwidth here yet and we are comfortable with that.

Suraj Kalia - Rodman & Renshaw

Fair enough. Last one, Turbo-Tandem, Emile, I think I heard you say it's in about 200 accounts. I just wanted to get an idea of how many accounts are "independent" and no sales rep needs to be present to handhold a particular procedure using the Tandem. Thanks guys.?

Emile Geisenheimer

Okay. To answer your last question, all are (inaudible) initially. The whole strategy here was to have our sales people or a qualified clinical support person work through the first five cases with an account and then move on to new accounts beyond that. So that's part of the state launch that we talked about in the beginning in our calls. The purpose of this is to have a positive result in these early cases and give the training down, so that the physician has confidence to pull a device and use it in subsequent cases. So I think it's that strategy is more [appropriate].

Don Markley

Operator if you can try and get Jason Mill back in the queue, we were cut of last time.

Operator

Certainly. Our next question is from Jason.

Jason Mills - Canaccord Genuity

Okay great. Not sure what happened, but that's okay. right at the ship. So the question I was asking just first off Emile, just the underlying procedural volume in peripheral artery disease. Wanted to get a sense quarter-to-quarter how we are looking here?

Emile Geisenheimer

Guy, could sort of take a jab on that, let me try to hand it to him.

Guy Childs

Right. Jason, we haven't seen the numbers yet this quarter from the other market participants, but specific to peripheral atherectomy, which is obviously on point with our business, we continue to see growth. We saw growth last year, we see growth this year estimated to be in the high single-digits to low teens at the high end. Our peripheral atherectomy business is up 8%, this quarter. We are still alone here in the Turbo-Tandem launch. We are guiding to a 11% to 13% growth for the full year, so we anticipate being certainly at the high end of the range of the market growth at a minimum.

Jason Mills - Canaccord Genuity

Okay, just a follow up to that one, before I move on, that's peripheral atherectomy. The underline procedures, folks in the cath lab getting, needing peripheral artery disease intervention, what are you seeing in terms of procedural growth through the cath lab for PAD generally? So atherectomy, may be you are seeing some more throughput, while Turbo-Tandem and others may be seeing a little bit uptake in atherectomy utilization and these procedures. What are you seeing in the procedures themselves? Do you have a sense for that?

Guy Childs

I don't have specific data in front of me, but have things have added, its certainly growing probably a little bit slower than the atherectomy growth.

Jason Mills - Canaccord Genuity

Okay, so less than the atherectomy. That is helpful. okay, next question, sort of a broader, more strategic question, when you look at the P&L, so the company clearly, you are not telling me anything that you don't know, this has a fairly good growth rate, consistent growth rate, good forecast for the Lead Management business, with seemingly some good green field there, we can talk about that. Specifically in the second, but in the PAD business, it has multiple products, not the full line no balloons, no stents but relatively slower growing business, but yet all in both businesses give you a very strong gross margins.

You showed the profit this quarter and you are expecting in the second half of the year but we are still looking at SG&A expenses that are nearly 60%; total Op expenses that make it difficult for you guys to just show a hockey stick-like performance to the bottom line given your top line growth profile. So a couple of years ago you decided to segment the sales forces. I am wondering if you could give us some insight into how you are thinking about longer term. How you can leverage this business better over and above expense management?

I wonder if there has been discussion about strategically how perhaps you could extract more value from relative to a strong gross margins you have and rather decent growth businesses on the top line especially Lead Management. I apologize sort for the wing to the question but hopefully you get the gist.

Emile Geisenheimer

Jason, I think we got it. You know what, this is the red button we used for the early question to cut you off. We won't do that.

Jason Mills - Canaccord Genuity

Thank you. I appreciate that. Sometimes I deserve it, I understand its actually I think an important question I had asked?

Emile Geisenheimer

I think it's very important question, it goes through the guts of our strategy. I mean we have talked about this a lot and it's coming together, in order for you to reduce that OpEx sales and marketing as a percentage of sales. God made numerators and denominators and we are working on both. We will grow the top line and we will grow the cost line at will lower rate. Well, how do you do that?

The way you do is a combination of things. The most important [manner of it] is revenue per account and revenue per person. To give more revenue per person, which comes for more revenue per account then you are going to have to lower expenses as a percentage of sales and that is the simple math of it and that's where we are focused on. So we have the numbers on our productivity, on our sales force productivity.

Guy Childs

During the quarter, our sales per person in United States was $1,178,000 on annualized basis and that's up 8% from the second quarter year ago, and that's exactly what we said we're going to do and its right on track with our expectations.

Jason Mills - Canaccord Genuity

Good.

Emile Geisenheimer

So the two ways you're going at this to make that happen is, first you don't proliferate lasers that you are not going to purchase in quantities that make sense. Nor do you put out salesmen who can only produce $500,000 to $700,000 a person. So, you concentrate and then you add either through a product pipeline to bring more products into the salesmen's bag or move bolt on acquisition of product line extensions, bring more products for the salesman to sell.

Then lastly and mostly very importantly you make the accounts independent. So that you can get productivity out of the sales people because they are not required shift their stands in a case. So, we're working all of those things in combination and its bit of a stew.

Its not a simple one thing, its lots of things, but when they come together and work it produces the productivity results that we're looking for and while it may not give you the hockey stick, which I don't like anyway because that's not sustainable usually, but it will give you steady improvement and give more leverage out, some more leverage can be derived from this high gross margin business.

Jason Mills - Canaccord Genuity

That's helpful. Then last question, segue is from one of the five things that you mentioned with respect to the sales bag, adding new products for your sales guys to sell. Its really a two part question. Wondering what the percentage of either Crossing Solutions accounts or atherectomy accounts or maybe both, into which you are selling your thrombectomy catheters and what sort of opportunity exists there within the VI business.

More broadly, your cash position is fairly decent, that said, now it allow you to go out and buy Boston Scientific next, there would be probably or a bigger business. So you have to look at small strategic product line. Second, I am wondering why, the market is out there, the supply of those opportunities and what your appetite is for them. So again, two part question and then I am done?

Emile Geisenheimer

I will deal with the second one. We are actively at any one time looking at four or five such opportunities and that's accurate in the current situation. Therefore, I think five actually that we are actively looking at, that fit that description of tuck-in product line kind of acquisitions and all of those will fit into our current call points and our current clinical expertise and our current customers. So that they will add to the productivity mix.

What we are not looking at is plenty of things out there that would draw us to a different call point and different clinical area. Well, you don't get productivity out of that, you just have to add people to use that. So that's the second part of your question. The first part of the question was…?

Jason Mills - Canaccord Genuity

Just, what sort of green fields do you have driving the thrombectomy catheters into your either Crossing Solutions or peripheral atherectomy accounts?

Emile Geisenheimer

Last time, we estimated that, that was a quarter ago, it looks like we will penetrate it by 20%. So we've got plenty of opportunity to cross sell and get products into those accounts we have established relationships with.

Jason Mills - Canaccord Genuity

That is 20% into which group, is that the Crossing Solutions account? That's a bigger number than peripheral atherectomy accounts.

Emile Geisenheimer

Yes, that is 20% of the two.

Jason Mills - Canaccord Genuity

Of the total. So okay. That is helpful, that's helpful. Thanks guys.

Operator

Our next question comes from the line of Amit Bhalla, with Citi.

Amit Bhalla - Citi

Hi, good morning, I have this question on Turbo-Tandem. Can you give us a little bit more color on the reorder rates here, a little bit more qualitative, that I am wondering a reorder rate, 70%, 80%, 90%, where are reorder rates right now and then by the end of the year, do you think you are in twice as in many accounts? Talk to us a little bit about the Turbo-Tandem trajectory?

Emile Geisenheimer

Okay, the reorder rates are, I don't know if I can really get to the as specific a number we want to get you, but there are a super majority [link] with that way. We are pleased with the number. Its a very high number and we mention this, based on sixty days from first order. So we only count those accounts on a sixty days or longer and in that category, it's a very high rate of reorder. So we are very pleased with that.

Jason Hein

Emile I would add to that. Amit, if you look at this adoption rate that Emile said early, that we're looking to make sure these centers are engaged in the technology and moving forward. So we are consciously having a slower adoption rate keeping around 200 active centers that we are seeing, those centers that events, proactively and actively pursuing this are reordering.

So in sixty day number, we are as in Emile said, seeing a majority of reorder, but yet half of our accounts are still at that sixty day window. So we are seeing that track well as we add accounts to the list, but once they hit sixty, we are seeing a high majority of reorders.

Emile Geisenheimer

As far as penetration is concerned we are into a couple of 100 accounts, it's about 40% or so of our atherectomy accounts. So there is a lot of room for growth there. However, I'd point out that even without management guidance the salesmen are not dumb, they will go to their closest customers that are having issue there first. So, I think we have got plenty of runway ahead of us. The penetration rate being only 40% which has been delivered and so there are lot of opportunity here to build this.

Amit Bhalla - Citi

Just a follow-up question. Guy, can you comment on just product pricing in the quarter and actually one another one a Quick-Cross. You made the comment you expect to gain share back in Quick-Cross. Can you give a little bit more detail there, I mean it doesn't look like it's happening. So put a more color there?

Guy Childs

Sure. In terms of the pricing on it there is always mix between distributor revenue, US versus international but in general pricing it was very stable with just some nominal fluctuations based on some of those mix areas, so not a meaningful driver in the quarter one way or the other.

What I said in the script it was not that we were going to gain share in the face of the competitive dynamics, I said we anticipate at retaining our market leadership position, which we believe we have, and we expect that we will continue to do that. The fact that we grew the business sequentially in the face of the competitive entrants I think is an encouraging sign.

Amit Bhalla - Citi

So, I mean your share position could still deteriorate but you will still retain the market leadership position is that it or am I parsing the words too finely?

Emile Geisenheimer

Let me comment. I think you've got that exactly right. I mean, recall two years ago, we have been in this category and we virtually had a 100% share, though that's not sustainable over the long haul. We've had at least four new entrants in the last two years, all of whom have their own accounts in places where they have a relationship. So we are bound to lose some of the business.

Our goal is not lose our volume or lose our status as the market share leader. We will continue to be the market share leader. We hope to grow the business at least so that we stay at the level we are and the share loss comes out just on the course.

Operator

Our next question comes from the line of Joshua Zable with Natixis.

Joshua Zable - Natixis

Just kind of follow up Amit's question here with the Crossing catheter here. In markets from mid-single digits, obviously being a market share leader is the big range from 51% to a 100% range. So, can you just kind of maybe just give us a little bit more color on, are you losing big chunks of share or is it just like you said, you obviously grew sequentially, the business seems to be stable. Just a little bit more color, because I know that was little confusing for me.

Emile Geisenheimer

I understand the questions Josh, its just that we don't have at our disposal. This is a market with many participants, many companies that are quite large that don't break out the specific line. So the last data that we were able to validate was full year 2009 data and we were in the 70% range in terms of share. Since then, we just don't have the visibility on other market participants and what they've done in the first half.

Joshua Zable - Natixis

Okay. I guess maybe when we think forward to like 2011 as we think of this category, would this business sort of year-over-year, because we kind of comp out, start growing that business after kind of having dealt with these competitors in the past two years. Is that the right way to think about it?

Guy Childs

That is exactly our goal. This year we expected some difficulty and after we moved through this competitive stage, we anticipate growing at market rates, I think, which is definitely going to be in the mid-single-digits and probably higher.

Joshua Zable - Natixis

Okay, great.

Emile Geisenheimer

Let me give a little color to the competitive landscape here and how do we see this, our strategy dealing with this new competition. There is a phenomenon that has been talked about a lot, what strategists call the learning curve. It's the cumulative knowledge gained by a competitor of experience gained through sales over a long period of time. So in this area, we have a really very deep knowledge of this seemingly very simple device.

Our strategy is basically to keep innovating and bringing new volumes and extensions to this product portfolio in this Crossing area and continue to earn our way as not just as market share leader but the leader in innovation of these products. As we do that, it's a way to keep your position on the shelf vis-à-vis the trialing that goes on with respect to new products among customers and its pretty effective.

We introduced a number of those [products] in the Crossing line in the last year and half, and they are not in themselves, huge products, but they just add to the portfolio of our Crossing products and make it very difficult for us to be replaced by a competitor.

Joshua Zable - Natixis

Okay, great that is helpful. I just want to change gears here, on the equipment I know the orders can be lumpy, in terms of sales versus placements, you guys are in a position now that your profitable obviously to perhaps, may be place devices, or sell them you have a new product out. When you back that going back a number of years, that was kind of initial launch that you did. Can you kind of just talk about it? Is it really just timing of the purchasing the lasers or is there more sort of the cap free program going on?

Guy Childs

No, it is entirely related to timing and the purchase of lasers, Joshua and its difficult to predict, difficult to control. The product pipeline for our laser systems in the second half is in good shape. I expect we will see more activity on that front, in the second half. It so happened at first half we did not close, as many laser sales. Compared, if you look at our recurring rental stream that is up a little bit from last year. So the decline is entirely due to the laser systems sales.

Joshua Zable - Natixis

Okay, great.

Guy Childs

That's primarily international?

Emile Geisenheimer

Let me emphasize that, we don't depend on lasers sales in the US market, but internationally it is more to North. So these sales, they are stilled there, are being worked but did not come through in the time frame that we had hoped overall sales as opposed to rentals.

Joshua Zable - Natixis

Just switching gears there, it was kind of my next question about international. Obviously, currency is a big headwind for you going forward, s so with that in mind you just commented on the equipment. Is that kind of really between the currency and the equipment maybe kind of being delayed? Is that really [August] going on out there?

Guy Childs

There is small piece of VI sales that were less than anticipated in the first half but we don't see anything in addition to the things you mentioned Josh internationally, but we don't see anything fundamental there. In fact procedure volumes were up in nearly all the geographies and our managing director or Senior Vice President of Operations, also has responsibility for international. Shahriar Matin is with his team this week and they are looking for a better second half in all areas of the business compared with the first half.

You mentioned currency. I do want to add some specifics to the headwinds we are facing in the second half. We estimate that based on the fluctuation and exchange rates towards the later part of the second quarter we expect that to continue into the rest of the year and that we estimate that's about a $700,000 headwind on second half revenue and despite that we still anticipate improving second half revenue internationally versus the first half.

Joshua Zable - Natixis

Great. Then just last question here on the launch of the Lead Removal product in Japan, congrats on the approval there. You kind of commented 10 training centers you are starting, I guess a couple of questions around it, one when are you guys expecting this, when you guys kind of thought your guidance for the year was this kind of innate or is this gravy?

Two, when do you sort of officially kick that off, and then I guess three, are there any implications from this approval to maybe some atherectomy device or other devices approval in Japan. Thanks so much guys. Congrats.

Emile Geisenheimer

Thank you. The last part of that first. The reason we made a point of talking about this is that the reimbursement approval for SLS in Japan is the first time we had full approval both regulatory and reimbursement and we hope to achieve that for peripheral atherectomy as well our Crossing devices. If that's the case then we'll be free to sell openly without limitation on numbers of incentives and so forth.

You may recall that we have in our coronary products, we have a kind of unique status in Japan where our products are considered high technology product. It's not reimbursed and its limited to being into a very few hospitals. So this is a breakthrough for us in terms of Japan.

I don't want to overplay it because this will take us sometime to go through the regulatory process in Japan for our other products and to get high volume out of this but ultimately it will be of substantial market volume.

Guy Childs

In terms of the first part of your question Josh, this is Guy. We see on the first year post launch a minimum of $500,000 of revenue in those 10 centers, a combination of laser systems and disposables. We will realize a portion of that this year in the second half. I don't think I want to get granular as to say whether or not that was included in our original outlook, but those are our expectations for that. Once we get through this initial phase over time, we would look to that business being a multimillion dollar business.

Operator

Our next question comes from the line of Thomas Kouchoukos with Stifel Nicolaus.

Thomas Kouchoukos - Stifel Nicolaus & Company

Just a follow-up on the Turbo-Tandem. You more than doubled your sites centers in Q2 from Q1. It looks like reorders are trending fairly well. Maybe so we don't get carried away on Q3, could you walk us through kind of what's your revenue ramp expectations might be. I mean, should we see normal seasonality kind of take effect in Q3 or is the momentum strong enough to carry us through that and see some sequential growth?

Emile Geisenheimer

Well, we are happy to get rid of seasonality, I am afraid, because too many people like to take vacations for some reason and on our peripheral procedures are unfortunately for the long-term they are postponable for the short-term. So it will also have a seasonal effect. I can't predict the exact ramp on Turbo-Tandem.

I don't want you to get too carried away, but I see continued progress in opening new accounts and I see continued reordering in our existing accounts. So hopefully we will see growth.

Thomas Kouchoukos - Stifel Nicolaus & Company

Okay, great. Then kind of following up on that, I think last quarter you guys talked about the, that you had kind of a call point dynamic where your base business is more interventional cardiologist and to get to the upper part of the leg, you really need to go after some vascular specialist, vascular surgeons, etcetera. Within the new centers that you have brought on line this quarter, can you talk about how that dynamic played out, and are you seeing more vascular guides or specialists come towards this application or is it mainly interventional cardiologist at this point?

Emile Geisenheimer

I will let Jason handle that one.

Jason Hein

Yes Tom. I think the answer is yes, but keep in mind it is a ramp up phase on that question as well. So obviously want to leverage the large base, the interventional cardiologist we have been working with. We have made some specific efforts with this line to go after vascular surgeon to introduce them the technology. What's attractive is seeing their feedback and knowing their professional accomplishes, got in the training they have attended. We are seeing that dynamic gain as well.

So we think in our new market, we have to leverage what we have and then look at some of these new physicians. We are doing that now. Like we said earlier, we are pleased with how the bigger strategy is working to drive the growth in a very controlled and very designed fashion.

Emile Geisenheimer

Just one thing to add to that, recall we have about 30% of our established virtual accounts are vascular surgeons. So this is not as though this is completely a nascent field to us, we do have strong clinical relationships with vascular surgeons. We understand the differences in the way they practice versus the interventional cardiologist, and we have our physicians who can guide us to their colleagues and so forth. So while it is a little more labor intensive than our existing accounts to open a new account completely for Turbo-Tandem, we expect to have some traction there.

Thomas Kouchoukos - Stifel Nicolaus & Company

Then may be within that group of the vascular surgeons, obviously we have had other tools to use for quiet some time now. Are you saying may be just qualitatively you can, may be give their reaction or to this point of their enthusiasm for the product versus what is out there in the market today?

Emile Geisenheimer

That's where I most excited about is that the feedback from the physicians I mentioned in the script, of all their case reports vascular surgeons as well as interventional cardiologists is that the device is easy to use. It is fast, it is faster than competitive products and they a get a very nice acute clinical results. So, we are getting very positive feedback from all of our categories, end users and including vascular surgeons.

Thomas Kouchoukos - Stifel Nicolaus & Company

Okay. Then, Guy, last one for you. It just I wanted to hone in around the R&D expense a little bit, especially as it relates to the ISR studies that's coming on. Obviously, you gotten to profitability but I want to you give sense of maybe what sort of investment is needed in Q4 and then going into next year. Maybe on an absolute dollar basis to fund the study and then how should we think about R&D expense ratio turning through next year?

Guy Childs

It's going to fluctuate from quarter-to-quarter, Tom, but I think a reasonable estimate is, on a quarterly basis $250,000 to $350,000 a quarter for the ISR study. We have that baked into our outlook for this year and to our plans for future years. So that's certainly manageable. This quarter our R&D expense was 12% of revenue. I would think that more a normalized R&D expense going forward is around 13% as a percentage of revenue.

Thomas Kouchoukos - Stifel Nicolaus & Company

Okay. Is there anything other than the ISR study that you'd be going or having next year kick in. It sounds like there is a small pilot study in Europe, but is there anything else on the clinical front that maybe we are not thinking about at this point?

Guy Childs

I'm not sure we are prepared to talk about that. We haven't fully vetted all that for next year's plan. So in terms of what we know today ISR is the most significant study and there maybe some smaller studies. I think I need to defer that question to little later.

Emile Geisenheimer

We'll start with the pipeline but we're not ready to talk about it.

Operator

The management has time for two more questions. Our next question is from Josh Jennings with Jefferies & Company

Josh Jennings - Jefferies & Company

Just first one, I got one about the Turbo-Tandem launch, I know you've reviewed it thoroughly. I just wanted to hear from you guys some color on your looking back in the last year where you are now. It sounds like you've been very pleased with the launch, but in terms of internal expectations at the beginning of the year, where are you here and can you just tell us if you'd exceed those expectations, if you're right in line or where you are at there?

Guy Childs

Josh, as per number basis, we are slightly ahead of where we expect it to be on the Turbo-Tandem launch

Emile Geisenheimer

Yes, I think from a performance level we're slightly ahead. From the feedback from customers level I'm just delighted. The product is being extremely well received by our physician customers and that always portends to the future. So, I'm very excited about that.

Josh Jennings - Jefferies & Company

Just looking at the ramp here, I know you guys are being cautious in making sure that you get the physician trained etcetera. How long do you think it takes until you sort of can open the doors on Turbo-Tandem and is it really just a matter of physician becoming self sufficient or how should we think about that?

Emile Geisenheimer

I think it takes five cases per physician and we have to sort of proctor with them, for us to be comfortable that they have got the proficiency. So it's just a account opening kind of [governor] if you will. I don't think we are holding back on opening new accounts except to the capacity of our new people to open and train the physicians that deal the case. So, its sort of a natural constraint I suppose but it will diminish over time.

Josh Jennings - Jefferies & Company

Okay. Then just so that this will ease out your modification of your vascular intervention guidance on the top-line, looking at the peripheral atherectomy now and anticipate we'd be in the range of 11% to 13%. Can you tell what's baked in for Turbo-Tandem performance?

Guy Childs

I appreciate the question Josh. So we are just not going to get into that level of specifics. Sorry about that.

Josh Jennings - Jefferies & Company

Okay. Just moving on to Lead Removal business, it looks like, last four quarters, if you look in my model and looking into your historic reports, you guys have been flatter on $9.9 million to $10 million for four quarters consecutively. Its been a great growth year-over-year. Sequentially, it's been a little bit flat. What drives, I know Japan will add incremental revenues as that gets ramped up. Is it the [simulator] that is going to drive growth here over the next two to three quarters? What strategically are you guys doing to ensure the sequential uptick that you are going to need, now that you are coming on in more difficult comps?

Jason Hein

Yes Josh, this is Jason. I'd say there's probably three things that are really going to drive it. Short-term education continues to be a big discussion. We are seeing that in the professional society. We are seeing that with the data that came out last year and the guidelines.

The second item is training and training really encompasses not only new physicians that are interested, but existing physicians that will even increase their training and that is with the simulator. Its been very, very well received and we are just getting underway with that. So that's the second element of the growth strategy.

Then the third is the long-term you mentioned over the couple of years, and that would include our product strategy, where we go forward, with any clinical data in the future the product that we would come out in the next two years, and that's how that dovetails into what we have right now.

Emile Geisenheimer

I guess, the other relevant that I would add is that, we are, for the first time this year we are investing pretty heavily in training faculty fellows at key institutions, which produce the doctors of next year and the year beyond, that practice in this area. So that was a program which we launched this year, will begin to bear fruit down the road, as these fellows take positions and private practice on it, other institutions that want to bring laser systems, Lead removal with them. So that's the other driver.

Josh Jennings - Jefferies & Company

Great, now that, that is how [I anticipate]. This last question is based below the knee atherectomy business on the peripheral side. Can you sort of give us some more color into how that is performing? Whether you guys are maintaining share or losing share and then what you are seeing competitively in the below the knee market, thanks a lot?

Guy Childs

Yes, we were pleased with the fact, that we had the largest sequential growth in our base TURBO Elite business, than we have seen over many quarters. So where we are seeing improving and that specifically was 4% sequentially. We had some tough comps versus last year, so it was down, compared with last year, but up 4% sequentially almost $250,000. I think the Turbo-Tandem launch is helping with that, pull through some of that business, and we see continued improvement there.

Operator

Our final question comes from the line of Bud Leedom with Global Hunter Securities.

Bud Leedom - Global Hunter Securities

Good morning. Thanks for taking my questions. I was wondering if you might be able to provide an update, I know you have two small debulking studies that are taking place in Europe. I think one is underway. If you could just provide any color on how those are rolling out here?

Emile Geisenheimer

Well, what we talked most about is the study in Germany that we are doing on in-stent restenosis that trial is I think we have something like 66 patients enrolled. The enrollment is only in a few centers. The enrollment rate is not very high. It's 100 patient study. When we just agreed to support and also a [CELLO] based study called PHOTOPAC and it's a study of a drug eluting balloon alone versus laser ablation followed by drug eluting balloon and the hypothesis that doing laser atherectomy before using drug eluting balloon assisted drug delivery make drug eluting delivery more efficient and should get superior results.

It's not a study that we have to design for physician initiated study that we are supporting through administrative grant, but it's a very interesting and exciting study because everyone in that physician community is talking about the prospectus of drug eluting balloons and for us to get an early indication of where we fit into that will be very positive for us.

Bud Leedom - Global Hunter Securities

Okay. I appreciate that. Then I guess translating that potentially into US clinical trials is there any specific timeline where you might start the try out maybe as an adjunct to the ISR?

Emile Geisenheimer

Well, we hope to start the ISR trials as soon as we can get an IDE approved by FDA and that's going to be a big multi center, multi-hundred patient study. So, that's of course and I'd say that's our primary focus. It obviously a big study for us and I think its important that it should be known that no atherectomy company has a randomized trial of this size and this complexity and this kind data will be very, very helpful to the company in establishing the superiority of its safety and efficacy. So we are hopeful that the data will show that and I think the data in this evidence based medicine world is very, very important. So that's why we are committed to it.

Operator

That is all for the time we have today. Please proceed with your presentation or any closing remarks.

Emile Geisenheimer

Well, I just like to thank everybody for dialing in for the call. We are pleased with our second quarter results and are optimist about remaining of the year. We've got a lot of work to do to driving this company towards consistent profitability and growing profitability is something we feel strongly that is our mission and building each of businesses in Lead Management and Vascular Intervention both in the United States and around the world. We are now looking for an opportunity to improve and wanting to pursue. So, thank you all very much and we'll talk next quarter.

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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