Novadaq Technologies' (NVDQ) CEO Arun Menawat on Q1 2014 Results - Earnings Call Transcript

May. 7.14 | About: Novadaq Technologies (NVDQ)

Start Time: 08:37

End Time: 09:37

Novadaq Technologies Inc. (NASDAQ:NVDQ)

Q1 2014 Earnings Conference Call

May 7, 2014 08:30 AM ET

Executives

Arun Menawat - President and CEO

Stephen Purcell - CFO

David Martin - VP, Corporate Development and Investor Relations

Analysts

Rick Wise - Stifel, Nicolaus & Company

Jason Mills - Canaccord Genuity Group Inc.

Margaret Kaczor - William Blair & Company

Matt Miksic - Piper Jaffray

Sheetal Prasad - Jennison Associates

Doug Miehm - RBC Capital Markets

Ben Haynor - Feltl and Company, Inc.

Operator

Greetings and welcome to the Novadaq's First Quarter 2014 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. (Operator Instructions) As a reminder, this conference is being recorded.

I’d now like to turn the conference over to your host David Martin, Vice President, Investor Relations. Thank you, sir. You may begin.

David Martin

Thank you, Kevin. Good morning, everyone. Thank you for joining us today to review Novadaq Technologies financial results for the first quarter 2014. On the call today representing Novadaq are Arun Menawat, President and Chief Executive Officer; Steve Purcell, Chief Financial Officer; and myself, David Martin, Vice President, Investor Relations.

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

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

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

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

Arun Menawat

Thank you, Dave. Good morning, everyone and welcome. The agenda for today is for Steve to highlight our 2014 first quarter financial results. As usual, after that I’ll discuss Novadaq's achievements in the quarter and the outlook and our strategic initiatives going forward. We will then have Dave provide an overview of the latest clinical publications and after that, we will open the call for questions. Steve please proceed.

Stephen Purcell

Thank you, Arun, and good morning. Q1 ’14 revenues of $10.3 million represent a 41% increase compared with Q1 ’13. SPY product sales increased to $9.2 million, $3.5 million higher than the same quarter last year, driven mainly by an increase in PINPOINT and LUNA capital sales.

First quarter of 2014 procedures performed using SPY technology systems, increased by 35% year-over-year. However, SPY technology recurring revenues of $3.4 million were flat due to increased sales of lower priced kits to customers from the purchase capital systems and a decrease in inventory purchases by one of our partners.

In comparison to Q4 ’13, revenues decreased in the amount of $450,000 mainly due to a sequential decrease in recurring revenues and royalties, partially offset by an increase in capital sales of both PINPOINT and LUNA products.

Gross profit of $6.7 million in Q1 ’14 increased from $4.5 million for the same period last year, due to increased sales from PINPOINT and LUNA products. In comparison to Q4 ’13, gross profit is lower by $48,000 mainly due to lower partner sales.

Operating expenses of $11 million exceeded previous Q1 expenses by $5.8 million, due mainly to an increase in selling and distribution expenses by $4.4 million as the Company continue to hire direct sales force personnel to support our PINPOINT and LUNA sales program.

An increase in research and development spending by $800,000 in support of product development and new and existing patents and an increase in administrative expenses by $600,000 due to increased insurance coverage, service and benefits and professional fees related to acquisition activities. In comparison to Q4 ’13, operating expenses increased by $945,000 due to increased hiring of direct sales staff and promotional expenses related to PINPOINT and LUNA programs, partially offset by lower professional fees.

Q1 ’14 non-cash warrant revaluation expense of $11.9 million was higher than Q1 ’13 warrant revaluation expense of $2.1 million, due to a higher change in the quarterly increase in the Company share price. In comparison to Q4 ’13, this non-cash expense increased by $12.4 million due to an increase in share price versus the share price decrease in Q4 ’13.

Net loss of $16.1 million in Q1 ’14 was $13.2 million higher than the net loss of $2.9 million in Q1 ’13. The change resulted mainly from higher operating costs in the amount of $5.8 million, higher warrant revaluation adjustment in the amount of $9.8 million; offset by higher gross margins in the amount of $2.2 million. In comparison to Q4 ’13, net loss increased by $13.4 million, mainly due to higher non-cash warrant revaluation expense of $12.4 million and higher operating costs of $945,000.

Cash required from operating activities in Q1 was $3.7 million, which included working capital requirement of $1.3 million and cash burn of $2.2 million from operations. Cash was a $177.2 million at March 30th, reflecting a decrease of $5.2 million from cash on hand at December 13, which included $2.1 million spend on equipment utilized in our placement model.

Now, I’ll hand the call over to Arun.

Arun Menawat

Thank you, Steve. The first quarter of 2014 was pivotal for Novadaq as our direct products became material drivers of growth. To me this is the most important message for the Company in Q1, 2014 and it is also the most important message for the future of Novadaq.

For those of you who have followed us over the last few years, no doubt you’ve heard us talk about the fact that Novadaq has created a new market and that our market entry has benefited from the strength of our industry leading partners.

Now with early traction, we’re starting to see with PINPOINT and LUNA, my confidence is increasing that we’ve built the foundation of a solid direct sales team. And that growing surgeon acceptance of the benefits of SPY imaging technology is permeating from our partner products to our direct products and that PINPOINT and LUNA will be major drivers of Novadaq’s growth going forward.

Based upon this, we’re reiterating that our revenue growth target for 2014 remains at 40%. And as I’ve indicated before, we expect that sales of our direct products will continue to grow at a rate greater than 40% while our partner products are expected to come in below that rate at least for 2014.

In the first quarter of this year, we achieved our revenue and margin targets reporting 41% year-over-year revenue growth and 65% gross margin. Novadaq’s strategy of investing in the direct sales team resulted in nearly 50% of our SPY technology revenue coming from PINPOINT and LUNA and the U.S. install base of PINPOINT and LUNA commercial and evaluation systems nearly doubled in -- during Q1 to stand at 139 units as at March 31.

Sales of PINPOINT and LUNA products reached $4.6 million compared to $0.2 million in Q1, 2013 and $3.3 million in Q1 -- Q4, 2013. This represents a 40% sequential growth of our direct products.

Let me also remind you that PINPOINT is now positioned as a market disrupter in a 2 billion global endoscope market and LUNA is creating a fundamental change in how wound care will be managed in the future and has the potential to treat more than 500,000 patients a year.

Regarding our partnered businesses, first, FIREFLY remains a successful product as demonstrated by the fact that while 45 da Vinci robots were sold in U.S., in Q1 as reported by Intuitive Surgical, 81 FIREFLY systems were sold during the same quarter.

We are also delighted that FIREFLY will be standard in the newest version of the da Vinci robot Xi. At the same time, while we continue to anticipate revenues from FIREFLY, we expect that we will -- it will become less and less material to Novadaq’s financials as our own higher growth revenue products grow at a faster pace.

Our other products SPY Elite as you know is distributed by LifeCell. Compared to Q4 performance, that indicated significant capital revenues, Q1 was a relatively soft quarter both because of fewer SPY Elite capital sales and as an adjustment in kit inventories at our partners.

Our agreement with LifeCell comes to an end in late 2015 and we’re in conversation with LifeCell regarding the future of this agreement. Surgeons continue to provide us with positive feedback regarding the clinical value of SPY Elite and we remain convinced that it should ultimately become standard of care.

I expect that a final strategy for SPY Elite will be in place before the end of this year. Again, we believe that SPY Elite has the potential to treat over 500,000 open surgery patients per year. Overall, we continued to be encouraged with the utilization of our devices, particularly during Q1, we estimate that our imaging technology was used in over 6,600 case -- procedures in U.S. representing primarily growth from PINPOINT and LUNA.

Subsequent to the quarter, we introduced the next generation of our PINPOINT device. This new device comes with features that enable the surgeon to use PINPOINT throughout the surgical procedure instead of only when fluorescence is needed.

In addition, we’ve introduced our next generation software that indicates a key new feature called color-segmented fluorescence or CSF mode. There is more information available on this feature on the front page of our Web site as of this morning. This new feature, color code and segments anatomy based upon differences in fluorescence and thereby has the ability to for example differentiate between a bile duct and a liver by depicting them in different colors. We believe this clinically -- clinically this new patented technology will be relevant in many applications including lap chole.

We will be demonstrating the value of this technology by including it in the future clinical studies. Also, subsequent to the end of the quarter, we announced the signing of a definitive agreement to acquire Aïmago SA, a perfusion imaging company with unique patented technology. We expect to close the deal within days and begin clinical studies with its first quarter -- first product which is already FDA cleared.

Since the Aïmago technology does not require the use of any inducted imaging agent, we believe that it formed a perfect compliment to our own SPY technology. Our initial clinical studies will be focused particularly in wound care applications where this technology can be used as a pre-diagnostic and to identify the appropriate patients for a deeper, more comprehensive analysis on LUNA days. In the end we expect to sell these two products in tandem.

At this point, I’ll turn the call over to Dave, to discuss clinical publications of the last quarter.

David Martin

Thank you, Arun. Since the beginning of this year, 17 papers discussing SPY imaging technology have been published, encompassing a wide range of applications. This brings the total number of publications on SPY technology to more than 100 and we’re seeing acceleration in the pace of publications. The 17, during the first four months of 2014, already exceeds the 15 papers published in all of 2013.

Three studies and one review were published in the colorectal surgery application and three papers were published in breast reconstruction. Publications appeared describing use of our imaging technologies in endometriosis and cholecystectomy and also in two novel applications. Cystectomy, in which fluorescence imaging was used to mark a bladder tumor, map lymphatics and conduct mesenteric angiography and also segmentectomy in which ICG was used to identify lung segments containing small tumors.

Three lymph node mapping publications appeared during Q1, 2014, including two reviews 190 patients SPY Elite study that was run at the Cleveland Clinic. In the study, (indiscernible) reported that sentinel lymph node biopsies were performed in two groups in melanoma patients. In the first group the biopsy was performed using blue dye and radio radioisotope; whereas in group two, SPY Elite ICG imaging and the radioisotope were used. The sentinel lymph node localization rate was 79.4% for group one and 98% in group two. And the office concluded that SPY Elite has several advantages including higher sensitivity and specificity, decreased operative time, and potentially lower false-negative rates.

It’s worth noting that on previous quarterly calls, we’ve discussed other studies that use PINPOINT ICG imaging alone without isotope in minimally invasive lung and gynecological surgeries and similar high rates of sentinel lymph node identification have been reported. And secondly, that with the radiopharmaceutical imaging technology that Novadaq acquired from Digirad last year, Novadaq in the future will offer imaging technology for both modalities used in the Cleveland Clinic study.

On the topic of acquisitions, Novadaq’s purchase of Aïmago which we expect will close in the next week or two, will bring out -- will bring with it a new compact and convenient perfusion imaging technology that as Arun indicated, is ideally suited for use outside the operating room.

To date seven papers have been published on Aïmago’s EasyLDI technology including descriptions of the technology in case reports in wound assessment and plastic surgery. For example, (indiscernible) reported that in a patient with severe frostbite, EasyLDI was able to accurately predict based on reduced perfusion at the time of assessment, all the digits that eventually required amputation.

(Indiscernible) used EasyLDI to show the heat preconditioning of skin flaps prior to mastectomy and breast reconstruction leads to increased skin perfusion and as a result better outcomes in the study of 50 patients.

So with the clinical summary complete, I’ll turn the call back to Arun.

Arun Menawat

Thank you so much, Dave. Before I open the call to questions, I do want to summarize. First, we’re successfully transitioning to a direct sales model. Second, our technology is disruptive and as Dave just mentioned, there are over 100 publications now that demonstrate the value of the technology. Third, the size of the opportunity is in the multi billion dollar range and the level of confidence that we’ve in achieving this continues to increase and thereby we see ourselves as a company with long-term growth potential of 40% year-over-year.

With that, I’ll now ask the operator to open the call to questions.

Question-and-Answer Session

Operator

Thank you sir. At this time, we will be conducting the question-and-answer session. (Operator Instructions) Our first question today is coming from Rick Wise from Stifel. Please proceed with your question.

Rick Wise - Stifel, Nicolaus & Company

Good morning, Arun. Can you hear me clearly?

Arun Menawat

Yes, I can. Good morning, Rick.

Rick Wise - Stifel, Nicolaus & Company

Good morning. Couple of things, just maybe starting with the direct sales, maybe you can give us a little more color on where you’re with the number of reps so far? How we think about that -- those numbers increasing or changing if the year unfolds and sort of bottom line of that if you’re at roughly -- if roughly 40% of your sales are direct in the first quarter, can you help us think how does that mix -- where do we end up as when we get by the time of the fourth quarter, that’s -- the direct as a percentage of total sales?

Arun Menawat

Yes, sure. So we ended the first quarter with about 65 sales people and we’re continuing to hire. Our goal has been to be at about 70 and I think hopefully as of today we’re at that number. We are definitely seeing good traction with our new products. And we’ve indicated that we want to be in triple digits by the end of the year with respect to the number of sales people. And I think that as the momentum continues to grow, we plan to be aggressive and continue hire sales teams. So, I think that at this point, I’m focusing on building the sales team and growing the direct business and less on other issue.

To your other question, yes I do think that the mix of direct revenues will continue to increase over the year and Rick to be very honest its very hard to give you an exact number, but I think as I’ve said in the planned part of the conversation, I don’t think the partner business is going to grow at 40% this year, but definitely the direct business will grow at a much faster pace this year and thereby fourth quarter I think you will see -- this quarter we’re about 50%, by fourth quarter we will definitely see a higher mix of direct business.

Rick Wise - Stifel, Nicolaus & Company

Great. And just a follow-up on that. Ultimately where do you want -- what’s -- is there an optimal sales force size Arun? Again, by the end of the year or over the next 12 to 18 months, how big do you want and maybe if you could just remind us or talk to us a little bit about how you’re thinking about productivity for this thing, maybe looking at your early best reps what kind of metrics would be focused on in terms of ultimately where this -- well the kind of revenues these people can produce?

Arun Menawat

Yes. I think in terms of the size, we have capital reps and we have utilization reps. And I guess they’re professionals with a lot of experience and these are I think in terms of size, we’re not going to be any different than any other company which has large opportunity. So I think the numbers over the long haul again will be in the range of 150 to 200. But what exactly is the timing will depend upon the growth rate and as I said, I plan to be aggressive in growing as long as the revenue comes in. With respect to the long-term metric, not the short-term metric, I think that typically it takes about nine months for a sales professional to really become to get to a productive stage. But I think over the long-term, I think $1 million is probably a reasonable target for a sales professional.

Rick Wise - Stifel, Nicolaus & Company

One last quick one, on the (indiscernible) FIREFLY front, obviously you had a really good quarter given all the moving pieces. Really is this -- I think its important that we all kind of reframe our expectations going forward given the transition sort of happening intuitive, I mean, you did 81 in the first quarter, I assume though the retrofits were going to pull down over time. Any help you can give us in terms of thinking about quarterly run rates and periods, should we think about -- what sort of thinking, is it 50 to 60 quarterly run rate on average more important, that’s the right way to think about it? Any color would be welcome. Thanks so much, Arun.

Arun Menawat

Sure. Rick, I think the -- my plan is to talk about the direct business more going forward, because quite frankly the partnered business will become less and less material to us. Second, I think that you’re right, retrofits will slow down at some point, but the other reality is that Xi have built in FIREFLY technology, so it will be standard. So my recommendation in terms of better color will be to look at the intuitive business and make your assumption a bit on what their management team is providing to you in terms of guidance.

Rick Wise - Stifel, Nicolaus & Company

Got you. Thank you so much, Arun.

Operator

Thanks. Our next question for today is coming from Jason Mills from Canaccord Genuity. Please proceed with your question.

Jason Mills - Canaccord Genuity Group Inc.

Thank you, Arun for taking the question. Good morning. Can you hear me?

Arun Menawat

Good morning, Jason.

Jason Mills - Canaccord Genuity Group Inc.

I wanted to go back to and ask you one of Rick’s fine questions with respect to the sales force, you mentioned that you have both capital and utilization sales reps focused on those two metrics respectively. In the quarter, obviously the capital reps did their job, and went beating our expectations. And I would love for you to talk about the -- how you’re incenting the sales force at this stage in your growth profile? It’s clearly a razor blade model, we saw relative to our model significant upside on the capital placement and a little bit later on the systems or on the procedure kits for reasons that you discussed. And I’m just wondering as we look forward, how we should think about your success relative to these two metrics, really how you’re incenting the sales force at the present time versus perhaps how that will change over time? Thanks, Arun.

Arun Menawat

Surely. Jason, in terms of incentives, they’re incentive to do both. But I think where we’re in our natural cycle is that capital certainly is playing a bigger role because we do need a larger install base before the utilization revenues pick up. And more and more what we’re finding is that, even though we have traditionally made pure utilization models or rental models or capital models available to the hospitals. I think more and more what we are certainly finding is that, they are either using their own leasing company or they’re using our leasing partners, but that they are more inclined to want to buy the devices through a capital lease or a capital purchase and keep their utilization dollars lower. Because I think that there does seem to be recognition that the utilization more and more specialties as they have talked about it in the, in his part more and more specialties are looking to use the technology. So, I think that in the natural cycle what you probably will see is capital will be a little bit more heavier part of our revenue mix in at least this year, and over the long haul I think you will begin to see utilization dollars begin to become stronger. I talked about this about a year ago is that, over the short-term we probably expect maybe 60% to 65% of revenues going into the capital side, but as you model the razor-razorblade models you will probably see that two, three years maybe four years down the road you will reverse that curve and the utilization dollars will go up, and that’s really what you’re seeing. With respect to capital incentives or versus others, I think that with PINPOINT and LUNA we’re suddenly seeing good pipeline. I think on the other hand with LifeCell we saw a significantly lower capital revenues in the Q1 than we did in Q4.

Jason Mills - Canaccord Genuity Group Inc.

Okay, that’s very helpful. So, with respect to utilization, as you continue to beat the numbers on the capital side, the utilization as you mentioned over the next couple of years will become more and more important. What do you think Arun will be a tipping point for utilization from a procedure standpoint, and obviously the direct sales products through LUNA and PINPOINT, but also with respect to SPY Elite and with respect to SPY Elite the second part of that question is you’re clearly incentivating that product could come under the umbrella of your direct sales force and I’m wondering over the next year and half until you reach the end of that agreement, how we should be thinking about LifeCell’s motivation to sell that product? I have one more follow-up and then I’ll get back in queue.

Arun Menawat

Sure. Jason, help me understand what’s your first question one more time, please?

Jason Mills - Canaccord Genuity Group Inc.

So, just generally speaking the drivers to inflection point with respect to utilization and procedural growth, you’re running -- it should have been more specific, but you’re running several clinical -- randomized clinical trials. I would presume that a read out of those clinical trials will drive awareness about the -- for us in emerging technologies utilization in a number of applications and perhaps that could be a driver of inflection to see momentum in acceleration and procedures and perhaps there are others that I’m not thinking about, that’s the general jest of my first question.

Arun Menawat

Got it, okay. Sorry, I got it now. So the core drivers for PINPOINT, started with general surgery in gastrointestinal tract, both in the upper GI and the lower GI and I think that is continuing to be a very, very interesting driver. But the reality is that we’re finding multiple specialties and many, many applications that and we’re getting some very positive feedback from the applicants, from surgeons. And these will include even for example lap chole, I think will be interesting particularly with our new software where the bile duct and the cystic duct becomes really, really visible and I encourage you to go to our Web site and watch the video of that new software how it enables lap chole very easily. I think that over time GYN procedures of both cancer surgeries and non-cancer surgeries will drive it. I think thoracic surgeons are beginning to drive that also. So really I’m very optimistic about the number of different specialties who are giving us a very, very positive feedback, and thereby as I said I’m really not very concerned about utilization. I think utilization and utilization dollars over time will happen based upon the enthusiasm that I see. To your second question, with respect to LifeCell. I think that, the current agreement, we need to see a better -- if we were to extend anything with them we would need to see a better financial arrangement. With the current financial arrangement we are less likely to move forward. But the reality is we are in conversation with them, and I would really like to not go over the details until we conclude the conversations with them and come to hopefully something that is good for both of the companies and the hospitals and the patients and as you know I kind of want to think about this in a broader sense.

Jason Mills - Canaccord Genuity Group Inc.

That’s helpful. I’ll get back in queue after this one. Here’s a question for Steve, solid gross margin expansion in the quarter Steve, just wondering how should we be thinking about the continued expansion here going forward?

Stephen Purcell

We expect to maintain that same percentage of margin on sales going forward based on the mix of work that we see coming up in the future.

Jason Mills - Canaccord Genuity Group Inc.

Okay, I’ll get back in queue. Thanks guys.

Operator

Thank you. Our next question today is coming from Margaret Kaczor from William Blair. Please proceed with your question.

Margaret Kaczor - William Blair & Company

Good morning.

Arun Menawat

Good morning.

Margaret Kaczor - William Blair & Company

Arun, a couple of quick ones for me, but obviously a strong quarter for PINPOINT and LUNA. Can you tell us how many of those were sales versus the trial units, and then how much success are you guys having at getting those sales of PINPOINT and LUNA after placing a unit for a trial period at the hospital or the wound care clinic?

Arun Menawat

Yes, absolutely Margaret. So, the pipeline is good. We are starting to see majority of the evaluation systems do convert into a sale. I would say somewhere between a quarter to a third of the installed base is sold in that range. So, the evaluations and clinical studies represent the rest of the installed base. And we’re also starting to see a little bit shorter time to closure as compared to last year when we introduced the product where people were really looking to testing and so on. I think more and more surgeons are beginning to see the value relatively quickly and we’re beginning to see the hospitals are -- beginning to give us guidelines on what the process would look like rather than just wait and see and study which is what we used to see last year.

Margaret Kaczor - William Blair & Company

Okay. And how does this compare to SPY Elite, back when you guys were kind of starting off the same rental and sales model with them, is it similar, is it different and why?

Arun Menawat

Yes, very good question. I think it is at least as good, it probably is a little bit better than SPY Elite. And I think the rational on the PINPOINT side is that particularly with the new device the surgeons can use it for the whole surgery and it is -- it requires less of a learning curve compared to SPY Elite that we’re just trying to do something totally different. And so, I think with PINPOINT it is a faster pickup. On the LUNA side the clinical value is very, very strong. We’re getting very, very positive feedback on the clinical side. I think where the -- I would say probably similar in some sense to SPY Elite though because there they do have to install and actually the clinical value at this stage is stronger than what we saw with SPY Elite during the early stage.

Margaret Kaczor - William Blair & Company

Okay, that’s great. And then, can you talk about where most of the displacements are. Are they at the SPY Elite hospitals that you’re at already and so maybe that’s the easy fruits that you’re picking up or you guys are trying to go after new hospitals with PINPOINT?

Arun Menawat

Sure. I think the fact is that between FIREFLY and LUNA there are over 1200 hospitals and so I think that the large number of device’s definitely are going into those hospitals where they already have experience with our technology. But I don’t think that we are hampered by the fact that if we go to a hospital that doesn’t have it, there are enough surgeons who are aware of it at this point that we are more focused on where the clinical value lies, which hospitals have using MEDPAR data, which hospitals have more need for the technology and we’re targeting a hospital where the need is equated at this point.

Margaret Kaczor - William Blair & Company

Got it. A couple of quick ones for me and then I’ll jump back into queue. But can you give a little bit more color on the SPY Elite usage versus the stocking on the consumable side. Obviously you’ve reported that 6600 number, is that commercial sales or is that the usage itself?

Arun Menawat

No, that number is usage. The revenues were light in Q1. A good portion of that is related to reduction in inventory. So, it was not -- it showed up in terms of revenue it was light, but in terms of utilization it has been pretty consistent from historical numbers.

Margaret Kaczor - William Blair & Company

Okay. And then last one for me, can you talk a little bit more on the sales rep hires. As you kind of look at the opportunity, is it more of people are coming to you asking for PINPOINT or LUNA, are you getting that much of a backlog that you need to add new reps or is it just you see the tremendous opportunity and so it's just -- is it a push or a pull situation, and then how are you putting them in the field, is it multiples in a region or how many regions are there, any clarity would be great, thanks.

Arun Menawat

Sure, Margaret I think that generally I would say we feel good about where we are in terms of the pipeline and the feedback and the referrals that we’re getting from the surgeons who are using the device and referring us to their friends, and which we think is the best way to go. We also are getting very good reception in terms of the education programs that we’re running that attendants in these programs continues to be very strong. And the clinical data that is presented in our own internal conferences continues to be very strong also. With respect to the sales people, I think that the mix impact to be honest is actually a relatively younger sales team, and these are people who are, who has to know how to understand clinical just like people who have more experience on selling pharmaceutical side, so they have to know how to talk clinical publications and so on. And these people will also have to be able to go and talk to the administration and talk economics. So we are looking at that mix of people who have clinical experience and economic experience, and that’s a very unique sales person. And so, we had to internally talk about we need people who are -- we do have people who are smart and they are very willing to learn and we’re spending a lot of time and effort educating them. And we’re looking less towards number of years of experience and more towards what they achieved in their years of experience historically, and we’re getting some very, very good people in at this moment.

Margaret Kaczor - William Blair & Company

Thank you.

Operator

Thank you. Our next question today is coming from Matt Miksic from Piper Jaffray. Please proceed with your question.

Matt Miksic - Piper Jaffray

Hi, guys thanks for taking our questions. I think we’ve covered a lot so far, but I did want to not to pin you down Arun, but just want to try to get maybe a little bit more specifics on just how many of those 139 systems either had been sold or how many are in evaluation. I know you’re managing the evaluation units a little differently now than you had been, but just to get a sense as to whether this was sort of a sideways quarter in terms of sales or whether it was, indeed a kind of step up in terms of system sale for PINPOINT and LUNA. And then I have a couple of other quick follow-ups.

Arun Menawat

Sure. So Matt, if you just look at the revenue from PINPOINT plus LUNA sequentially Q4 versus Q1, it's up about 40%. So, in terms of capital sales with those two products, it was a pretty good quarter, and really it's carried the quarter. With respect to the installed base as I mentioned, I don’t know the exact numbers but somewhere between a quarter or a third in the range of where I think they are sold systems. There are few leased and then a few evaluations behind that. And I think, the total number is somewhere in the range of 139 or so, and so that includes all of that installed base.

Matt Miksic - Piper Jaffray

Okay, that’s helpful. On utilization -- in that 30%, 40% or 40% sequential, is that reasonable to think that the decent property for just sort of the step up in capital sales versus most of the revenue there are coming from capital from those lines?

Stephen Purcell

Yes, I think so. I think for Q1, that’s right.

Matt Miksic - Piper Jaffray

Great. And then on utilization, also maybe if you could give us an update, you gave us an early look I think last quarter as to what the utilization rate for those two direct systems look like compared to normalized utilization for say the Elite systems. Can you give us a sense of where you are, what you’re seeing now?

Arun Menawat

So, I think Matt, it's fair to think that a good bit of the growth in utilization or the number of patients treated in Q1 came from PINPOINT and LUNA. So, I think the numbers that we’ve talked about in the past, we’re at least doing that if not better than that in those products.

Matt Miksic - Piper Jaffray

That’s great. And so, that would mean -- I mean I think you’ve given us rates of 50 to 60 annualized run rates for us sort of a mature Elite system, the LifeCell system, it sounds like that utilization for PINPOINT and LUNA is still kind of a notch or two higher than that?

Arun Menawat

That’s absolutely true. That’s right.

Matt Miksic - Piper Jaffray

Great. And then, just one on each of the two line systems, color on a couple of things I guess that has happened, coming out of stages I guess we were hearing more talks than we had every heard about this idea of standard of care on the PINPOINT side, just how important it sounds like fluorescence imaging is making a much bigger impression than, it sounded like you would have thought a year ago and maybe you could maybe give you a sense of whether you’re also seeing that kind of increase and whether it looks like a bigger opportunity and maybe some milestones to catalyst to develop that further?

Arun Menawat

Matt, I definitely feel on a long-term basis more talk and more optimism about the technology, about our products. I think that the only reason I have been contained in saying that is because I also want to make sure that the goals in terms of 2014 goals; we still think 40% is a very good goal in terms of revenue growth. But I think that over the long haul, as I said I don’t know when there will be a hockey stick, but I do think that these products are starting -- we’re starting to see enough momentum that these products are likely to be big products, and as I said in the planned presentation I think we are dealing with multi-billion dollar opportunities here. And I continue to feel more and more optimistic about our ability to capture a part of that opportunity.

Matt Miksic - Piper Jaffray

And the extended or additional clinical developments that might play a role in that, maybe you’re talking all about next steps there on the PILLAR side?

Arun Menawat

We are certainly going to plan to have the PILLAR III study which will be a randomized multi-center study. We have reviewed the protocols with the PILLAR II investigator team, and it is right now going through certain regulatory related reviews. And I think by, at the next analyst call we certainly expect to be able to provide the details for you.

Matt Miksic - Piper Jaffray

Great. And then just finally on LUNA, I guess one of the things going back a little further we had heard from some of the centers that we’re using as if they were sort of developing a bit of a magnet or hallow effect around the use of fluorescence imaging in the respective region where they operate in terms of drawing in chronic wound patients or increasing their referral rates and it's really early, herein you’re still kind of getting started. But can you talk a little bit about that dynamic either drawing in patients, referring of patients working in conjunction with hospitals and whether you’re seeing fluorescence imaging play a role here yet?

Arun Menawat

I think Matt, that’s a very good question actually. I mean first of all I agree to it. It's a little bit early because we introduced the product about a year ago and -- but there have been two studies that are likely to get published where there is a demonstration that this leads to much more of a personalized or targeted care for the patient and that ultimately leads to better economics for, in fact for the hospitals because they can move much more decisively and much more quickly in certain types of treatment procedures. So, I do think that you will get more data by end of this year in published form on this. But I agree it to be, it's early but I think definitely the initial reaction seems to be pretty strong.

Matt Miksic - Piper Jaffray

And this will be like total cost of care, front to back healing of some of these product wounds, is that the idea?

Arun Menawat

That’s exactly right. It is to be able to look at the total picture of what the total cost of care including all of the treatment that the patient undergoes, the number of visits, what the profitability impact would lead to the hospital, and then ultimately to the payer. And there are studies that are underway and some of the initial data is definitely encouraging.

Matt Miksic - Piper Jaffray

Got it. That’s very interesting and helpful. Thank you for the color.

Arun Menawat

Thank you.

Operator

Thank you. Our next question today is coming from Sheetal Prasad from Jennison Associates. Please proceed with your question.

Sheetal Prasad - Jennison Associates

Hi, guys, thank you for taking the question. I just wanted to be a bit clear on the SPY Elite, LifeCell partnership. Was there softness in the capital sales and the inventory adjustment was that related at all to the contract negotiations, and in light of the negotiations should we just be ever more conservative on the contribution of SPY Elite for this year until that’s settled out? Thanks.

Arun Menawat

Sure, Sheetal good morning. Sheetal, I think that overall I would say we are likely to have a good year with respect to PINPOINT and LUNA. And the partner products are not likely to grow at the pace that our products will grow and thereby the overall rate of growth in the 40% range. I know that there is a desire to know more about where we are with the LifeCell partnership. And given that we are in conversation with them, my request is that we -- you’ll give us the time to sort of negotiate and then come back to you when we have the final result on this. I think that, the worst case scenario is the way you might think about this, is that this is a fixed quarter issue in the sense that the contract automatically comes to an end in later half of 2015. And so, if we cannot get a better agreement it will automatically end. And if we get into a better situation sooner it will be good news for everybody. So, I think that’s how I look at it, the opportunity for us by Elite is significant, it's in the 500,000 patient range. And I very strongly believe that it will see standard of care in the poor applications where it is. But I do know that we do have a short-term issue related to the negotiations and I can assure you we’re working on it quite aggressively.

Sheetal Prasad - Jennison Associates

Okay, great. Thanks so much.

Operator

Thank you. Our next question today is coming from Doug Miehm from RBC Capital Markets. Please proceed with your question.

Doug Miehm - RBC Capital Markets

Okay, good morning Arun. I’ll keep this short.

Arun Menawat

Good morning.

Doug Miehm - RBC Capital Markets

I find what the CSF, and quite interesting and maybe you could tell us from a competitive standpoint is this something that will be introduced on your partner products ultimately or could you keep this to the company itself so that you guys can cover out an even more important role in this whole area.

Arun Menawat

Doug, that’s a great question actually. It is unique to our product, and it is not partnered with anyone. I am personally very excited about this because for the first time, there has been this long-term view that is some day people will be able to color code the end segment, different parts of the organs, and when the surgeon opens a patient they will be able to see different artifacts or abnormalities in different colors. And I see this as the beginning of that. For the first time we’re bringing that to reality than just talk. And this software has a long way to go in terms of what the potential it can deliver and it is patented with and it is not partnered with anyone, it will be unique to Novadaq only.

Doug Miehm - RBC Capital Markets

Interesting. Then in that case would there be any thoughts given to strategic pricing of the PINPOINT system, such that you could carve out a dominant role in this space?

Arun Menawat

Doug, I think that this is one of the reasons why I think in terms of long-term utilization or utilization dollars; I’m less concerned because I think that as I talked before there is -- we’re investing quite a bit in our research and development and will continue to do so. And I think that these types of features will continue to give us both pricing power and the ability to create a specialized offer by application. So, we can further refine this for lap chole. So, when the surgeon is using our technology they can enter lap chole at the beginning and it would set the system for lap chole and thereby they can easily see the bile duct and the cystic duct and the other artifacts that are immaterial can become far less prominent. If we can do the same kind of thing in endometrial lesions someday and different type of cancers someday. So, I do think that this opens the door for something very, very positive over the long-term. At the same time I would say we’re at the beginning phase so, it certainly is not likely to have an impact in terms of revenue in 2014, but over the long-term it's a very significant advancement for us.

Doug Miehm - RBC Capital Markets

Fantastic, okay. Thanks very much. That’s great.

Arun Menawat

Thank you, Doug.

Operator

Thank you. Our next question today is coming from Ben Haynor from Feltl and Company. Please proceed with your question.

Ben Haynor - Feltl and Company, Inc.

Good morning, gentlemen.

Arun Menawat

Good morning, Ben.

Ben Haynor - Feltl and Company, Inc.

Just on the EasyLDI; do you expect reimbursement to be available for that and if so do you have kind of a ballpark range that you think you might call in?

Arun Menawat

Ben, we have reviewed the reimbursement of that. We are checking right now with the American Medical Association, the appropriate body, we are certainly optimistic that it will be, but we need to wait till it's confirmed.

Ben Haynor - Feltl and Company, Inc.

Okay, that’s helpful. And then you mentioned that you have the capital reps and the utilization reps. Could you kind of give your thinking on well, first off where is the split at now, is it two-thirds capital, one-third utilization and then how does that progress over time, does it become more utilization reps as you build the installed base?

Arun Menawat

Yes, so that’s a very good question Ben. So, right now you’re right we’re about at two-thirds capital and one-third utilization. And I think over the short haul since the capital rep either likely to move have transfer. The capital professionals will be more where we will focus on. The way typically if you look at companies that do the razor-razorblade model, what you typically see is that the capital reps or capital professionals are the first ones that you need. And there is a natural point where you saturate that, that group. And that saturation typically comes in the 80 to 100 range. And then after that for the size of -- based upon the size of installed base you can continue to grow the utilization professionals, and that’s kind of the strategy that we will follow also, and that for a certain number which we are in the process of defining is for a certain number of installed base how many sales professionals we need that they can cover a certain number of procedures and continue to train and educate and so on and drive the day-to-day utilization of all of our products. And so that’s how we will grow the utilization side based upon the size of the installed base, and typically that is sort of open ended in the sense that, the larger the installed base the larger that team will grow.

Ben Haynor - Feltl and Company, Inc.

That makes sense, that’s very helpful. And then lastly, with the decrease in inventory purchases by one of your partners this quarter, do you think they have taken inventory to a level that the appropriate level in their mind or should we expect that impact the current quarter as well?

Arun Menawat

Yes, Ben I think that the large reduction in my guess is done. There is probably going to be some small reduction but they will not be as material to the revenues as they were in Q1.

Ben Haynor - Feltl and Company, Inc.

Okay. Thank you for that. That’s all I had.

Arun Menawat

Excellent.

Operator

Thank you. We have reached the end of our question-and-answer session. I’d like to turn the floor back over to management for any further or closing comments.

Arun Menawat

I would like to thank you all for your participation again today and your interest in Novadaq. And I look forward to updating you on the financial results at our Second Quarter 2014 Conference Call later this year. Thank you.

Operator

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

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