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The Spectranetics Corporation (NASDAQ:SPNC)

Q3 2010 Earnings Call

October 27, 2010 11:00 am ET

Executives

Don Markley - SVP, Lippert/Heilshorn & Associates Inc.

Guy Childs - VP & CFO

Shahriar Matin - SVP, Operations, Product Development and International

Jason Hein - SVP, Sales and Marketing

Analysts

Jason Mills - Canaccord Genuity

Amit Bhalla - Citi

Suraj Kalia - Rodman & Renshaw

Joshua Jennings - Jefferies & Company

Thomas Kouchoukos - Stifel Nicolaus

Bud Leedom - Global Hunter Securities

Operator

Welcome to the Spectranetics Third Quarter Results Conference Call. At this time, all participants are in a listen-only mode. Following management’s prepared remarks, we’ll hold a Q&A session. (Operator Instructions) As a reminder, this conference is being recorded, October 27, 2010.

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

Don Markley

Thank you. This is Don Markley with Lippert/Heilshorn & Associates. Thank you for participating in today’s call. Joining me from Spectranetics are Chief Financial Officer, Guy Childs; Senior Vice President for Sales and Marketing, Jason Hein; and Senior Vice President for Operations, Product Development and International, Shar Matin.

Earlier today, Spectranetics released financial results for the three and nine months ended September 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 to remind you that management will make statements during this call that include 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 Securities 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, October 27, 2010.

I’ll now turn the call over to Guy Childs. Guy?

Guy Childs

Thank you, and good morning, everyone. During this morning’s call, I will make some introductory remarks, review our financial results, and provide an update on the status of our planned randomized trial for the treatment of in-stent restenosis. I will then close with our outlook for the rest of 2010.

As previously announced, Emile Geisenheimer will retire from his position as Chairman, President, and Chief Executive Officer effective November 1st, and will remain on our Board of Directors.

During this transition, the Board of Directors has appointed Jason Hein, Shar Matin, and me as an Executive Counsel to run the day-to-day operations of the company. We report directly to an executive committee of the Board of Directors that will lead the search for a new CEO as well as overseeing the activities of the Executive Counsel.

I’d like to begin my thanking Emile for his leadership over his many years with the company and his steady hand as we navigated through a significant set of challenges over the last couple of years.

We have emerged from these challenges a stronger company. As mentioned in the press release, we have undertaken significant steps to streamline the operations of the company and improve the productivity within our sales organization.

We have substantially completed work associated with the site consolidation and enhanced our compliance systems to comply with the provisions of our corporate integrity agreement. These activities have taken a significant amount of internal resources that are now focused on new product development, initiation of a randomized trial to treat in-stent restenosis and attaining operating efficiencies.

Undoubtedly, challenges remain, but I know I speak for Jason, Shar and all of our dedicated employees when I say that we are up to the task and we’re excited about out plan to move the company forward.

I’ll begin with a summary of our financial performance starting with revenue. Revenue for the third quarter ended September 30, 2010, was $29.6 million, an increase of 3% from last year. Lead Management revenue once again lead our growth. This was partially offset by weakness in our Vascular Intervention revenue, which reflects the challenging economic and competitive environment.

Finally, distraction associated with the realignment of certain Vascular Intervention sales territories was unavoidable, but necessary in order to consolidate smaller territories. Despite the temporary disruption associated with these actions, the business generated adjusted pre-tax income, excluding special items, of $1.6 million during the third quarter, which represents 5% of revenue, and is the highest level of profitability the company’s ever achieved. This is a significant improvement over $600,000 of adjusted pre-tax income, excluding special items during last year’s third quarter.

As noted in our press release, adjusted pre-tax income is a non-GAAP measure and is reconciled to GAAP results in the tables attached to the release. The special items during the quarter were significant, and I’ll review each of them in detail later in the quarter.

We ended the quarter with cash and investment securities of $26.4 million, an increase of 4.5 million from 21.9 million at June 30, 2010. This increase includes proceeds from the sale of an auction rate security position of $2.3 million. Excluding this transaction, the increase in cash and investment securities during the quarter was $2.2 million.

Cash flow from operating activities was nearly $3 million, which is another strong indicator of the underlying health of our business.

With these three key points on revenue, adjusted pre-tax profitability and cash flow in mind, we will turn to a detailed review of our third quarter results, beginning with revenue.

Lead Management continued its strong performance, generating revenue of $10.6 million or growth of 8% versus last year. Recall that last year’s third quarter is a difficult comparison, as we benefited from unprecedented interest in our lead extraction products, following the May 2009 Heart Rhythm Society meeting, where the retrospective LeXiCon registry data was presented and the expanded guidelines for lead extraction were adopted by the Heart Rhythm Society.

We continue to be optimistic regarding the future growth potential of this business. We enjoy a market leadership position based on randomized clinical trial data that demonstrated superiority over mechanical lead extraction techniques, and also supported by a world-class sales and marketing team. Further, interest in Lead Management continues to grow based on increasing awareness of problems that can be associated with infected, abandoned, and malfunctioning leads.

Vascular Intervention revenue during the quarter was $14.6 million, which is a decrease of 6% from the prior year third quarter. Within VI, atherectomy decreased 5%; crossing solutions was essentially flat and thrombectomy decreased 19%.

We continue to make progress on the launch of our above the knee Turbo-Tandem product, generating 1.1 million of revenue during the quarter. Overall, peripheral atherectomy revenue was down 5% compared to the prior year.

We eliminated a net of 11 positions within our Vascular Intervention sales organization as part of the sales territory realignment. We’ve also made changes to our incentive compensation plans that will provide greater incentives to our top performing sales territories, as measured by revenue size and growth over the prior year.

Crossing solutions revenue was essentially equal to last year’s third quarter, which is an improvement from low to mid-single digit declines during the first two quarters of 2010. Thrombectomy revenue decreased 19% or $300,000 compared with last year. Although we completed the QuickCat recall promptly following its initiation in July of this year, we believe that ordering patterns were adversely impacted this quarter as a result of the recall. To round out the discussion on a revenue performance, laser equipment revenue was strong at $2.1 million during the quarter, an increase of 50% from last year. Service and other revenue totaled $2.3 million, an increase of 6% compared with last year.

Breaking down our revenue geographically, U.S. revenue totaled $25.5 million, up 4% versus last year. International revenue of 4.1 million decreased 4% compared with last year as reported, and was up 3% on a constant currency basis. Gross margin was 71.3%, compared with 72.4% a year ago, due primarily to higher mix of laser revenue, which is lower margin business. As noted earlier laser revenue increased 50% compared with the prior year third quarter.

Selling, general and administrative expenses totaled 16 million during the second quarter, a decrease of 4% compared with last year. We have made progress in leveraging this line item as demonstrated by a reduction in SG&A cost as a percentage of revenue from 58% during the year ago quarter, to 54% in the third quarter of this year. Research, development, and other technology expenses totaled $3.6 million, a decrease of 2%, and represents 12% of revenue. We incurred $8.1 million of operating expenses that we classified as special items.

I will now review each one of these charges individually beginning with the 6.5 million of costs that are associated with the accrued indemnification obligations to former employees that were recently indicted as part of the federal investigation that commenced in September 2008. These costs arise due to Delaware law, our articles of incorporation, as well as contractual obligations that require us to advance legal defense costs to these former employees. We have estimated these costs, assuming that the trial for each of the three former employees is a joint proceeding, and it occurs within the next year or so.

If the trial date is extended beyond 2011 or the proceedings become more complex than we estimated, the cost incurred could be substantially higher. The asset impairment charge of 900,000 is due to the write-off of an in-house sterilizer that was in the process of being assembled for our use. During its assembly, the Environmental Protection Agency issued a ruling that banned the use of one of the gases used in the sterilizer effective in 2015. We subsequently learned that the supplier of the gases will stop providing the gas during 2012 which effectively limited the useful life of this asset to a point that it becomes cost prohibitive to place the asset in service.

We have outsourced the sterilization for most of our products as an alternative to performing the sterilization in-house, and we believe this will also be a cost effective solution. Employee termination cost of 0.7 million were incurred as a result of the termination of 14 employees in the company, mostly within the Vascular Intervention sales organization. This realignment consolidated territories that were small in nature. Following the restructuring, our vascular sales organization consist of 43 territory sales representatives, 17 clinical specialists, and seven in sales management.

GAAP, pre-tax losses, which includes 8.1 million of special items was 6.6 million during the third quarter compared with 2.5 million during the prior year third quarter, which included 3.1 million of special items.

Net loss during the third quarter of 2010 was $12.7 million or $0.38 per share compared with $2.5 million or $0.08 per share in the prior year third quarter. In addition to the special items previously discussed, net income in the third quarter of 2010 included a $6.1 million non-cash charge related to an increase in the valuation allowance against our deferred tax asset, which is based primarily on our historical GAAP losses, and the uncertainty associated with generating taxable income in future periods due to the indemnification costs discussed previously.

Excluding the special items in both periods, and the increase in the valuation allowance against the deferred tax asset in the third quarter of 2010, adjusted net income was 1.5 million or $0.04 per diluted share compared with 0.6 million or $0.02 per diluted share a year ago.

Turning now to the planned initiation of our randomized clinical trial to treat in-stent restenosis, we are in the process of completing bench testing and an animal study as required by the FDA before submitting our investigational device exemption. This testing is going as planned. We anticipate concluding this work, and submitting the IDE to the FDA late in the first quarter or early in the second quarter of 2011.

The company has updated its outlook for 2010 full year performance as follows. Management anticipates its Lead Management revenue will grow 11% to 14% during 2010 as compared with 2009. This compares with previous guidance for growth in the mid-teens.

Laser equipment revenue and service and other revenue are expected to increase up to 2% in 2010 compared with 2009. This compares with previous guidance for a decline of approximately 5%. Vascular Intervention revenue during 2010 as compared with 2009 is now anticipated to decrease by approximately 1% to 3%.

Peripheral atherectomy, which is the largest product category within Vascular Intervention is anticipated to grow 3% to 5%. This compares with previous guidance for growth of 11% to 13%. Our revised outlook for Vascular Intervention reflects the challenging economic and competitive environment in the transition associated with the realignment of certain sales territories implemented in September of 2010.

Gross margin is expected to be approximately 71%. This compares with previous guidance of approximately 72%. Company estimates total revenue for the fourth quarter of 2010 to be in the range of $29.1 million to $30.1 million, which would bring full year 2010 revenue within the range of $117.7 million to $118.7 million. The company expects to be profitable on an adjusted pre-tax basis for the fourth quarter and full year excluding special items.

Operator, we are now ready to take questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Jason Mills with Canaccord Genuity. Please go ahead with your question.

Jason Mills - Canaccord Genuity

Can you hear me okay? Great. So congrats on the cash flow, it seem to be a positive aspect of otherwise underwhelming quarter, and it sounds like that could continue. Maybe you could talk about the cash-flow generating capabilities of the company number one, and number two, clearly as we look at the stock, there has been some value lost here for shareholders. As you guys look forward on the Executive Counsel, what do you think the best way is to drive value creation, let’s say over the next 18 months? Would it be continuing to progress with your current initiatives to restructure costs and drive operating leverage? Or do you think the company at this point looking more aggressively at building the business from a top-line perspective in a way that perhaps isn’t dilutive to shareholders. If you could maybe talk about where your priorities are there on that front, that would be helpful as well. Thank you, Guy.

Guy Childs

Yes, Jason, let me answer that and I’m sure Jason can jump in with any of the commentary.

Jason Mills - Canaccord Genuity

Okay.

Guy Childs

In terms of our cash flow generation, I think it reflects a lot of hard work over the last 12 months. We did a restructuring about a year ago that eliminated 1.6 million to streamline some of our R&D operations, and consolidate some leadership at the executive level in the company. There’s been things that you wouldn’t see. There has just been an ongoing focus in the company about managing day-to-day costs, travel expenses, things of that nature that you would expect. And we’ve grown the business versus last year too, and all those things contributed to cash flow.

And turning now, I think we’ve done that hard work. Another point that I would like to make is there has just been a substantial amount of resources that have been tied up on site consolidation and compliance-related activities, and we’re now turning the page on those activities, using those existing resources to drive things that will encourage revenue growth, and maybe Shar can talk a little bit more about those efforts.

Jason Mills - Canaccord Genuity

Okay.

Shahriar Matin

Jason, so just to give you an update, we do look at the next 18 months or so as top-line growth will be important for us, and the way to do that for us is going to be mainly to focus our teams on new product development, both line extensions as well as new product platforms. One specific one that we’re progressing on, we’ll be able to give more details on those early next year, as we get further along in the product development, but it’s really to have organic growth with internal development as our resources come off of compliance and site consolidation, and can be placed on new products.

Jason Mills - Canaccord Genuity

Okay. Great. And then on the Lead Management side, I suppose others will have questions on VI, so I’ll leave that for them. But on the Lead Management side, perhaps, Jason, that has been a good growth business. We had forecasted the growth year-over-year would not look as good as perhaps that business progressing, because of your difficult comp. That came to fruition, but as you look forward, given where the penetration is, a double-digit-type growth business for the foreseeable future?

Jason Hein

We think it is, Jason. We predicted a mid-teens here. We’re probably just a point or two under that. I think part of it is, like you said, the comp we had in Q3 last year was probably our strongest quarter ever. But in the three years we’ve split out the business, we have shown progression probably in all but one of those quarters, and that was just following Q3. Last year, the Q4 couldn’t keep up with the high Q3.

But we think with the comments you heard also from Shar, both on, both sides of the business, the investment we’re doing right now is the awareness training. Guy alluded to that and the Heart Rhythm meeting last year, and again good meetings this year. But we think with those investments and we continuing to develop the clinical data as well as the product line, that is our strategy is to maintain that mid-teens and we have been doing that now for over three years, so we want to keep that up.

Jason Mills - Canaccord Genuity

Lastly, is there any competitive work being done in this area? We hear often from companies that they’re attracted to this business. Maybe you could discuss how easy or difficult it would be for a company to enter it based on what has gone on in the past, and what you’re seeing out there competitively in a market I think it’s fair to say a niche market, but one that is a fairly strong niche market that is attractive to people?

Jason Hein

I would say the market is attractive. The fact that there isn’t another player in that right now is indicative of some of the barriers. It doesn’t mean those cannot be overcome. But some of the barriers would be based on the product line approvals. There may be a PMA involved depending on the study requirement; there’s obviously some upfront costs. It’s not going to be that prohibitive for some investors.

But at the same time, it’s a prioritization that each company looks there to say, where would I spend my money? And it’s still a fairly small opportunity; we have invested in it for probably 14 years now and getting approval over 10 years ago. And I think some people look at it as maybe a collaborative effort, are there ways that we management and they support other business like the CRM and we’re seeing maybe interest in a collaborative level as well. But as far as competitors coming into the market, we hear similar rumors as you do, but I guess, we’d have to wait and see how that plays out.

Operator

Your next question comes from the line of Amit Bhalla with Citi. Please go ahead with your question.

Amit Bhalla - Citi

I wanted to go into a little bit more detail on the new products, I appreciate you won’t tell us exactly what they are for competitive reasons, but can you at least tell us what segments you are going to be launching some of these new products in, when you expect them on the market, and what kind of contribution you think you’ll have from these in 2011?

Shahriar Matin

Sure. I’ll take that Amit. We are looking at both products for Lead Management as well as VI. Most of our efforts will be on products for VI, and we expect to have a couple of them launched in the second half of next year, closer to the end of next year, so there will be some contribution to our revenues for next year, but I would not count on too much. Much of the upside will be as we go into 2012 with our new products.

Amit Bhalla - Citi

Okay. And secondly, in terms of looking out to 2011 in terms of some of the cost-control measures you’re putting in place, can you give us a feel for what kind of leverage you expect in the business in the next 12 to 18 months?

Shahriar Matin

Amit, I appreciate the question, I really do, and don’t fault you for asking it, but we’re just not in a position right now to talk about 2011, and it’s not consistent with past years. We always give our outlook for the coming year in February. So we will do that on that call.

Amit Bhalla - Citi

Okay. Then maybe I can just sneak a Turbo-Tandem question in there, given that Turbo-Tandem is very early in its launch, I’m a little surprised by the quarter-over-quarter decrease in revenue. I would think that some of the issues you outlined in CIA would have had a broader impact on the business. Can you just talk about the impacts of Turbo-Tandem and when you expect that to return to growth? Thanks.

Jason Hein

Yes, Amit. This is Jason, I’d say a couple of comments on the Turbo-Tandem the couple of things we look at. If you look it, if everyone was having a decline across our sales territories, our 43 reps, I would be concerned. But when we break out the individual territory performance, we’re seeing some very strong performance on say the top 15 and we’re seeing some marginal performance on the bottom 12 to 14. So, one of the reasons that drove our realignment was looking at that lowered, we don’t see this as a straight across reduction. I think to Jason’s first question about reduction of our cost structure. But this was about looking at where the efficiencies and where the success has been.

So for Tandem, we are seeing success in this in probably the top third of our territories and the middles and the average. But when we look at it, we’re seeing great adoption on the ease of use and the changes we made at the end of last year to improve that product, so that has gone very well. And if you look at one simple, maybe boil it down to one issue, is we projected our reps to be on average of four or five accounts right now at this point of the launch. Right now, we’re probably trending closer to that four number than the five.

That one-number difference does account for a good portion of the reduction from our expectation. But we’re seeing that success in some accounts in those top third, so we see it is possible, and they are far exceeding that. We do look it and we want to make sure that as we enter new accounts that we are having the success we want before we jump into that fourth, fifth, and sixth account. So we’ve actually put a little bit of a control on that to ensure the quality is high is on each account that adopts the technology.

The last thing I’d add to that is we do see some disruption. We’re going after some key accounts. They’re high volume accounts for us. They’re also high volume accounts in general. And we’re seeing competitive product introductions also go to those centers, so we do see some pressure. And it really comes down to seeing maybe a delta of the four versus five accounts, and we’re seeing competitive pressure, but at the same time are very pleased with the higher-end performance we’re seeing in there top third maybe top 40% of our team.

So we’re encouraged by that. And I think the changes we’re making here in the team and some realignment is not a cost-cutting structure, it is about maximizing our performance. So I’m encouraged by what we see, and I’m encouraged by what we’re going to do here in Q4.

Amit Bhalla - Citi

Does it growing during fourth quarter, sequentially?

Jason Hein

I’d really not go through projection. I think I want to say, I haven’t quite feel confident about how the realignment is going to impact that impact on a short-term. I think that’s going to be a variable that’ll probably be Q4. Q1, I think we’re going to see any of the disturbance from the realignment will of course abate at the end of the year. But I’d say on average it’s probably a mixed bag on being close to what we’ve seen before in Q4.

Operator

Your next question comes from the line of Suraj Kalia with Rodman & Renshaw. Please go ahead with your question.

Suraj Kalia - Rodman & Renshaw

Guy, I understand this might be somewhat of an unfair question, especially given all the changes have held. But when you look at, if memory serves me right, about a year or so ago, we embarked on this mantra of deeper account penetration. So far based on the reported numbers, unless my math is wrong, utilization rates have not budged. There’s somewhere between $27,000 to $28,000 per laser per quarter. Can you or Jason or anyone shed some additional color in terms of was it purely a function of the distraction and the legal headaches? Is it related to competitive pressures? How would you characterize that? And how should we look upon it moving forward?

Guy Childs

Let me give you the exact numbers, Suraj and then I’ll let Jason comment. But as of Q3, in the U.S., we’re at $30,000 per account per quarter, that compares to 31,000 per account per quarter a year ago, so not a dramatic change.

It’s probably more reflective of the competitive environment than anything, and the fact that it’s held up where it is, I think, is somewhat encouraging. I’ll let Jason comment further.

Jason Hein

Yes, Suraj. I would add that when you look at the revenue per laser, if you’re looking at across a 500 for our vascular interventions accounts or maybe 700 plus for the total, you’ll see obviously revenue divided by the number of lasers. But what we’re seeing within that distribution is we have an emphasis throughout this year working in what we would first characterize in our key accounts, that’s part of what I alluded to prior about some of the top performing sales reps are obviously taking that time to go and improve their business and their position and their product introductions.

It ranges everything from training other physicians to bringing in the other product lines that are not used to increasing utilization and taking shares. So what’s masked in those macro numbers is looking at what we’re doing within any range of these 20 to 50 to 80 centers that we’re focusing on.

So without breaking out the specifics and kind of quartiling out our customers we are seeing the traction we want, overall, though. Why you see a flat number on the macro is of course one of the factors is we’re not adding to our number of lasers like we have in prior years, but we’ve had a strong number of lasers in this quarter.

I think we’ve had a net of 18 laser placements in the quarter which is probably higher for the year, comfortably are high. And that matches our strategy of focusing on key accounts. And it’s going to take time for those 18 centers that we’ve just got up and going to demonstrate their performance, but that’s also part of the new compensation plan. That’s part of, you may call it, the targeting our key accounts, but at a macro level, yes, we mask a lot of that, but I just want to be aware of some of those elements that are going on that we’re very pleased that they have been in place for about six months.

Suraj Kalia - Rodman & Renshaw

Okay. Well, I’ll just rest that question. Jason, when you look at the VI market or Guy for that matter, when you look at the VI market, Turbo-Tandem is down sequentially. And obviously it is a softer quarter, but with what we are hearing on how Covidien is gearing up in the field, or Metronic pushing into the field, I mean you guys have some 800-pound gorillas coming into this space. And help me understand, is it just a function of changing the comp structure for the sales guys that is going to get us out of this flat line trajectory?

Obviously, the PME trial for ISR is good, and we appreciate and acknowledge, how you guys are still embarking on that, but in the interim, walk us through how you’re going to fight all these, the 800-pound gorillas coming in?

Jason Hein

The large competitors have been a factor since we worked here. So we’re used to that, we expect that, and we’ve won against them in the past. I think the challenge is there are new competitors in the market, and just like the question about the suitability Jason Mills asked about the Lead Management side, we do operate in very attractive markets, and we acknowledge the fact that our other competitors are interested in that as well. But some of the comments you’ve heard already today, the cost savings was really not designed as cost savings, it was really an effort internally to look at improving our efficiencies in order to gear up for this kind of head-to-head battle with competitors like this. It’s not take 10% across the board out of our cost line. It’s not that at all.

We’re actually looking at areas where we’re winning. My comment about our top 40% reps. Let’s leverage that. Let’s improve the comp plan to retain that top talent. Let’s allow them to beginning to go toe-to-toe against competitors. Shar alluded to the new product line, we definitely want to pour more money into R&D and increase that investment. We also see the value of clinical trials. We’ll continue to invest in that going forward.

So we recognize the challenge out there. We welcome it. But I think what we’re doing is when we talk about these efficiencies and cost structures, we’re looking at areas where we’re winning those fights, and we’re going to leverage those wins, and we’re going to retract a little bit of our investments from areas where we’re losing. But we’re encouraged by seeing areas where we’re winning and we’ll continue to fight large competitors.

Suraj Kalia - Rodman & Renshaw

And finally, again, with the prelude that Guy, Jason, and some of the other key execs on the counsel, this is not a reflection on you guys. Obviously, you all are keeping the ship afloat. I guess that I have to ask, the way this whole change has been brought about in terms of CEO position. Have you all been given an indication of, look, we are going to do a six-month search, these are the traits we are looking for in a CEO internally or externally and within six months we will get it wrapped up? That’s the first part of the question.

The second part is, I worry that a new guy comes on Board, let’s say completely, he is from a glass industry or whatever. He’ll have his own strategic vision and then we’ll go back in a product cycle where comps are changed and the whole thing starts all over again, just trying to reconcile what you guys are doing, and the continuity that will be presented with whoever comes to the helm. Thanks for taking my questions.

Guy Childs

Yes, Suraj. This is Guy. Well, a couple of points. First the Board Executive Committee is conducting a search and they’re entertaining a wide range of candidates. I think second, this team, and Emile and everybody throughout the company spend a lot of time developing a strategy that’s focused on developing new products and important clinical research in the form of the in-stent restenosis trial. So, I can’t predict where all of that goes. But I would say that this team here is very comfortable with the strategy that we have in place, and we believe it’s the appropriate strategy. And we’ll leave the executives search to the Board. They are optimistic about the ability to attract CEO. We share that optimism. And we’ll let that process play out.

Operator

Your next question comes from the line of Josh Jennings with Jefferies & Company. Please go ahead with your question.

Joshua Jennings - Jefferies & Company

Just to sort of retrench back on the Turbo-Tandem. Can you just talk about the customer base that you’re having a good impact with, talk about the reorder rate, the utilization rate and then whether or not you’re actually realizing any of those cross-selling synergies that are potential with below the knee procedures?

Jason Hein

Yes, Josh. As far as specifics on the Turbo-Tandem, I’d tell you that as you look at it at a macro level, you’re seeing just over 1 million in the quarter. We have seen in and we’re roughly in 250 accounts right now. We’re just slightly below what we had targeted in our launch plan. And again, my comment was limiting that incremental one account pro out of our reps that were still developing say that third and fourth, so.

So in the accounts we’ve been in, let me just kind of reiterate some of the highlights. The clinical success has been very good. We haven’t had products issues as far as the ease of use and the adjustments we made at the end of last year, so that’s been very positive. We have been able to attract more specialties and we’ve talked about prior calls with vascular surgeons, and we’re also seeing good feedback, and even ASP we’ve seen zero erosion in the pricing. So we haven’t had pressures there.

As far as the below the knee synergies, that is of course, in you go with the new product or combining product lines. We are working on a few strategies. In certain accounts we have seen some nice synergies. It’s actually worked well as we’ve created what we call a center of excellence program. And their belief and trust in the laser has created that synergy. What you don’t see in the macro numbers is like I mentioned earlier, we see a distribution of performance across the 43 territories, but I think we are seeing that, that is part of our strategy as we continue this launch, as we know we’re still really in the third quarter of this launch and if this expands out that synergy is a key element.

Joshua Jennings - Jefferies & Company

And just in terms of your view on potential inflection point for Turbo-Tandem and adoption. What does it take, just continued penetration and experience with the device? Does it take more clinical data? What do you need to do to complete with some of the existing technologies out there for the above the knee application?

Jason Hein

I think you named a couple of them. Our continued experience of the product is important. We still have many of our physicians who haven’t completed say their 10 or 12 case. That’s going to be a factor. Obviously, enhancing our product line, if we create these synergies, the synergy can come towards Turbo-Tandem as well. We also look at clinical data. You mentioned that. That’s a clear one. We have very limited data during our initial evaluation, which is productive for what we need but as far as any registry or prospective data, that would be interesting. That’s part of our planning. We’ll be assessing that here in the month of November. But that is something we spend a fair amount of time on recognizing and that’s an absence right now and the market, is some pretty strong data.

Joshua Jennings - Jefferies & Company

Great, and just if you could comment on the performance of just the peripheral below the knee business or devices in the quarter, sort of crunching the numbers with 1.1 million in Turbo-Tandem, and as recorded you had a down tick. It’s a seasonal quarter, but can you just comment on the performance of that business, you are confidence that that can rebound in Q4, and then also, just the competitive environment, are you seeing a lot of competition from CSII, and their Diamondback, and then also Covidien’s Turbo Hawk below the knee device that’s been launched recently?

Jason Hein

Yes, we are seeing the competition step up and of course, that’s what I alluded to earlier. We are seeing our atherectomy business is down, we see it is down versus Q3. We obviously have some three or four specific initiatives to address that. Competitive pressure is really kind of twofold for us. Obviously, these are customers who are very interested in new technology, but they have the same approach we do, and they call it the top 50, 100, 150 customers out there.

These are common targets for all of the new companies to be taking their new products to, so that that is a factor. And prior question was on the clinical data that is one as well. But we do see some leverage with SFA products, some of the technologies. We are working on it, Shar eluded too, for delivery next year and then probably the third element is, some of the training and education initiatives as we go back and look at where we are having great success with below the knee and above the knee, how can we leverage those great experiences. And we don’t have to wait for new products a year from now, how do we leverage those good experiences. And that’s probably an important plan here in the short-term, we haven’t said enough about it and that is there have been some very good experiences. We have had some great discussion with physicians, some collaborative work, I think, that is going to help get that story out as well.

Joshua Jennings - Jefferies & Company

Great. And just lastly, with some of the clients in the quarter in the peripheral business, you mentioned that pricing hasn’t been pressured for Turbo-Tandem. Can you just talk about price on your other peripheral devices and where that’s at, what you’re expecting going forward? And then whether there’s significant competitive pricing going on out there? Thanks.

Guy Childs

Josh, this is Guy. In terms of the pricing, they’ve been stable not only in Tandem, but in all of our other atherectomy devices as well. On a worldwide basis, understand there’s some distributor mix in there in that internationally. But on a worldwide basis, our non-Turbo-Tandem peripheral atherectomy business is just under $2,000 per unit and that’s been stable.

Jason Hein

And Josh, I would add that ASP has not been an issue for us on our atherectomy products. What’s interesting there is there’s also an opportunity in that and we are competitively priced compared to the competitive products. And that’s one thing when we look at the successes we’ve had in certain areas that was one of the strong factors there. We don’t see pressure on price because we are competitively priced, and that’s one of the elements, when we have a good clinical outcome coupled with a competitive price. That’s part of our strategy of saying what some of the advantages are and that’s one reason why I’ve seen a drop in the ASP.

Operator

And at this time, management has time for two further questions. Your next question comes from the line of Thomas Kouchoukos with Stifel Nicolaus. Please go ahead with your question.

Thomas Kouchoukos - Stifel Nicolaus

A lot of them have been asked already. Just looking at Q4, Guy, typically a stronger quarter for you, you’re looking for a relatively flat performance sequentially. Can you talk about, you’ve gone through the competitive landscape pretty well I think and talked about some of the restructuring issues. What are you seeing in terms of overall procedure volumes and kind of the economic weakness? And what are your thoughts going into Q4 about there has been some talk about maybe a pickup in procedures. And as you take the temperature of the market, what are you guys seeing on that front?

Jason Hein

Guy, I’ll go ahead and take that one. We see anecdotal feedback on that, we do hear pressure, but at the same time we do know if some customers who’s activity is up, without seeing probably more rounded out market data this year. I’d hesitate to put stake in the ground and say well, I think the growth is or not. But we do see economic pressures, it’s impacted other companies, it’ll impact say even capital placement.

But yet we had a strong quarter as we focused our efforts to place the net of 18, but we see it both ways right now. I’m hearing physicians tell me that there is pressure down and at the same time I hear some other guys say there, they’re picking up some activity. But you’re right, Q3 is seasonally a soft quarter. But I think it’s mixed feedback right now from the customers I was with last week.

Thomas Kouchoukos - Stifel Nicolaus

And then on the Quick-Cross product line, looks like you spent some of the time this quarter flat versus down in the prior couple of quarters. Do you think the worse is over from the competitive filing standpoint that it’s upwards from here or do you think it’s just a single quarter anomaly that you’re able to flatten things out?

Jason Hein

Well, as we mentioned last quarter we had some strategies to stem that what you heard from Guy earlier that we were flat, so we accomplished our goal. I think we’d all be naïve to think that an attractive market and a good product line would not continue to be under fire. So we have to keep up our fight. We have some offensive and defensive ideas that we have in progress, but to answer your question, no, I don’t think the worst is over in the short-term. But we should expect further challenges. It is a very attractive product and a very attractive market segment. So we’ll continue with the expectation that this will continue through the next several quarters.

Thomas Kouchoukos - Stifel Nicolaus

Okay. And then one follow-up for you, Guy. Looking at the quarter itself and all of the one-time items, you strip those out and clearly the profitability is improving and you guys have shown very nice progress on that front. As we look into Q4 and next year, and I’m not asking for guidance here, but when do you think a lot of the noise goes away? I mean do you see a lot of the onetime items being kind of out of the picture as we move into next year and we get a cleaner kind of picture when you report?

Guy Childs

I hope so, Tom. As we look in to next year, I think, I’d be remiss if I didn’t say that there’d likely be something in Q4 this year that our contractual provisions within the employment contract that will be disclosed at the appropriate time. But it’s all contractual. That contract is public information and we don’t expect any deviation from what’s contractually agreed to.

Thomas Kouchoukos - Stifel Nicolaus

Okay. And so as you go into next year, would it just be the accruals you’ve taken basically the legal defense. Is that, the only thing that stands...

Guy Childs

Yes. Well, we’ve taken what we hope is a good estimate to cover those costs, up through a jury trial. So there should not be unless there’s something we don’t anticipate in terms of those proceedings, there should not be ongoing costs in our P&L there.

Operator

Your next question comes from the line of Bud Leedom with Global Hunter Securities. Please go ahead with your question.

Bud Leedom - Global Hunter Securities

Hi. Thanks for taking my question. Most of them been answered, but I just wanted to follow-up on the economic side of the ledger. You talked about patient volumes, but I’m also wondering has there been any change in payer reimbursement, the environment there, such as increased documentation or anything that you’ve seen differently in this quarter, relative to the last couple of quarters?

Jason Hein

Bud, as far as economic probably the most discussion I’ve been involved to noise, so to speak has been around changes in reimbursement. I think there has been a lot attention placed on it this year.

I think people are more aware of coding. They want to tighten up their coding. They want to make sure they’re properly documenting everything. That has how we’ve been underway for maybe 18 months. But I think right now the interest has shifted beyond improving coding, it’s probably transferred to the next stage, which is understanding what the changes are going to be here for next year and some of those discussions.

Bud Leedom - Global Hunter Securities

Okay. Fair enough. And then Guy on this, on the R&D line, just looking forward, obviously there is a focused strategy on new products coming out. We also have the ISR ramping up in 2011. How should we look at the R&D line on a go-forward basis? It’s kind of trough here this year, do you expect that to pick up or a lot of these products just developed on the run rate we’re seeing right now?

Guy Childs

Sure. In terms of, as a percentage of revenue, we’re at 12%, that’s on the low-end of what we’ve done historically. We’re just entering our planning process for next year. The thing that we know for sure is that we’re going to initiate the randomized study for in-stent restenosis. We also have some projects rolling off. But as I said before, the quarterly cost for the trial is going to be in the range of 250,000 to 350,000 per quarter, and obviously it’s going to fluctuate based on enrollment activities and other things. So that’s a known increase. The other things are we’ll talk more about that on the next call once we get through our planning process.

Operator

And that’s all the time we have today for questions. I would now like to turn the call back to management.

Guy Childs

Thank you for participating in the call today. We demonstrated by this quarter’s results, we’ve worked hard to retain profitability in the midst of a difficult revenue growth environment. Substantial internal resources have been necessarily focused on site consolidation and compliance related activities. Now these activities are just substantially complete, these resources are now focused on obtaining increased operating efficiencies as well as building a pipeline and new product and clinical applications to drive revenue growth in the future. Thank you.

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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