Vascular Solutions' (VASC) CEO Howard Root on Q2 2014 Results - Earnings Call Transcript

Jul.22.14 | About: Vascular Solutions, (VASC)

Vascular Solutions, Inc. (NASDAQ:VASC)

Q2 2014 Results Earnings Conference Call

July 22, 2014 04:30 PM ET

Executives

Phil Nalbone - VP of Corporate Development

Howard Root - Chief Executive Officer

James Hennen - Chief Financial Officer

Analysts

Tom Gunderson - Piper Jaffray

Jason Mills - Canaccord Genuity

Ben Haynor - Feltl and Company

Operator

Ladies and gentlemen, thank you for standing by. Good afternoon and welcome to Vascular Solutions’ Second Quarter Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Instructions will be given at that time. (Operator Instructions). As a reminder, ladies and gentlemen, this conference is being recorded today Tuesday, July 22, 2014.

I would now like to turn the conference call over to Phil Nalbone, Vice President of Corporate Development at Vascular Solutions. Mr. Nalbone, you may begin.

Phil Nalbone

Thank you, Jessica. Good afternoon and thank you for joining us. On today’s call, our CEO Howard Root will review the top-line results and other key factors behind our second quarter performance and business outlook. Then our CFO, James Hennen will go through the financial details of the quarter and provide guidance for the third quarter and full year of 2014. After that, we’ll open the call to your questions.

Before we get into the details, I’ll read the necessary preamble. This conference call is being webcast to the public and is completely open to members of the media, Vascular Solutions’ shareholders and other interested parties. Today’s conference call is a proprietary Vascular Solutions presentation and is being recorded by Vascular Solutions. No other recording, reproduction, transmission or distribution of today’s call is permitted without Vascular Solutions’ consent. This call is being audio simulcast on the Internet via our company website at www.vasc.com. A replay of the conference call will be available on the Internet shortly after this call is concluded through Tuesday, July 29th. To listen to the replay, visit the Investor Relations section of our website.

Forward-looking statements made in the course of this conference call and webcast are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements can be identified by words used such as may, will, expect, continue or other similar expressions.

There are certain important factors that could cause the company's actual results to differ materially from those anticipated by the forward-looking statements as described in our Annual Report on Form 10-K and other recent filings with the Securities and Exchange Commission. Forward-looking statements are made based on our analysis as of today's date and we undertake no duty to update the information provided on this call.

I'll now turn the call over to Howard Root.

Howard Root

Thanks and good afternoon everyone. I'm pleased to report another quarter of very strong financial results for Vascular Solutions. During the second quarter, we achieved a record level of quarterly revenue, while sustaining our double-digit sales growth and improving our operating margins.

We continue to expect 2014 to be our 11th consecutive year of double-digit revenue growth and with a deep pipeline of new product opportunities, we remain very excited about continuing this trend for the foreseeable future. Our second quarter revenues grew 12% to $30.7 million, which was right at the mid-point of our guidance range for the quarter or between $30.2 million and $31.2 million and slightly above Wall Street's analyst estimates.

The geographic mix of product sales was 82% U.S. and 18% international. Our U.S. sales grew by 8% to $25.1 million, while our international sales grew by 39% to $5.5 million. International sales in the second quarter were helped by the continued expansion from the first quarter launch in Japan of our GuideLiner and SuperCross catheters by our distributor Japan Lifeline but even excluding Japan, our international revenues grew by 24% during the second quarter. Our network of international distributors covering 55 countries simply did an outstanding job selling our products and we saw a strength across a broad spectrum, starting with GuideLiner and including our SuperCross microcatheters, TwinPass dual access catheter, Venture catheter and many supportive catheters and also our D-Stat Flowable, and radial, D-Stat radial hemostat products and even our Vari-Lase laser council and procedure kit sales in international markets.

For the quarter, we estimate the previously announced recall of our Langston catheter resulted in the reduction of approximately $300,000 in our revenue. That recall was necessitated by a problem with a purchase component that could fail during use but has not been reported to cause any patient injury. We were able to quickly fix the issue and resume Langston shipments by the end of June. Without the Langston recall, our revenues for the second quarter would have grown by more than 13% to $31 million.

Now, I will take you through the highlights in our three product categories. In our largest category which is catheter products, second quarter revenue increased 17% to $20.4 million compared to $17.4 million in the year ago quarter. Once again GuideLiner was the standout performer. Second quarter sales of GuideLiner increased 49% to $7.8 million that included 42% growth in the U.S. despite the fact Boston Scientific was able to reenter the market with its competing guide extension device called Guidezilla in mid April after the federal circuit court in our patent lawsuit vacated the preliminary injunction against U.S. sales of the Boston Scientific product.

On the international side, our sales of GuideLiner grew 68% with a big boost from Japan. During January, Japan Lifeline began the market launch of GuideLiner and we are very pleased with the reception that GuideLiner is receiving in the Japanese market. But even without Japan, our international GuideLiner sales were up 42% in the second quarter and that was in spite of international competition from Boston Scientific since our patent lawsuit in the preliminary injunction only stopped U.S. sales of Guidezilla.

Overall, we're still in the early days of adoption of rapid exchange guide extension as more and more physicians are realizing the clinical benefits of using the GuideLiner in challenging interventions.

The improved performance characteristics of our third generation version called GuideLiner V3 that we launched last July has allowed us to focus on increasing utilization in existing accounts in addition to our ongoing efforts to broaden our count base.

We still see a lot of growth opportunity ahead for GuideLiner and we are continuing with innovation efforts and line extensions and accessory products to add GuideLiner’s momentum.

Other catheter products that contributed significantly to our strong second quarter performance were the Guardian Hemostat valve and related Flamingo inflation device, the SuperCross microcatheters which grew 134% helped by adoption in the Japanese market; the TwinPass dual access catheter, which grew 19%; specialty guidewires for interventional procedures, which grew 16%, and micro introducer kits, which grew 15%.

The Venture Catheter contributed more than $4,000 in sales as we continue with the global roll out of that device which we acquired from St. Jude Medical and then relaunched last year.

Also in catheter products sales of our Pronto extraction catheters were stable sequentially, but declined 10% on a year-over-year basis to $4.6 million. This has been a mature product category for sometime now and recently we have seen heavier competitive pricing pressures and even more new entrance into the aspiration catheter market.

Pronto remains the leading extraction catheter on the market due to its superior features and benefits. And we have strategies in place to lower our cost to compete more effectively in this price conscious market. Our second largest product category is hemostat products which includes our thrombin-based patch products our D-Stat Flowable and our radial products.

During the second quarter, hemostat products revenue increased 3% to $6.2 million. Our traditional hemostat business remains under pricing pressure as well as the steady migration away from thermal artery access toward radial artery access in the United States. Our growth in the hemostat products category is being driven by our two newest products that cater to radio access, the Vasc Band Radial Hemostasis device and the Accumed wrist positioning splint. Combined, these radial products contributed just over $1.1 million in sales during the second quarter, an increase of more than 51% from last year's second quarter.

The Hemostat products category remains a major focus of our new product initiatives. Already this year we've launched two important new products with the U.S. market launch announced on June 19th of our Gel-Bead Embolization Spheres for the treatment of hyper vascular tumors and the late January launch of our ThrombiDisc Topical Hemostat for control of bleeding around indwelling catheter lines. While both of these new products are clinical niches that require evaluations for wide spread adoption. We believe they both will become material revenue contributors starting in 2015.

Our third product category vein products and services had a second quarter revenue increase of 5% to $4.0 million. The growth driver in vein products is our reprocessing of Covidien’s ClosureFAST varicose vein treatment catheter which contributed $2 million in revenue during the second quarter, an increase of 14% from $1.8 million in the second quarter of 2013.

Since our launch of reprocessing at the beginning of 2012 we have quickly built it into a material revenue driver and during the second quarter, we continued to expand our customer base by adding 38 new accounts bringing our total to 600 accounts in the U.S. But in the second quarter we also started to see more aggressive pricing tactics in Covidien particularly with our high volume customers which negatively affected our sequential results.

Our sequential quarterly reprocessing revenue was also negatively affected by the seasonal trends in the vein market as well as by our reprocessing partners turnaround time dropping substantially in the first quarter which resulted in a $600,000 backlog from December being cleared in the first quarter, but obviously not repeated in the second quarter.

Beyond our revenue growth during the second quarter we continued to expand our operating leverage, which is inherent in our business model. Compared to the prior year, in the second quarter our operating income increased by more than 13% to $5.0 million and without the Langston recall we estimate that our operating income would have been up by more than 25%. But even with that substantial improvement, part of our operating leverage this year is being offset by substantially higher legal expenses on two matters. One of these matters is the patent infringement suit that we filed against Boston Scientific concerning their Guidezilla competitor to our GuideLiner catheter. As previously discussed, the Federal Circuit Court vacated the preliminary injunction on Guidezilla U.S. sales on April 15th and during the second quarter we focused on active legal preparation and discovery work at the trial court level with the case still scheduled to be ready for trial in March 2015 but an actual trial date likely to be set for later in 2015.

The other legal matter involves the whistleblower lower loss suite initiated in 2010 and intervened in by the U.S. Attorney's Office for the Western District of Texas involving the short kit version of our Verilase vein product. As we reported in February we agreed to settle the civil lawsuit by agreeing to make a one-time payment of $520,000 while making no admission of fault or liability. Because of the written agreement moralizing this settlement still has not been completed and signed by all parties the $520,000 payment remained on our balance sheet on June 30th as an accrued expense.

As we previously disclosed settlement of the civil litigation has no affect on the related criminal investigation. That investigation is described in our periodic reports that we filed with the SEC including our quarterly report on Form-10-Q that we filed today. We obviously do not control the legal process or this investigation and therefore any estimate of legal expenses and outcomes is almost impossible to make with any precision. But at this time we expect to continue to incur substantial legal expenses through the remainder of 2014 and therefore we are not changing guidance for legal expenses at this time.

Finally regarding new products and development our pipeline continues to be full. Our goal during last few years has been the launch around 10 new products each year and right now we have approximately 40 new devices in various stages of development. In addition to ThrombiDisc and Gel-Bead we expect to launch around 10 new products this year all from our internal pipeline. We are also pursuing several opportunities to bring in new products from distribution agreements or tuck-in acquisitions. We continue to pursue reprocessing of a second cardiovascular medical device with our reprocessing partner which we view as a significant commercial opportunity starting in 2015, but we have no updates on the status of this new reprocessing product at this time.

And with that I will turn the call over to James for the financial review.

James Hennen

In the second quarter, our gross margin was 66.5% down from 68.8% in year earlier quarter. There were two factors that contributed to the lower gross margin in the most recent second quarter. The first was a much higher proportion of international sales through independent distributors in our overall mix. 18% this quarter compared to 15% in the year ago second quarter.

Second, we incurred approximately $360,000 in expenses related to the Langston recall. Without those recall expenses, our gross margin would have been approximately 67.7%. For the remainder of 2014, we expect our gross margin to be in the range of 67.5% to 68.5%. Our second quarter operating income was $5 million representing an operating margin 16.4%, again without the 300,000 in loss revenues and 360,000 in recall expenses from the Langston recall operating income would have been approximately $5.6 million for an operating margin of 18.1%.

In the year ago second quarter, our operating income was $4.4 million which represented an operating margin of 16.2%. Looking ahead, we expect our operating margin to be around 18% in the third quarter and to average approximately 17% for the full year. As we previously discussed, those operating margin assumptions for the full year reflect our expectation of $4 million in legal expenses which is more than double our ordinary level of legal spending.

During the second quarter, G&A expenses were $2.7 million or 9% of revenue compared to $2.3 million or 9% of revenue in the year-earlier quarter. We expect G&A to be 8% to 9% during the rest of the year, subject of course to variability and litigation developments. Note that in recent years a typical level of G&A spending for us has been in the range of 6% to 7% and we would expect to move below these traditional levels once our litigation activities return to a more normal pace.

Sales and marketing expenses were $7.3 million or 24% of revenue compared to $6.8 million or 25% revenue in the year ago second quarter. Sales and marketing expenses remain a key leveraging point for improving our operating margin overtime as more products are added to the relatively fixed cost structure of our U.S. sales force and the international distributor network.

At the end of the second quarter we had 94 field sales and sales management employees in the U.S., a level that has remained quite steady since the beginning of 2008. We estimate that sales and marketing expenses as a percent of revenue will be approximately 23% to 24% during the remainder of 2014.

Research and development expenses were $3.2 million or 11% of revenue compared to $3.5 million or 13% of revenue in the second quarter of 2013. For remainder of the year, we expect R&D as a percentage of revenue to be approximately 11.5% to 12.5%.

Clinical and regulatory expenses were $1.3 million in the second quarter or 4% of revenue compared to $1.1 million or 4% of revenue in the year ago quarter. We expect clinical and regulatory expenses as a percent of revenue to remain relatively constant at around 4% in each of the remaining quarters of 2014. The medical device excise tax was $353,000 during the second quarter or 1.2% of revenue compared to $339,000 or 1.2% of revenue in the year-earlier quarter. We expect our medical device excise taxes to remain at approximately 1.2% of revenues for the remainder of this year.

Amortization expense in the second quarter was approximately $412,000, an increase from $392,000 in the year ago quarter. We expect our quarterly amortization expense to remain at approximately $410,000 for the balance of 2014. Income tax expense was $1.8 million and pre-tax income of $5 million, representing an effective tax rate of 36%.

In the year ago second quarter, our income tax expense was $1.6 million and pre-tax income of $4.4 million, reflecting an effective tax rate of 37%. For both the third quarter and full year of 2014, we expect the income tax rate to remain at 36%. For the full year, we expect income tax expense to be between $7.1 million and $7.6 million. Of this, we expect to be able to utilize $2.4 million of deferred tax assets to offset our tax payments, resulting in the use between $4.7 million and $5.2 million in cash to pay state and federal taxes in 2014.

Second quarter [net] income was $3.2 million and increase of 14% from $2.8 million in the year ago quarter. Adjusting for the effects of the Langston recall, our net income would have increased by approximately 28% to $3.6 million. On a GAAP basis, earnings per fully diluted share in the second quarter was $0.18, an increase of 9% from the year earlier $0.17. Adjusting for the expenses associated with the Langston product recall, adjusted earnings per fully diluted share was $0.20, an increase of 22% from the $0.17 in the second quarter of 2013. Our EPS guidance for the quarter had been $0.18, $0.19. So without recall, we’d have exceeded our guidance.

The total number of shares used in calculating fully diluted earnings per share was 17.6 million in the most recent second quarter compared to 16.9 million in the comparable period a year ago.

Turning to the balance sheet and cash flows. During the second quarter, we generated $3.5 million in cash from operations. We used cash of just under $1 million for capital expenditures, and just under $500,000 to purchase shares divested under outstanding restricted stock awards to satisfy income tax withholding requirements.

In 2014, we expect to generate cash from operations of just over $20 million. And we estimate that our capital expenditures for the year will be approximately $12.1 million, including our previously announced plans to acquire our manufacturing facility later this year for $7.2 million. With that facility acquisition, we expect to reduce our annual occupancy cost by around $350,000 on an after tax basis starting in 2015, resulting in approximately $0.02 per share of earnings accretion.

Our days inventory in-hand at June 30 was 147 compared to 150 at the end of March. We expect our days inventory in-hand to remain in the range of 140 to 150 days during the remainder of 2014, with a projected inventory balance of approximately $16 million at the end of the year. Accounts receivable days sales outstanding were 49 at June 30 compared to 51 at the end of March. We expect our DSO ratio to remain at this level for the remainder of 2014.

Now I’ll turn to the financial guidance. Starting with the full year, we’re raising the bottom end of our guidance range and are now targeting revenue of between $123 million and $125 million. Previously, our guidance range was a $121 million to $125 million. At the midpoint of our new guidance range, our growth would be approximately 12% over the $110.5 million in net revenue we reported in 2013.

We’re also raising our full year GAAP earnings per share guidance including our higher than normal legal expenses to a range of $0.73 to $0.77 per share which represent growth of 12% to % 18 from the 2013 GAAP EPS of $0.65. We are projecting a 36% income tax rate in 2014 compared to 31% last year. The lower tax rate in 2013 was a result of high level stock option exercises and the recognition of R&D tax credits that have been deferred due to congressional delay at the end of 2012.

Included in our EPS projections for 2014 are $3.8 million in non-cash stock-based compensation, $1.6 million in amortization of intangibles and between $1.4 million and $1.5 million for the U.S. medical device excise tax.

For the third quarter we expect revenue of between $30.5 million and $31.5 million. At the midpoint that represents growth of approximately 11% compared to the $28 million reported in the third quarter of 2013. Our GAAP EPS guidance for the third quarter is between $0.19 and $0.20 per diluted share compared to $0.16 in the third quarter of 2013.

Included in EPS projections for the third quarter are $800,000 in non-cash stock-based compensation, $410,000 in amortization of intangibles, approximately $370,000 for the U.S. medical device excise tax and a 36% tax rate.

With that, I will turn the call over to the operator for the question-and-answer portion of our call.

Question-and-Answer Session

Operator

Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. (Operator Instructions). And our first question comes from Tom Gunderson from Piper Jaffray.

Tom Gunderson - Piper Jaffray

Hi good afternoon guys.

Howard Root

Hi, Tom.

Tom Gunderson - Piper Jaffray

So let’s start with strong oU.S. growth and in the text Howard you talked about sort of a broad strength among the distributors. I am just curious if you can give us a little bit more color on that, are their cath labs busier, are the new products pulling through other products for the distributors and making the growth there, does it feel like a onetime or does it feel like maybe a little sustainable?

Howard Root

I think it’s really primarily two things. There is a couple of new distributors we have changed some distributors in a couple of territories to get better representation and they have done a nice job. And as well as expanded a few more territories there are a couple of more countries that we get into but namely a couple of countries we got better representation. And then it was just I think a better effort. It’s not the number procedures I mean if you look at what it is and it’s not like cath procedures are growing 35%, 40% anywhere in the world I don’t think maybe a very few markets but not where we are.

And so it’s got to be better performance and really broadening the appeal. So it starts with the right people doing the right things at the right territories then it’s giving them the right tools and making sure that they are hitting the right messages to go out there and then important it’s having the right products. And GuideLiner V3 is the leading charge and that really gets people excited and from that you can pull things in behind it in these countries.

So I think if you look at our international growth I mean I don't think we are going to expect to see that kind of growth 39% growth year-over-year international for the foreseeable future, I think this is a nice step up. But it's not a onetime step up. I mean part of that is Japan getting up to speed fully feeding their distribution network and getting things going there, but even without Japan we were up 24% internationally in the quarter. So, I take 24% growth in any market going forward. And that really is the result of distributors doing better, but I don't think we're at the peak of that.

I think another way of looking at it, I mean historically we've been a little bit under penetrated international compared to the U.S. and part of that, because we are not direct international so we don't control our own destiny. But when you get the right distributors with the right products and they are hungry, this is the kind of performance you can get with a really good solid international distributor network.

So, I think we'll plan a little bit of ketchup, we've got a little bit of the win from the Japan launch of GuideLiner and SuperCross and we've got a little bit of a benefit from improving some of the distribution in a couple of countries, but I think it's primarily just better execution with really good products.

Tom Gunderson - Piper Jaffray

Thanks. And then just a small product/competitor question. On ClosureFast, if I understand you right sequential growth was less than you maybe had expected, but it was also exacerbated by an extra 600,000 in Q1, so maybe that would have been closer to 2.1, if that 600,000 had been in the Q4 is that -- am I getting that right?

Howard Root

Yes. So what happen is in Q4 our sales force did a great job and in the first two years they did a great job way over our expectations for this reprocessing service. And in Q4, you get that big push and this year was even exacerbated, because people were worried about their insurance and so they make sure that they got their procedures done before January 1. So they had a big influx of catheters reprocess and that ran up the turnaround time.

So things that would normally have been in Q4 got pushed into Q1, that was about $600,000 of sales of revenue in Q14 that came from Q4. But then as Q1 gets toward the March timeframe especially in the Southern Area of the country number of procedures goes down and our turnaround time got better and our reprocessing partner did a great job of staffing up extending the facility to hit the turnaround times.

So then we did not have a back order coming into Q2. And then at the end of Q2 you are into the June month and then we all know that then procedures go down then and so that's kind of the sequential story there (inaudible) has always been our most cyclical business by far and that's what we're running into. So I think it was a little bit higher in Q1 than what the normal Q1 would be because Q4 was just outstanding, but some of that got pushed over and obviously not repeated in Q2.

But part of it honestly is that Covidien fighting harder on price to come down considerably and they are going after a high volume accounts, once you see that and you lose one or two then you got to go back in deal with it, we've done that and we're continuing to grow. But I don't think we're going to see the same kind of growth we had in the first and the second year when we get to this 20% to 25% of the market is doing processing, if it gets a little bit more sticky then trying to get that first 10% to 15% to jump on.

Tom Gunderson - Piper Jaffray

And when did Covidien's pricing response start to have an impact was it Q2 for the first time or did it started earlier?

Howard Root

No, they've always done that. We came out and it's always the same as reprocessing you see as we look at other people doing reprocessing of the devices. The first thing I say is it can't work and then if it starts working they have to drop that and they say it's not safe (inaudible) said at the same time and then you get couple of years of experience 50,000 catheters reprocessed, no problems and that argument runs hollow and so then they have to deal with it on a pricing basis.

And in the second year we started to see more pricing attacks. And it's always a question where is the customer comfortable doing reprocessing and where are they comfortable saying I am just going to buy new. And so it's a continuous process and not a one-time event but in the second quarter we saw a couple of the large volume accounts go away from us and we’re doing something to get them back, but in this market the large vein clinics and I don’t mean just one clinic often times there are network that has 5 or 10 clinics with one customer. And if you lose that customer it can be material and it’s only increment. I mean we’re still growing but we’re not growing like we had in the fourth quarter and the first quarter and I think it’s probably because Covidien just got a little bit sharper pencil on the pricing.

Tom Gunderson - Piper Jaffray

Got it. Thanks for those answers.

Howard Root

Thanks Tom.

Operator

Thank you. (Operator Instructions). And our next question will come from Jason Mills from Canaccord Genuity.

Jason Mills - Canaccord Genuity

Hey guys, congratulations on a good quarter.

Howard Root

Jason, thanks for joining us.

Jason Mills - Canaccord Genuity

You bet. Howard, I’d like to focus and I understand in Japan the Japanese market a little bit and I know that you’re careful to point out that you grew very well outside the U.S. without Japan. But just how important could Japan be for you over the next couple of years? And where are you if you use the baseball analogy from an innings standpoint with GuideLiner in Japan within early seemingly good adoption happening in the first couple of quarters. I am guessing it’s still early but just maybe characterize that opportunity with not only GuideLiner but the SuperCross was phenomenal in the quarter as well. Generally speaking, your portfolio matches up with what Japan does from a cath lab standpoint, but it’s never really been that big for you. So I am wondering if over the next couple of years, it’s going to be something to hear about more?

Howard Root

Well, Japan is definitely a different market and you know that I know that and with the caveat that I am not an expert in selling in the Japanese market and I am getting things second hand here. Where we are with the GuideLiner as we finally found a product after 17 years we found a product that really fits into Japanese market, challenging interventions is what they are all about, they want to use the new tools to make it better. They are price conscious just not as price irrelevant as it used to be in Japan. But they are aggressive to adopting new technology that brings a clinical benefit. And then we matched up with Japan Lifeline which is just an outstanding partner for us.

They understood the product, they know this area, they've got the right team in place. They put together right marketing materials and they did a great job starting in January to launch it. So six months in from January through the end of the second quarter it's still getting the product out there on the shelves getting the evaluations, getting it started so they're feeding the channel to get it all operational. And there is a little bit of course when you go through distributors you got to feed the channel and get its staff right and then from there as they continue to use it, it gets reordered.

So looking in Japan and the rest of this year we think it will be relatively constant to what the second quarter is. And maybe that's little conservative but I just want to be there given that I am not travelling to Japan seeing what's going on. But we have gotten great reports from them on the clinical utility of the product and the uptick of it. And both the SuperCross and the GuideLiner at least with the GuideLiner I mean at list with the GuideLiner but then the SuperCross is really state of the art micro catheter has done well with the Japanese people so on the reimbursement is an important thing to deal with they've done that in the Japanese market as well.

So I can't give you exact number I say we're in about 400 centers in Japan and if you want to get it there that's about one-third of the interventional labs in Japan so around 1,200 total of about third of those. In the US by contrast we sold the GuideLiner into almost every substantial interventional cath lab in the country and that's about 2,000 and I don't for quite add 2,000 (inaudible) get close because if you do challenging interventions you want to have the GuideLiner on the shelf.

So but Japan Lifeline obviously goes after the busiest accounts first, and then moves on from there so I am not saying that we're one-third of the way into the potential in Japan but I certainly don't think we're not half the way to it could be but when we get there, it’s going to be a little bit outside our control because we are dealing with an independent distributor.

Jason Mills - Canaccord Genuity

That’s helpful. And then sort of following up on Tom’s question about ClosureFAST but then also loping into hemostat business which you made mentioned of in your prepared remarks. It looks like at least from our modeling perspective we are a bit too aggressive with just sort of modeling for the outstanding growth you had early on. So now we are understanding a bit more about that market becoming a little bit more competitive. At the same time your B revenue estimates notwithstanding Langston and so you are getting that from other areas. So as you would -- as we model going forward and you have done a good job of giving guidance from a broad perspective but it seems like perhaps what you are sort of insinuating to is you may expect a bit of acceleration in growth in the total hemostat product line, primarily from the radio products and maybe subdue your expectations on the vein side at least until we see more evidence of what’s going on in the market. Is that fair?

Howard Root

Yes, I think you have been around this industry long enough and you see what we have done too is that in today’s market you can’t just take one product and continue to hammer at home and get huge growth always forever. When we have 80 products to benefit as you are going to have some that are growing more than you expect and other ones that unfortunately aren’t going to do as well as you expect. And to get double-digit sales growth, you got to launch new products, you got to ride the hot hand and you have got to manage mature products. So like Pronto and D-Stat Dry are mature products.

In the hemostat area, the patches are mature just because there is a lot of amount there and price is always an issue and the switch to radial takes it away. In the ClosureFAST reprocessing, I would not call it mature but I would call it the easy growth is the first year out there because you are getting it out there and you are seeing the response, the second year you are getting the momentum continued and by the third year as quickly as we got it up to where it is, we're fighting a more competitive game. So getting it into that 30%, 40%, 50% growth year-over-year in ClosureFast reprocessing that's going to be a really tough nut to crack. And I'd be real happy if we continue to have kind of year-over-year growth we had it in second quarter going forward.

So, that on an individual product basis, I think that does kind of take a little bit of out of our expectations of where that ClosureFast product would be third quarter and fourth quarter of this year. But I don't expect it to drop; I expect it to continue to increase, but not as fast as we thought it would be.

And then the big thing in reprocessing is when we add that second product and that one hopefully we get into 2015 and that opens up a whole another market for us. So, you just in medical devices today, you just can't go out there with the same product and expect to have growth year-over-year. You've got to improve the product or you got to come up with new products and we do both of those and that's how we get it. So, it's going to be a little pluses and little minuses.

In this quarter ClosureFast is a little under what we would liked, but GuideLiner was above what we thought we could do with that. And the Japan market particularly both SuperCross and GuideLiner well above what we thought they would do in the second quarter.

Jason Mills - Canaccord Genuity

Great. And just last housekeeping on the ClosureFast. When you say you expected to increase, are you talking on a sequential basis or on a year-over-year basis? Obviously the fourth quarter is going to be difficult comp for you. But just to help us sort of making sure we adjust our model accordingly there.

Howard Root

Yes. So, it's a most cyclical business in the summer months, we're going to be on a sequential basis probably down a little bit, because you are always down in the summer months under of course main process. And in the fourth quarter it will come nicely. Overall for the year, I think somewhere around 15% growth rate, over 2013 to 2014 it's kind of where we would expect it to be, but there is some variability obviously in that.

Jason Mills - Canaccord Genuity

Got it. Okay. Thanks Howard. Talk to you later

Howard Root

Thanks.

Operator

Thank you. And our next question will come from Ben Haynor from Feltl and Company.

Ben Haynor - Feltl and Company

Good afternoon gentlemen.

Howard Root

Hi Ben.

Ben Haynor - Feltl and Company

Just kind of a follow-up on one of Jason's question, so you mentioned earlier that you're still in the early days of GuideLiner uptake; is it your view that few years out you could see the run rate double once you talk about adding new accounts, Japan I think you mentioned adding accessories to that line?

Howard Root

Yes. So I guess there is two parts there. When we say we're early in the uptake, we’re really talking Japan and 400 accounts and 1,200 labs. I think we can still grow nicely in Japan, we're not seeing we’re near at the max there. U.S. we’re three to four years into it, so we're further along in our ramp there. The market right now, originally I thought when we launched GuideLiner to be a $20 million market if everything worked well. I was obviously wrong because we're already doing $30 million in sales.

So when we look at it, I mean clinically utility of this product is far beyond what I originally thought it could be that's a good thing. And now I am looking at this potentially being a $50 million product. Now there is competition out there, so I think we have a much better product but it is Boston Scientific and they are on the market worldwide and so we're going to have to fight that game going forward.

But obviously in the second quarter that did not take a lot of wind or any wind out of our sales with the return on the U.S. market and then being active in the international market. So, where is it? This year doing a great job, I don't see it going down in the third quarter, fourth quarter, next year continued growth, particularly Japan into their second year of the launch. And I think the $30 million growing to $50 million subject to whatever competitive pressures we might have from Guidezilla being in our market.

Ben Haynor - Feltl and Company

Great, that's very helpful. And then on the Gel-Bead Embolization Spheres, could you talk a little bit more about may be how the launch is going, being a month or so into it and then maybe how you see the market opportunity there?

Howard Root

Right. So let me talk about the product and the opportunity so the Gel-Beads are resorbable gaelics and beads for use in treating hyper vascular tumors. So it’s advantages in cases where they pretty much only won temporary embolization or they don’t care about permanent embolization. We think the market in the U.S. is somewhere around $10 million to $20 million a year for that type of product. But it’s a type of product that there isn’t a competitive product out there. So it’s a plus and a minus. The minus is you’re not going out there saying this is a better product which you’re already using for the same reason. What you’re saying is this is a new product that gives you a new feature that you haven’t previously had and we’d love you to use it. And that means that you don’t have competition on that feature but you also have to get the evaluations and the understanding of why that’s the feature that resorption is the feature that the physician wants.

So in the second quarter it was really evaluation stage and as I said I think this is a material driver, material revenue generator I should say in 2015. So we’re still in the early stages of evaluations. We’ve got it out there, we had a great medical meeting where they were showing it and showing the use and actually a lot of physicians came up and expressed interest in it. And so we’re getting it out there for some evaluations and then hopefully getting some publications and then spreading the word on the use.

And the other thing about Gel-Beads a little bit is it’s in the interventional radiology market. We primarily have two main customers interventional cardiologists, interventional radiologists. Interventional cardiologists in the cardiac cath lab are much quicker in adapting new technologies and talking about and then growing it. Interventional radiologists are more I won’t say conservative but they’re not as high profile of the specialty and it takes a little bit longer to get them to adopt new things and to talk about new things and to get people to accept new things. So that’s why we’re saying it’s not a material driver for us this year but probably next year as we’re going to start seeing numbers for Gel-Beads hopefully in the U.S. market.

Ben Haynor - Feltl and Company

Great, that's all I have. Thank you, gentlemen.

Howard Root

Thanks Ben.

Operator

At this time I am showing no further questions. Mr. Root please continue with your closing remarks.

Howard Root

Right, I want to just thank everyone for participating on the call. It's been a great second quarter, we look forward to continuing into the third quarter. And if anyone has any questions, they can call us after the call is done. Thanks.

Operator

Ladies and gentlemen, that concludes our conference for today. Thank you for your participating in Vascular Solutions second quarter conference call. You may disconnect.

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