The Spectranetics Corporation's (SPNC) CEO Scott Drake on Q2 2014 Results - Earnings Call Transcript

Jul.24.14 | About: The Spectranetics (SPNC)

The Spectranetics Corporation (NASDAQ:SPNC)

Q2 2014 Earnings Conference Call

July 24, 2014, 4:30 PM ET

Executives

Lynn Pieper - IR

Scott Drake - President & CEO

Guy Childs - CFO

Analysts

Chris Pasquale - JPMorgan

Matt Black - Stifel

Jason Mills - Canaccord Genuity

Brooks West - Piper Jaffray

Charles Haff - Craig-Hallum

Suraj Kalia - Northland Securities

Shagun Singh - CRT Capital Group

Operator

Good day, ladies and gentlemen, and welcome to the Spectranetics Corporation 2014 Second Quarter Financial Results Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. (Operator Instructions) Please note today’s conference is being recorded.

I would now like to hand the conference over to Lynn Pieper. Please go ahead.

Lynn Pieper

Thank you. This is Lynn Pieper with Westwicke Partners. Thank you for participating in today’s call. Joining me from Spectranetics is President and Chief Executive Officer, Scott Drake; and Chief Financial Officer, Guy Childs.

Earlier today, Spectranetics released financial results for the quarter ended June 30, 2014. If you have not received this news release or if you’d like to be added to the company’s distribution list, please call Westwicke Partners at 415-513-1280.

Before we begin, I’d like to remind you that management will be making statements during this call that includes forward-looking statements within the meaning of federal securities laws. These statements involve material risks and uncertainties that could cause actual results or events to materially differ 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 because of new information, future events or otherwise. This conference call contains time-sensitive information and is accurate only as of the live broadcast, July 24, 2014.

I’ll now turn the call over to Scott Drake. Scott?

Scott Drake

Thanks, Lynn. Good afternoon, everyone. And thank you for joining our Q2 call. This quarter, we posted top line growth of 10%, marked by continued strong performance in the Vascular and International segments and improved execution in Lead Management.

We also completed the acquisition of AngioScore and received FDA clearance for the ISR indication, two important milestone events. To frame this call and capture the context of our business, we have in front of us three major priorities; number one, capitalize on ISR; number two, successful integration of AngioScore; and number three, return Lead Management to consistent double-digit growth.

With crisp execution and success in these areas, we will be in a very different place as a company in the not-too-distant future and we believe our market cap will reflect success.

This afternoon we’ll break down our comments as follows. First, I’ll walk through the quarter’s financial performance for each segment. Next, I’ll discuss significant progress on our growth drivers. Guy will go deeper into the financials and 2014 outlook, and then we look forward to fielding your questions.

Our Vascular Intervention business delivered revenue of $22.5 million, a constant currency increase of 18% and U.S. peripheral atherectomy was up 22% over prior year. This performance was balanced across hospital and office-based labs, and our growth rate remained significantly faster than the market. These results are driven by solid traction in the field and our expanded team is settling in.

The Lead Management business achieved revenue of $16.1 million, up 6% constant currency. Growth for this quarter reflects improved commercial execution and we continue to expect a return to double-digit growth in the fourth quarter.

We’re encouraged by the fact that growth was present in all categories, Laser Sheaths, Lead Locking Devices and a modest contribution from Mechanical Tools.

Our International team posted revenue of $8.7 million, a 17% constant currency increase. Robust growth in Japan and solid performance in Europe highlight these results. Our gross margin improvement efforts continue to pay dividends and results were again strong at 76%, a 300 basis point improvement over prior year.

Our net loss was $6.6 million or $0.16 per share and our non-GAAP net loss was $2.4 million. This excludes acquisition-related items and Guy will provide more detail.

Now on to our growth drivers. Growth acceleration in our Vascular business is predicated upon capitalizing on ISR, successful integration of AngioScore and leveraging our expanded commercial footprint. Our U.S. atherectomy growth in the second quarter was 22%, driven by sales execution, case penetration and new accounts.

Our larger sales team is increasing its productivity and performing as projected. This expanded coverage was well timed with the ISR label and the incremental scale of the AngioScore team adds substantial firepower.

We’re excited to announce that we were successful achieving the ISR indication. We are the only company with the label. Our primary competitors are contraindicated, the clinical data is compelling, and the addressable market is very large.

EXCITE acute data was presented at NCVH and was very well received. Mean lesion length was 20 centimeters, about a third of patients were being re-treated for ISR, also about a third of patients had chronic total occlusions and there was approximately three times more moderate to severe calcium present in the laser arm.

We achieved highly superior outcomes for both safety and efficacy and we also saw procedural success of 94% in the laser arm versus 83% in the control. These data turned heads. Physician feedback was that these are real world patients and the outcomes are compelling.

Our next major trade show with a full dataset, including six months follow-up will be presented at TCT. Additionally, we have submitted the publication in a very prestigious medical journal and we look forward to seeing it in print.

We are gearing up for the biggest launch in the history of the company. The full team, including our AngioScore teammates, will be trained and ready to capitalize on ISR in August.

During the quarter, we closed the acquisition of AngioScore. The deal brings together two great companies and represents a major step forward. The combination solves our highly calcified morphology gap, creates meaningful scale adding fuel to ISR and other growth drivers, provides the impetus to focus on the coronary market, broadens our portfolio of highly-differentiated clinical solution, leverages our global footprint, enhances our product and clinical pipeline and speeds our path to meaningful operating leverage.

This deal fits like a hand in glove and we already see the complementary nature of our portfolio in the form of cases using both AngioSculpt and SPNC products. Recent physician feedback using the combined technologies to aid in a complete solution for plaque modification has resulted in great angiographic results. We recently announced the launch of the 200-millimeter scoring balloon and early feedback and adoption is excellent.

In summary, our Vascular business is gaining momentum, our competitive position has never been stronger and we’re poised for success.

On the Lead Management side, this quarter we drove a return to growth. Our efforts are focused on penetrating Class I indications, executing the limited launch of mechanical tools and capitalizing on our larger commercial footprint.

HRS and CardioStim provided excellent forums to feature these initiatives. At both conferences, we saw strong clinical data supporting the fact that device infection remains under-treated or not treated at all. As the Cleveland Clinic Symposium highlighted, physicians are committed to improving patient care by educating on the importance of prompt complete system removal for those with device infection.

The conferences also provided opportunities to showcase our new mechanical platforms, SightRail and TightRail. Building on our position as the market leader, these new products are providing our customers with the most comprehensive set of options for lead extraction. Physician hands on experience with these products drew lots of attention. And following HRS, we began a controlled limited launch.

The financial contribution during this phase has been modest and we continue to generate real world commercial experience. Along with launching these new products, we’ve been incredibly focused on improving tactical execution in the U.S. The rigorous training required for our new sales reps is complete and we’re gaining traction.

The expansion has enabled us to broaden our reach and reinforce belief in Class 1 and 2 indications. Better patient care is dependent upon driving procedural growth, and this is our goal.

With the launch of mechanical devices, our world-class training and expanded commercial footprint, our position in Lead Management is unparalleled and is never been stronger. We are dedicated to get back to the kind of growth we’ve delivered for many years.

Internationally, we continue to drive rapid growth in Japan and solid results in Europe. Highlighting recent accomplishments, we continue to accelerate the pace of new laser installations internationally, our new dedicated sales forces in Germany are delivering solid early results in both the LM and VI divisions.

We received reimbursement approval for our Point 9 ELCA coronary catheter in Japan and our launch is underway with great early results. We made our first Lead Management non-laser sales in China and we have recently received approval for non-laser products in India where we’re preparing for launch.

Finally, we expect a majority of our laser portfolio to be approved in China, India and Brazil over the coming 12 to 18 months.

I’ll now turn the call over to Guy to provide more detail on the financials.

Guy Childs

Thank you, Scott, and good afternoon, everyone. I’ll review the details of our second quarter financial performance and provide our full-year 2014 outlook. During the review of second quarter results, I will provide color on major P&L line items that support our 2014 outlook. I trust this will be helpful for model updates.

Given the closing of the AngioScore acquisition on June 30, I want to begin by outlining how the acquisition impacts Q2 and our 2014 outlook. Our June 30 balance sheet reflects the purchase price allocation and the upfront payments of $230 million to AngioScore stockholders.

Our Q2 P&L does not include any financial contribution from AngioScore other than the deal-related costs labeled as due diligence, transaction and integration costs on our P&L. Our 2014 outlook includes AngioScore’s operations from July 1 through December 31.

In the press release and later in my prepared remarks, additional color on the financial contribution of the AngioScore acquisition is provided.

With that said, our Q2 results were stellar and provide an excellent platform to build on in the second half of the year. As Scott mentioned, our three primary goals are the successful integration of the AngioScore acquisition, commercialization of the large ISR opportunity and a return to double-digit growth in our Lead Management business.

Second quarter revenue of $43.6 million was an increase of 10%. Vascular Intervention revenue of $22.5 million increased 19%, or 18% constant currency, led by U.S. peripheral atherectomy growth of 22%.

The VI growth was supported by crossing solutions and coronary revenue. Crossing solutions revenue increased 9%, which is the highest growth rate in this product line at least for years. Our expanded sales team is driving this renewed growth.

Coronary atherectomy and thrombectomy revenue continued their recent trends with growth of 33%. Notably, coronary atherectomy revenue, which is the majority of sales in this product line, increased at an impressive rate of 67% with strong contributions from Japan, supported by double-digit growth in both the U.S. and Europe.

Lead Management revenue increased 7%, 6% constant currency to $16.1 million. Market trends continued to be favorable and we’re looking forward to accelerating growth back to double digits, driven by our sales force expansion and improved sales execution.

Laser System, Service and Other revenue declined 10%, 11% constant currency to $4.9 million in the second quarter. This was due primarily to fewer laser sales and lower rental revenue. Laser sales of 14 units last year is a tough comp compared with the nine units we sold this year. And the decline in rental revenue is expected given our focus on disposable product sales growth.

We placed 46 laser systems this quarter compared with the record of 48 placements in the prior year. On a geographic basis, revenue in the U.S. was $34.9 million, an increase of 8%. International revenue totaled $8.7 million, an increase of 22% as reported, 17% constant currency.

Our gross margin was 76%, up 300 basis points from the second quarter last year. The improvement was led by production efficiencies and a favorable mix of higher-margin disposable products. We are ahead of schedule on our gross margin expansion efforts and ongoing productivity improvements are underway at both Colorado Springs and Fremont manufacturing facilities.

Our revised full-year guidance assumes gross margin within the range of 74.5% to 75.0% for the full year. This includes the slightly dilutive impact of AngioScore gross margins. It excludes the non-cash costs that will be recorded in the second half of the year as part of the step up in inventory basis required by GAAP.

Research, development and other technology expense was $5.7 million or 13% of revenue, compared with $5.5 million or 14% of revenue in last year’s second quarter. Our revised outlook for the full year assumes R&D spending of approximately 16% of revenue. This increase, as a percentage of revenue, was anticipated given the investments in the Drug-Coated AngioSculpt program and this R&D investment is offset by spending reductions in other areas of the business, as well as continued expansion of gross margin.

SG&A expenses of $28.5 million represented 65% of revenue, compared with last year’s $23.1 million or 58% of revenue. The increase was led primarily by higher personnel costs associated with the expansion of our field sales team. Our revised outlook implies SG&A spending of approximately 62% of 2014 full-year revenue.

We incurred $4 million of due diligence, transaction and integration costs. These costs consisted of investment banking, legal, accounting, and consulting costs directly related to due diligence in completion of the transaction.

We recorded $0.6 million related to the medical device excise tax. Acquisition-related amortization and contingent consideration expense totaled $0.2 million. This does not include any similar costs related to the AngioScore acquisition. These costs will commence on July 1 and estimates for the full year are provided in the press release tables.

Other expense of $0.5 million in the second quarter compares with $14,000 of other income last year. The increased expense is due to interest expense and amortization of debt issuance costs tied to the $230 million convertible debt offering that closed in June. We estimate these costs to be $4 million for the full year.

We recorded a provision for income taxes of $0.2 million in Q2, consistent with our expectations. We expect 2014 income tax expense to be consistent with 2013 levels. We do not expect the AngioScore acquisition to have a material impact on income tax expense in the near term except for potential non-cash adjustments related to purchase accounting.

Net loss was $6.6 million or $0.16 per share, compared with net loss of $0.7 million or $0.02 per share last year. Adjusted EBITDA was $0.8 million this quarter versus $2.1 million last year. The decrease was planned and primarily a result of the sales force expansion.

Due to the size of and non-cash nature of many of the costs that arise from the AngioScore acquisition, we’ll begin providing an additional metric, non-GAAP net loss. In the second quarter, costs excluded from non-GAAP net loss consisted primarily of due diligence and transaction costs related to the deal. Going forward, they will include integration costs, intangible asset amortization, contingent consideration expense and litigation costs that relate to enforcement of AngioScore’s intellectual property.

Non-GAAP net loss in the second quarter was $2.4 million or $0.04 per share compared with $0.3 million or $0.01 per share last year. Tables showing a reconciliation of non-GAAP financial measures are provided in the press release.

Cash and cash equivalents totaled $107 million as of June 30, 2014, which reflects the proceeds from the convertible debt financing and the payment of the upfront purchase price to AngioScore stockholders.

Now turning to our 2014 outlook. We project revenues to be in the range of $198.5 million to $201 million, an increase of 25% to 27% over 2013. This includes a $27 million contribution from recently acquired AngioScore products.

Excluding the AngioScore revenue, organic revenue is anticipated to be in the range of $171.5 million to $174 million or 8% to 10% growth over 2013, which is consistent with our previous outlook. The organic revenue includes a modest contribution from the recently approved ISR indication and mechanical tools, offset by anticipated and inherent disruption associated with the integration of the Vascular sales team.

Net loss is projected to be in the range of $36 million to $38 million or $0.85 to $0.90 per share. Non-GAAP net loss for 2014 is projected to be in the range of $13.3 million to $15.3 million or $0.32 to $0.36 per share. Adjusted EBITDA is anticipated to be in the range of breakeven to $2 million.

I’ll turn it back to Scott for closing comments.

Scott Drake

To summarize, we exited Q2 in a great position. We grew double digits. Gross margin expanded 300 basis points. We achieved the ISR indication. AngioScore integration is underway. Multiple product launches are in process. And our team is focused on growth. We are in an excellent position to capitalize on some of these exciting growth drivers in our space.

Now, we’ll open up the call for questions, Karen.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from the line of Chris Pasquale from JPMorgan.

Chris Pasquale - JPMorgan

Thanks and congratulations on the approval last night in the quarter. Scott, I was hoping you could start and maybe talk a little bit about the strategy as you leverage the ISR approval. Are you going to focus initially on trying to increase utilization in existing customers or is this something that you think you take and try to use as a foot in the door to really drive new laser placements at new accounts?

Scott Drake

Yeah. So, let me provide a little bit of context there, Chris. We have the AngioScore, I’ll call them the legacy AngioScore team in-house training last week training on the legacy Spectranetics products, if you will. That training went very, very well and the timing of the label just couldn’t have been better.

The full team, both the AngioScore teammates and legacy Spectranetics teammates come together next week and we will be training again on products to reinforce features and benefits and clinical benefits of our products and also train on ISR, how to position the clinical data and account segmentation and the like.

You can anticipate that the lowest-hanging fruit that’s out there, that we will go after first, are those accounts, roughly 550 of them, that have an installed laser dedicated to our Vascular business. And then, we would use that foothold and momentum to open up roughly 1,000 opportunity accounts that are out there. So you can think of it kind of in that step-wise fashion first going after the lowest-hanging fruit.

Chris Pasquale - JPMorgan

And how much of a commercial push do you think you can make prior to the presentation and publication of the EXCITE data itself, is that a gating factor here or do you think you can make that message heard prior to the podium and the journal article?

Scott Drake

I think there is an opportunity to actually dig in today, we received an e-mail from one of our teammates who actually did an ISR case followed by 200-millimeter scoring balloon. So, it’s already coming together and I feel very good that the field team will be literally doing cases today on the ISR front.

Certainly, the publication and the podium presents will help us deliver that message in a more profound way so again you can see momentum building here from multiple angles as we go forward.

Chris Pasquale - JPMorgan

And then just one last one from me, if I could. You mentioned that you think AngioScore speeds up the process of driving significant operating leverage for the company, can you talk a little bit more about that, obviously we can’t see here in the ’14 results, but maybe update the longer-term profitability goals that you think are achievable for Spectranetics?

Guy Childs

Sure, Chris, this is Guy. One thing I would point out is in our call last quarter we had guided to full-year SG&A spending, as a percentage of revenue, at 64%. With the AngioScore acquisition included, we’re now guiding to 62%, so some evidence of progress, but certainly more to be made. I think it’s also important to point out that the 62% for this year has only a small portion of synergies and we’re looking for cost synergies in full-year 2015 of $8 million to $10 million as we previously stated.

So, in terms of the operating leverage in the business, we continue to believe that 15% is a reasonable first stop for us. We had previously outlined that as a three to five year journey. We think that AngioScore accelerates that time frame for us, not yet prepared to call the shot from a timing perspective, but as we integrate AngioScore, as we get deeper into the ISR launch and mechanical tools, that will - signs of emerging leverage will come from those three activities.

Operator

Thank you. Our next question comes from the line of Rick Wise from Stifel.

Matt Black - Stifel

Hi, this is actually Matt Black, I’m here for Rick. Rick is bouncing on a couple of calls. So, I just have a couple of questions. I just want to make sure, I’m understanding how much you are baking in for AngioScore dis-synergies, if I think about their 2013 revenue of about $55 million, you are baking in $27 million for the second half of the year. So are we right kind of thinking that you are looking at $3 million or $4 million or about sort of 10% type dis-synergies, is that the right size of that?

Scott Drake

I think there is several components, Matt. Let me broaden the lens just for a second, if I can. I think the simplest way to look at this is the legacy SPNC business guidance is unchanged. When you take a look at what we’ve baked in for AngioScore in the back half of ’14, it is approximately what they did in the back half of ’13 despite the fact that their business, now our business, is growing very nicely.

To give you a little context there, the overall business grew 13% in the first half, a little bit more rapidly in the second quarter and the International business is strong. I know that’s something that the Street was looking at and now we have the 200-millimeter launch coming into play here. So the offsetting penalties are on the put side, very profound on ISR launch and the new products that we’ve highlighted and the takes would be integration disruption.

So that’s how we’re looking at it broadly and we expect momentum in the overall combined business to build in the back half of the year as the team settles in and we put some of the inherent challenges and disruptions of the integration behind us.

Matt Black - Stifel

Okay, that’s very helpful. I appreciate that. And I just wanted sort of an update on your sales force size, I think your, and correct me if I’m wrong, you are at about 120 quota-carrying reps in VI now, is that correct?

Scott Drake

Yeah, that’s right. And again a little context there may be helpful. If you go back a relatively short time ago, AngioScore and Spectranetics, respectively, had about 50 quota-carrying reps. Today, as a combined team, we have about 120 quota-carrying reps and about 170 commercial teammates in the U.S. market.

Matt Black - Stifel

Okay. And then the last question, I’m just going to try here, congratulations on ISR, but how would you have us think about and I appreciate it’s early, but sort of the roll out understanding that it’s going to be more of a 2015 and ’16 beyond opportunity, but how would you have us think about as we all start to bake in the opportunity into our numbers, the first couple of years here in terms of contribution from this large opportunity?

Scott Drake

The punch line here, Matt, unequivocally is that we have an incredible opportunity in front of us to really change the paradigm of patient care for a large subset of patients that need it. And the data speaks very, very loudly.

You are exactly right in that it’s early for us and we want to get a little commercial experience before we call the shot and we need to settle in from an integration standpoint and we’re preparing for, at the end of the calendar year, an Investor Day, where we‘ll give a little more color on what we believe we can achieve with ISR in ’15 and beyond, so let us get a little time under our belt, get our team fully trained and executing here, August 1 and we’ll be back to you with more granularity.

Operator

Thank you. Our next question comes from the line Jason Mills from Canaccord Genuity.

Jason Mills - Canaccord Genuity

Hey guys thanks for taking the question. Congrats on a great quarter. Can you hear me okay?

Scott Drake

Sure, can. Thanks, Jason.

Jason Mills - Canaccord Genuity

Scott, thanks for the answer to the last question. I’m going to push a little bit further and just sort of try to segment some of the facts to see if perhaps -- because we unfortunately, we don't have the benefit of waiting or getting asked today, I'm sure all of us, about what the incremental upside from ISR could be, it's a quarter early etcetera.

So if we're thinking about, and we talked last night about this a little bit, about the number of accounts you have lasers in, say a third of the 1,500. I guess the first part of the question as it relates to ISR, does that third that you're in right now, your sales force say a week from now can go in and start talking about using the laser instead of balloon to treat the cases they had already been treated, represent about the same percentage of the current ISR market in the U.S., which you've talked about being 115,000 procedures or call it, something around a $300 million market?

Scott Drake

It’s slightly higher, Jason, the percent of ISR cases that are done in accounts where we have lasers is about 40%. So we’re in higher volume places than peer average, if you will. So it’s slightly beneficial to where we currently are. And you are exactly right there is about another 1,000 hospitals and labs that would warrant a laser given their volume and the importance of our sales reps time.

Jason Mills - Canaccord Genuity

So if we're thinking about 40% of that opportunity, the second part of the question is, talk to us about how the reimbursement setup looks. The fact is, I think, they're using balloon or other atherectomy devices to treat in-stent restenosis already. They now have data, which we all saw last night in the IFUs and I'd like to know about the reimbursement environment, because if it's as strong as it looks like it is, I'm wondering why we wouldn't see some sort of an early adoption among that 40% through the balance of this year.

And I can appreciate the guidance, you wanting to be conservative and in fact I thought you threaded the needle very well there given all the moving parts. But perhaps you could sort of give me a devil's advocate point of view as to why we won't see, at least to some extent, conversion at accounts that are already doing something for these patients and have a laser?

Scott Drake

You are right on top of it. I’d provide the following thoughts. You know the clinical data and the compelling nature of that, highly superior from both a safety and an efficacy standpoint, so we can go into physicians by and large that are using plain old balloon angioplasty today and tell them that not only are we more effective but we’re safer.

When you add atherectomy to the reimbursement you get an uptick in the reimbursement at the hospital or office-based lab receipts that much more than offsets the cost of the laser catheter. So you have a clinical incentive and you have economic incentive as well, so it’s very nice when those two things line up and in this case they do.

So, we’re just trying to be very careful here with setting the right expectations. We do believe it’s going to take us a little bit of time to change clinical practice, but I want to be clear that we are bullish about this opportunity.

Jason Mills - Canaccord Genuity

That’s helpful. Last question, I will get back in queue. Sorry for cheating a little bit. On the Lead Management side, it was a really good bounce back quarter. I'm sorry I missed some of your prepared remarks, but what sort of -- what are your internal analytics telling you with respect to, as you look at the account by account segmentation across the country, where did you see the turnaround happen the quickest and what did you learn from that that sort of gives you confidence that you are on the way to double-digit growth in the fourth quarter, which is I think you reiterated today, right?

Scott Drake

We sure did. Yeah, we have confidence that we’ll be there Jason. When you look from a few different vantage points, it feeds to that confidence, number one we had growth in every product category in Lead Management from Laser Sheaths to Lead Locking Devices to Mechanical Tools contribution, which was modest, but we feel good about what we achieved there.

We’re going to stay silent on the dollar amount there. You see that our tenured reps that were unaffected and that was a group that we called out on the last call to try to provide context to what happened there in the first quarter. Those tenured reps that were unaffected grew double digits and our new reps are also showing growth. So, we look at this from a number of different perspectives and we feel very good that in Q4, we’ll be back to that double-digit growth rate.

Operator

Thank you. Our next question comes from the line of Brooks West from Piper Jaffray.

Brooks West - Piper Jaffray

Scott, could you go over a little bit on the integration side, you’ve had some recent sales leadership movements. I also wanted to just see how you were, I’m sure you’ve identified kind of top performers within the AngioScore organization, is everything, I guess can you update us on how the sales leadership transitions are going, and are you getting everybody from the AngioScore side that you want?

Scott Drake

Yes, let me start broadly and then I’ll narrow in and say that there is equal importance to wrapping our arms around both sides of the organization as we become one. And to give you a punch line there, I feel good about that. Again 120 quota-carrying reps, about 170 commercial teammates in the U.S.

The guiding principle is that we’re following as the integration comes together, number one maximize growth, number two, let’s serve our customers in an even more profound way, and number three, let’s minimize disruption.

And regarding that last point, we see a clear path to having about 75% of the legacy AngioScore and Spectranetics business being in the hands of legacy AngioScore and Spectranetics teammates, respectively, to minimize disruption and really get on with the offensive opportunity that we have in front of us.

From a leadership perspective, we have the same business unit leader that you know over the Vascular business. We have the Head of the Commercial Organization at AngioScore now running the combined sales team, and the Head of Marketing from SPNC running the combined marketing team, an incredibly powerful group. And I feel very, very good about where we’re at on that front.

And Brooks, at a more granular level, when you look at our area VPs, our regional directors and sales teammates, I feel very good about our ability to wrap our arms around all of the wonderful talent that we have and I feel like that’s coming together pretty nicely.

Brooks West - Piper Jaffray

That’s helpful. Thanks. And then, Scott you ticked off a bunch of emerging market opportunities, just wondering if you could kind of quantify the near-term opportunity for you guys in the kind of non-U.S., non-European space? Thanks.

Scott Drake

Yeah, happy to. So, we probably won’t totally satisfy you there, Brooks, but I would tell you that the story of our International business is a very broad diversity of many wonderful bets and that’s really what’s led to our International business being about 20% of our revenue today and a decade ago it was about 10% of our business. And we continue to grow faster internationally than we do in the U.S. market and I love what we have in front of us opening up the BRIC opportunities and continued rapid growth in Japan.

I would expect that our growth rate there will consistently be double digit and as we enter into China in a more profound way, India, and expand our offering in Brazil, we’ll get more granular with what we think that means, that generally starts small obviously and expands from there, but we love the diversity of that and what’s going on in the International business.

Operator

Thank you. Our next question comes from the line of Charles Haff from Craig-Hallum.

Charles Haff - Craig-Hallum

Hi, guys, nice quarter. Thanks for taking my questions.

Scott Drake

Thanks, Charles.

Charles Haff - Craig-Hallum

Question for you on Lead Management. With Cook reentering the market again with Evolution and RL, is there any pickup that you’ve made or is there any interruption that you can see on the Cook business or was there enough inventory on the shelf that you’re not really going to benefit from it too much?

Scott Drake

I’m probably going to steer a little bit clear of that. I think we’re in a very different position today as a company than we were previously. We’ve expanded our sales team, as you know, by about two-thirds. And we now have the most complete set of devices, both energy based and mechanical devices in that market and we are absolutely bullish on the opportunity to better treat patients and to grow our business more rapidly. I think this business is much more a story of market development than it is competitive dynamics. And that’s just fundamentally how we view it.

Charles Haff - Craig-Hallum

And on Shortie device for mechanical tools, what are the plans for Shortie device and when do you think you may have something going there?

Scott Drake

Yeah, it’s launched, Charles.

Charles Haff - Craig-Hallum

I’m sorry.

Scott Drake

No, not at all. It’s a recent development. In fact, I didn’t mention it in my prepared remarks in the TightRail and SightRail comments that I made. We have, what we call, the TightRail Mini product. So the feedback on that device specifically from both Europe and the U.S. is very positive, but again we’re in limited launch phase on the full TightRail offering, both the mini and the longer version and we’re collecting that data and you know well our behavior as it relates to new product launches and we continue methodically down that path.

Charles Haff - Craig-Hallum

Okay. In our checks with physicians tell us that having the Shortie product is really important. If you have to look down the road now that you kind of have a full bag there, where do you kind of see this mechanical market shaking out between you guys and Cook, pick any time frame that you want in terms of what share you may be targeting or what you think is realistic in the future?

Scott Drake

Yeah, again, I would point back to -- we view this as a market development opportunity, not so much a share grab although certainly we will go out and find those accounts and provide them our offering both mechanical and laser base along with all of the training and education that we do that we believe differentiates us in the marketplace.

So, we really look at taking this from roughly a $100 million served market and how do we make it a $700 million served market, it’s much more about that than it is taking Cook’s share, but we do believe that mechanical tools plays a material role in that.

And I’ll give you a couple of instances to bring it to light. Number one, there are markets around the world that we’re entering into now, for example, that have many, many hospitals that are probably less apt to buy our laser technology that is the highest and most expensive technology in the world. So being able to bring into those markets mechanical devices, we believe, is a very smart thing to do and necessary to serve patients in those markets.

Secondarily, in more developed markets such as the U.S. or Europe, we have an offering that customers are comfortable with already using mechanical devices and we see it as an opportunity to up-sell them to laser overtime or just continue to serve as them with what they are comfortable using.

We believe fundamentally that physicians went to school for a very long time, they’ve got a live patient on the table, so it’s our goal to offer them preferred technology and allow them to make the choice that they’re most comfortable with.

Operator

Thank you. Our next question comes from the line of Shagun Singh from CRT Capital Group.

Scott Drake

Hey, Shagun.

Operator

He has disconnected. Our next question comes from the line of Suraj Kalia from Northland Securities.

Suraj Kalia - Northland Securities

Scott, congrats on a nice quarter. Two questions, if I could. First, Scott, for the 40% of the ISR cases you mentioned in, I believe, it was 500 accounts, based on your due diligence, how many are currently using and how many plan on using a drug-coated balloon, what does your guys’ internal intelligence suggest?

Scott Drake

In the U.S. market since the drug-coated balloons aren’t yet approved, I would say the utilization is zero or very low. So, when we’re talking about those 500 accounts, we’re referring to the U.S market exclusively, Suraj. Am I understanding your question correctly?

Suraj Kalia - Northland Securities

Sorry, I thought you were just talking on a global basis, I wasn’t specifically referring to the U.S. Scott, in terms of off-label usage for ISR with the laser, do you have any idea in terms of how much -- to what extent any color you can give that it’s already being used, would love to get some color on that?

Scott Drake

Yeah, happy to. We’ve got very good data here although it’s not source data, because we’ve had to go mine it ourselves and we’ve done that on two occasions with third parties to triangulate and make sure that we’re accurate with this.

Of the 250,000 procedures that are done on a world-wide basis, something like 2% to 3% of them are done off-label with Spectranetics technology and roughly 12% of those 250,000 cases use any atherectomy on an off-label basis.

Suraj Kalia - Northland Securities

And Guy, forgive me, you’ve put in a lot of numbers, I was trying to make a note of it, what were the growth rates for peripheral atherectomy, coronary, crossing solutions, thrombectomy? I missed a few of those numbers. Thanks for taking my questions.

Guy Childs

Sure. Suraj, the overall VI business grew 19% as reported, 18% constant currency. Consistent with prior quarters, really strong performance in U.S. peripheral atherectomy, that was 22%. Crossing solutions growth, as you know, has been challenged with competitive pressures over the last few years, it’s actually up 9% and our coronary business was up 33% in the quarter.

Scott Drake

Coronary exclusively was up 67%, Suraj, and coronary and thrombectomy combined was the former number, correct?

Guy Childs

That’s correct, yeah.

Operator

Thank you. Our next question comes from the line of Mike Matson from Needham & Company

Unidentified Analyst

Hi, guys, this is Brad filling in for Mike. First question, with regards to -- back to the sales force, with regards to the coronary sales force, just kind of asking for an overview on how you plan on building it, how many reps, timing, something like that?

Scott Drake

We’re down the path, I would say, with the commercial leaders of building that plan. I don’t intend to get overly granular giving the competition a look at how we’re going to attack the market. So I’m comfortable telling you 120 quota-carrying reps and 170 commercial teammates in the field. I don’t want to get more granular for competitive reasons at this time. I can tell you that we are in a very strong position to focus on both the coronary and peripheral markets and look forward to really attacking the opportunities that we have.

Unidentified Analyst

Okay, and then kind of stepping back, back to drug-coated balloons, just kind of wondering what your thought is on like potential of drug-coated balloons replacing stents and potentially shrinking the ISR opportunities?

Scott Drake

I think we’ve done a lot of research on the stent front and I believe the stent market is going to continue to grow for many years as we go forward. I do believe in the power of drug-coated balloons and the meaningfulness of that technology. So I do think there will be an impact there and growth rates over time will be more muted on the stent front, but I do believe stents will continue to grow for the foreseeable future.

And I believe that the technology that we offer in terms of de-bulking from a laser atherectomy perspective is not only relevant for ISR, which is obviously a huge opportunity, but it’s also relevant for de novo disease. And when you think broadly about where the market is going, the market is going toward plaque modification and vessel preparation and we have, I would contend, the strongest position in plaque modification in the industry and that is a macro trend that we will see for as long as I’m above ground.

Unidentified Analyst

And then, I know you gave the U.S. peripheral atherectomy growth, do you have the total peripheral atherectomy growth?

Guy Childs

It was very similar

Operator

Our next question comes from line the Shagun Singh from CRT Capital Group.

Shagun Singh - CRT Capital Group

Hi, thanks for taking the question. I’m sorry I got dropped off. I had a question on your revenue guidance, which actually looks a little bit conservative to me. You’ve now included mechanical tools, as well as ISR in your base guidance, which was not previously included, but the base guidance is the same.

Can you talk to -- and also for AngioScore, I guess you're assuming flat year-over-year growth. So can you comment on that? And then, secondly, can you give us a sense of how much revenue have you dialed in for mechanical tools versus ISR in 2014?

Scott Drake

You want to take a cut at that.

Guy Childs

Okay. So, first of all, Shagun, thank you for the question. I won’t talk you out of your perception, but I will tell you that we definitely have recognition in all of the different integrations that I’ve done that there is inherent disruption and we’re are trying to recognize that here and also give you some visibility to what we’re seeing in the business.

The SPNC business, going forward, we’ve left that guidance alone, despite the fact that we will have disruption there with the two teams coming together and on our AngioScore business, we’re just guiding back to be flat with back half ‘13 despite the momentum that’s in that business, also due to the inherent disruption of bringing these two teams together.

So I don’t think there is a lot of value in trying to parse out the various puts and takes there other than to give you that big picture and also provide the comfort that we’re going to work awfully hard to beat our guidance.

Shagun Singh - CRT Capital Group

Okay. That’s helpful. But any sense of how much you're estimating for mechanical tools versus ISR for 2014?

Guy Childs

We’re still in limited launch there and we’ve not gotten out of that to full release and our practices to get all the way through our limited launch, that enables us the space to truly listen to our customers and hear their feedback prior to putting any pressure on ourselves from a financial perspective. So we’re still in that mode right now, and we’re feeling good but not ready to give a number to the Street yet.

Shagun Singh - CRT Capital Group

Okay, that’s fair enough. And then on the EPS side, can you help us think about EPS in 3Q versus 4Q, just given the puts and takes of like the integration, as well as the launch of ISR?

Scott Drake

Sure. From a non-GAAP EPS perspective, we do expect the second half of the year to be a reduced loss versus the first half. And from a Q3 versus Q4 perspective, consistent with past trends, Q4 is typically seasonally stronger for us. Q3 reflects seasonality more pronounced in Europe, but to a lesser extent in U.S. So for all those reasons I think relatively stronger on both the revenue and EPS performance in Q4 versus Q3.

Shagun Singh - CRT Capital Group

Okay, great. And then my last question is, just a point of clarification. So, you do not have indication for ISR in international markets and I was just wondering what the plan is there? Thank you.

Scott Drake

Thanks, Shagun. We’ll definitely be looking at expanding the ISR indication to emerging markets. We do have the CE Mark today and -- but of course the clinical data from EXCITE ISR is new.

Operator

Thank you. And that concludes our question-and-answer session today. I would like to turn the conference back to management for any closing comments.

Scott Drake

Thank you, Karen, and thanks everyone for joining us on our call. Look forward to doing it again in 90 days.

Operator

Thank you. Ladies and gentlemen, thank you for your participation in today’s conference. This does conclude the program and you may now disconnect. Everyone have a good day.

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