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Volcano (NASDAQ:VOLC)

Q2 2014 Earnings Call

August 07, 2014 5:00 pm ET

Executives

John T. Dahldorf - Chief Finance Officer and Principal Accounting Officer

R. Scott Huennekens - Chief Executive Officer, President and Director

Analysts

Christopher T. Pasquale - JP Morgan Chase & Co, Research Division

Michael Matson - Needham & Company, LLC, Research Division

Chris Hammond - Goldman Sachs Group Inc., Research Division

Bruce M. Nudell - Crédit Suisse AG, Research Division

Danielle Antalffy - Leerink Swann LLC, Research Division

Joanne K. Wuensch - BMO Capital Markets U.S.

Jayson T. Bedford - Raymond James & Associates, Inc., Research Division

Operator

Good afternoon, and welcome to Volcano Corporation's Second Quarter 2014 Earnings Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded, Thursday, August 7. A replay of the call will be available through August 10, by dialing (404) 537-3406, passcode 66540992, or via the company's website at www.volcanocorp.com. I would now like to introduce Mr. John Dahldorf, Volcano's Chief Financial Officer. Please go ahead, sir.

John T. Dahldorf

Thank you, and good afternoon. With me today is Scott Huennekens, Volcano's President and Chief Executive Officer. Scott will review the key events at Volcano since our last quarterly earnings call, and I will follow with a discussion of our financial results for the quarter and updated guidance.

Before turning the call over to Scott, let me remind you that today's discussion will contain forward-looking statements that involve risks and uncertainties that could cause our actual results to differ materially from those discussed in today's call. These risks and uncertainties are outlined in today's press release and in our filings with the Securities and Exchange Commission. We caution you not to place undue reliance on our forward-looking statements, and we disclaim any obligation to update these statements. Scott?

R. Scott Huennekens

Thank you, John, and good afternoon, everyone. Because we are holding our Analyst Day on Monday next week, our comments today will focus primarily on recent events at the company. We will provide a more encompassing strategic overview and outlook on Monday, and hope you will be joining us in person or via the webcast.

In the meantime, Volcano had a solid quarter. We continued our strong performance in Europe and generated market share growth in the U.S. and Japanese FM markets. We also completed the AtheroMed transaction, and our commercialization effort is underway.

In addition, we continue to roll out our more recent offerings, including iFR, the Verrata FM wire and SyncVision. I'll speak to these programs shortly.

During today's call, I'll discuss the following: number one, an update on our vision and long-term strategy; number two, the factors behind our updated guidance for the balance of the year; number three, an overview of our financial results for the quarter and the performance of our core businesses, as well as the ongoing rollout of iFR, the Verrata wire and SyncVision; number four, an update on the AtheroMed transaction and the launch of the Phoenix Atherectomy System; five, our announcement today regarding the planned divestiture of Axsun; and six, the litigation settlement reached with St. Jude and announced today.

I want to update you on the evolution of our long-term strategy, to start with, which we will cover in greater detail on our Analyst Day on Monday. The 4 elements of our winning strategy are as follows: number one, coronary leadership, that is maintaining and expanding our existing leadership position in coronary physiology and intravascular imaging through product innovation, increased market penetration and geographic expansion; number two, peripheral expansion, continuing our strong growth in peripheral imaging through innovation and indication expansion, while also growing and commercializing our existing and new therapeutic products, such as the Pioneer CTO Re-Entry Catheter, Valet Microcatheter, Crux IVC filters and Phoenix Atherectomy catheters.

The third element of our winning strategy is financial leverage and profitability. We are committed to achieving financial leverage as a pathway to profitability and expanding profitability, as exemplified by the Axsun divestiture announced today, current expense management programs, litigation settlements and reductions in legal costs going forward, and the transition of disposable manufacturing to Costa Rica. We will discuss our plans in this area in more depth on Monday as well.

And then the last, or fourth element of the strategy, is business model scale. This includes continued global expansion, with more than 50% of our revenues being generated outside the U.S.; higher growth rates in our emerging geographies versus more mature markets such as the U.S. and Japan; and expanding our sales organization for coronary and peripheral in key geographies; and limited tuck-in M&A focused on peripheral therapies.

Our decision to revise our guidance for the balance of the year was based on several factors. While John will provide additional color during his comments, these factors included the following: first, the softness in the coronary imaging market continues to be greater than we had anticipated. While PCI activity in the U.S. appears to be stabilizing and has stabilized in other geographies, IVUS penetration and utilization declined in the U.S., resulting from increased pressure to hospitals to reduce costs.

Conversely, we believe these cost pressures are providing a bit of tailwind for FFR utilization, given the strong data that demonstrates its use provides improved patient and economic outcomes. In addition, we are not yet satisfied with the pace of traction from our U.S. sales force following the reorganization we implemented earlier this year. We are taking steps to accelerate that traction and believe that sales force productivity will increase during the balance of the year in the U.S.

Second, the outlook we had for the additional adoption of our new products, such as iFR in the U.S., SyncVision and Crux, was a bit ambitious. Timing, in the case of iFR and SyncVision, were the culprits in market adoption with respect to Crux. The initial level of uptake of these offerings does not reflect on the efficacy or value of these offerings due to clinician or our long-term views on their importance.

Third, we have continued to lose share in the Japanese coronary imaging market and the growth in market share we are realizing in FFR in Japan has not been sufficient to offset the decline in imaging market share in Japan.

The Japanese market has become increasingly competitive. As we have stated in prior calls, we believe some of this share loss is a result of clinicians interested in trying the newest offerings from our competitors.

On the imaging side, we believe that the introduction of SyncVision, currently underway, will give us a solid boost to our imaging business in Japan. We also believe that we will enhance our competitive position in the Japanese FFR market, as we continue our rollout of iFR and introduced the Verrata wire there during the current quarter. We've also made some changes within our sales force structure in Japan to increase its efficiency.

As I indicated a moment ago, John will provide some additional color on our outlook shortly. And we plan to address the current market environment, our longer-term view on our markets and our initiatives to grow the company during our Analyst Day presentations on Monday.

We believe that we have the right programs in place and a strong product lineup, including iFR, Verrata, SyncVision and our peripheral imaging and therapeutic offerings, to meet our growth objectives in 2015 and beyond. It's also important to note that despite our revised outlook for our revenues, our initiatives to control SG&A and our R&D expenditures are enabling us to maintain our guidance for non-GAAP EPS for the year.

Turning now to the results for the quarter. Revenues increased 1% on both a reported and constant-currency basis. In the U.S., we experienced an uptick in FM disposable revenues, as we believe the market grew approximately 10% year-over-year.

While our share of the U.S. FM market declined slightly versus a year ago, overall, we believe we gained share in Europe and Japan. We believe we are starting to benefit from a limited market release of iFR in the U.S. and continued customer conversions to the Verrata wire, both of which we believe will enable us to regain market share in the second half of the year and going forward.

With respect to IVUS disposable revenues in the U.S., we had excellent growth with our peripheral imaging, which grew more than 30% year-over-year in Pioneer CTO Re-Entry Catheter sales. While we believe PCIs in the U.S. continued to stabilize during the quarter, the IVUS coronary market declined in the high-single digits versus a year ago, due to a decline in IVUS coronary penetration as a percentage of PCI, although our share in the U.S. IVUS market has held steady. We continue to have a cautious outlook for PCIs, both in the U.S. and globally, through the balance of the year.

In Japan, our FM disposable revenues grew 23% and 29% on a reported and constant-currency basis, respectively. The FFR market in Japan grew in the mid-teens in the market year-over-year, and we gained market share during the quarter.

We believe this was due in part to the continued rollout of iFR in Japan. The IVUS market in Japan experienced a slight uptick year-over-year, but our decline in IVUS disposable revenues in Japan reflect several factors, including loss of share and the reimbursement cuts that took effect on April 1 and unfavorable FX exchange rates in the quarter.

During the quarter, our business in Europe and the Middle East continued to demonstrate strong growth across all product lines. Both IVUS and FM markets grew nicely, and we maintained our solid market position, increasing our share of the FM market.

FM disposable revenues increased 32% and 25% on a reported and constant-currency basis, respectively. We believe the ability to offer customers iFR and the Verrata wire is facilitating our market share gains in Europe, Middle East, India and Africa. With respect to APLAC, we had a solid quarter, although we experienced a modest decline in overall revenues year-over-year, as we faced tough comparable versus the second quarter a year ago, particularly in systems revenues.

In summary, we continue to offset the softness in coronary imaging activity by driving market penetration and share gains in the peripheral market through growth in our FM business, particularly in Europe and Japan. Globally, we believe the FFR market grew approximately 14% in the quarter and then our share of the global FFR market was just under 50%.

We continue to believe in the long-term prospects for FFR, based on the growing need to document the necessity of procedures. For example, a recent survey of Blue Cross Insurers found out that, increasingly, providers are being reimbursed not on the number of tests and procedures performed, but rather for improving outcomes and lowering costs.

The survey found that roughly 20% of reimbursements are now value -- or, excuse me, now based on value-based payment models. We believe this kind of trend portends growth opportunities for FFR.

A combination with technology innovation, such as iFR and Verrata, clinician education and the elevation in the U.S. practice guidelines and coverage decisions requiring the use of FFR to approve ischemia prior to doing a PCI.

In addition, to increase penetration of PCIs, we believe there are opportunities for the use of FFR in indications such as acute coronary syndrome patients, the peripherals and mapping in coronary artery bypass procedures.

We continue to be the overall IVUS market share leader in our geographies, and have a global share in excess of 50%. And even as we faced increased competition in our imaging and physiology businesses, we continue to offer customers the broadest portfolio systems and disposable products and to be the provider of choice.

Some of our competitors are, just now, introducing modalities that we have been providing our customers for a number of years. As a result, we continue to have an important competitive advantage, which enables us to build upon our already large install base by winning the overwhelming majority of system placements in our key geographies.

We believe both our physiology and imaging market positions will be enhanced by SyncVision co-registration with IVUS and angiography in the short term and with FFR in the 2015 and '16 range, which we are now in the process of rolling out the IVUS versions in the U.S., Europe and Japan.

We continue to be excited about the opportunities available with the AtheroMed transaction, which closed late in the second quarter. We continue to believe that we will receive clearance on the Phoenix Atherectomy System currently before the FDA later this year. In the meantime, we are in the process of ramping up production at the Menlo Park facility and implementing our commercialization strategies in anticipation of initiating a market release in the fourth quarter.

We plan to implement a full-market release for below-the-knee catheters in early 2015, followed by the full release for above-the-knee catheters in the second half of 2015. The initial response to the Phoenix catheters from the clinical community has been highly positive, and we are looking forward to bringing the device to the marketplace.

Turning now to today's announcement, and we plan to pursue a divesture of the Axsun business. This decision was driven by our previously outlined 4-element long-term strategy focused on coronary imaging and physiology leadership, peripheral expansion, profitability and business scale. The Axsun business and financial models, those no longer fit strategically with Volcano. We have already had discussions with several potential acquirers, and I hope to conclude this divestiture by the end of the year.

John will discuss the implications of this transaction on our revenues, improvements in gross margin and operating expenses during his comments. In the meantime, I want to acknowledge the significant contribution of the Axsun team over the past several years.

Also, as we announced today, we have reached a settlement agreement with St. Jude, resolving all outstanding litigation matters between our 2 companies. Under the terms of the settlement, the parties have agreed to dismiss their lawsuits with prejudice, with neither party admitting liability to the other. Each party will be granted a release of liability for alleged misconduct, granted a license to all patents ensuite [ph], and granted a covenant not to sue as to various current and future products. As a part of this settlement, no financial payments will be made to either party by the other. We are pleased with the resolution of these litigation matters, and believe we can now better focus on the needs of clinicians and patients.

This now means that all significant legal matters are now settled. And John will discuss our expectation for reduced litigation costs going forward.

In closing, we believe we have the key strategic elements in place to grow the company, expand gross margins, drive to increase profitability and enhance shareholder value. We continue to be the innovation leader and market leader through iFR, Verrata, SyncVision and our peripheral imaging and therapeutic offerings, including Pioneer, Crux, Valet Microcatheters, and later this year, the Phoenix Atherectomy System.

We have the industry's broadest peripheral imaging catheter portfolio and a more focused sales force serving the market and are implementing new clinician education and clinical trial programs. Keep in mind that imaging penetration in the peripheral market continues to be in the low- to mid-single digits, providing us a significant market opportunity going forward.

Our reorganized sales force, in combination with our technology leadership, will facilitate our market share strategies in coronary physiology. And we will augment these attributes with the clinical programs designed to demonstrate the clinical and economic efficacy of iFR.

While subject to the ebb and flow of PCI activity, increased competition and growing pressure by hospitals to reduce costs, we believe our coronary imaging business can be a long-term contributor to the company, as we continue to win the majority of console placements, although at slower growth rates than in the past.

As I've indicated today, we believe that the SyncVision can be an important tool for us in differentiating both our coronary imaging and physiology offerings.

Finally, we continue to look at limited tuck-in M&A opportunities to build out our peripheral therapeutic offerings, especially those that complement our platform imaging and physiology technologies. We will continue to execute this strategy with a disciplined capital allocation strategy based on the goal on investing our cash such that our returns will be greater than our weighted average cost of capital.

We remain focused on opportunities that can generate near-term returns through our manufacturing, distribution and clinical expertise, while being cognizant of risks such as overpayment, dilution and integration.

Thank you again for joining us today, and we look forward to providing you an expanded update and outlook for the company on Monday.

I'll now turn the call over to John. John?

John T. Dahldorf

Thank you, Scott. Revenues on a reported basis for the second quarter of 2014 were $102.6 million versus $101.3 million in the second quarter a year ago. Our results include sales of the Pioneer device, which we did not have a year ago.

On a consolidated basis, foreign currency exchange rates were not material during the quarter. For the first 6 months of 2014, revenues, on a reported basis, were $197.1 million versus $194.6 million in the same period a year ago.

On a constant-currency basis, revenues in the first 6 months of 2014 increased 3% versus 2013. Consolidated sales of multi-modality systems and related equipment in the quarter were $10.2 million versus $11.5 million a year ago. Total console placements in the quarter were 221 versus 248 a year ago, including 72 in the U.S. versus 86 a year ago.

In Japan, we had 42 placements versus 25 last year, and 88 in Europe versus 99 last year. We placed 19 consoles in Rest of World versus 38 a year ago. Excluding our legacy IVG systems, we now have more than 7,400 consoles placed versus approximately 6,500 a year ago.

Highlights of our revenue performance in the quarter and first 6 months of 2014 included, in the quarter, FM disposal revenues increased 12% year-over-year, including increases in Japan of 23% on a reported basis and 29% on a constant-currency basis.

Our Europe, Middle East, India, Africa activity continue to be very solid, with growth in IVUS and FM disposal revenues, with FM disposable sales increasing 32% and 25% on a reported and a constant-currency basis, respectively.

For the first 6 months of 2014, total FFR disposable revenues increased 10%, with increases in Japan of 12% and 22% on a reported and constant currency basis, respectively, and 26% and 21% in Europe on a reported and constant currency basis, respectively.

Gross margins for the quarter were 63.2% versus 64.4% in the second quarter a year ago. Gross margins in the quarter were impacted by unfavorable manufacturing variances versus the prior year, costs related to the ramp of manufacturing in Costa Rica and duplicate capacity, and a one-time charge to settle the royalty dispute.

We expect gross margins will be in the low-62% range in the third quarter, while we exit the year at approximately 64%. Operating expenses in the second quarter were $57.6 million versus $65.4 million a year ago. Year-over-year, SG&A increased by approximately $3.6 million, due primarily to costs associated with the expansion of our U.S. sales force, litigation-related expenses, costs associated with our new headquarters and nonexecutive incentive compensation programs.

R&D expenses declined approximately $4.3 million versus a year ago, due to the strategic re-prioritization initiative implemented last October. We do expect an uptick in the R&D expenses in the second half of the year, reflecting the impact of our AtheroMed-related activities.

With respect to our other expense categories. We recorded an acquisition benefit of $7.2 million, reflecting an adjustment to the Crux contingent milestone liability. This resulted in a net acquisition-related benefit of $6.4 million. This adjustment reflects our current fair market value estimate of the milestone payments versus the conservative view at the time we recorded the purchase accounting for the transaction.

Amortization charges are related to the Crux and Pioneer transactions, and we also recorded a benefit of approximately $850,000 in restructuring charges, as we were able to negotiate a favorable termination fee with one of our vendors. Interest expense for the quarter was $7.3 million, of which approximately $2.3 million was a cash expense. With respect to income taxes due to the nominal net income in the quarter, income taxes were not material.

We continue to expect our effective tax benefit rate will be approximately 35% for the remainder of the year. For the second quarter of 2014, we reported net income, on a GAAP basis, of $282,000 or $0.01 per diluted share, versus a loss of $2.4 million or $0.04 per share in the second quarter a year ago. Weighted average shares on a diluted basis in the quarter were 51.7 million.

We expect that weighted average basic share for the year will be approximately 51.4 million. Excluding acquisition-related items, amortization of intangibles and noncash interest expense on our convertible notes net of tax, we reported non-GAAP net income of $0.01 per diluted share versus the non-GAAP net income of $0.03 per diluted share in the same period a year ago.

With respect to guidance for 2014, based on today's foreign currency exchange rates, we expect revenues of $397 million to $401 million on a reported basis, and $401 million to $405 million on a constant-currency basis. Factors contributing to our revised outlook for revenues include: expectations around coronary imaging and FM revenues in the U.S.; and slower-than-expected adoption of new products, such as SyncVision and Crux; our outlooks for revenues from coronary and peripheral imaging and distributed products in Japan; lower-than-expected revenues from APLAC and Axsun; and our current guidance includes a strong dollar versus the guidance that we provided in May.

We expect gross margins will be in the range of 63% to 63.5%, and operating expenses will be 65.5% to 66.5% of revenue. Our expectations for operating expenses reflect a reduction of approximately 250 basis points versus our prior guidance reflecting our initiatives to control spending in SG&A and R&D. Factors driving this improved outlook down include lower litigation expenses, reduced headcount and prioritized R&D spending and overall ongoing expense management.

On a GAAP basis, we expect a net loss of $0.52 to $0.55 per share, with a net loss, on a non-GAAP basis, of $0.16 to $0.19 per share. As Scott noted earlier, in spite of our new revised revenue, forecast for the balance of the year, we've been able to maintain our non-GAAP EPS guidance based on continued implementation of our expense control programs.

With respect to the third quarter of 2014, we expect revenues, on a reported basis, will be in the range of $95 million to $97 million, and $95.5 million to $97.5 million on a constant currency basis. We expect gross margins will be in the range of 62% to 62.5%, and that operating expense will be in the range of 69% to 70% of revenues. On a GAAP basis, we expect a loss per share of $0.17 to $0.19 in the third quarter, and a loss per share of $0.04 to $0.06 on a non-GAAP basis.

We expect weighted average basic shares will be approximately 51.4 million in the quarter. I want to echo Scott's comments and acknowledgment of the contributions of the Axsun team to Volcano. While we will provide you more specific data once the transaction is completed, for illustrative purposes on an annual basis, if Axsun was not included in our current guidance, revenues would be approximately $22 million lower; gross margins would be improved by approximately 200 basis points; and operating margin would increase by approximately $4.5 million.

To be clear, our reported results and guidance include Axsun as an ongoing entity. In closing, I want to remind you of our Analyst Day in New York next Monday at the Midtown Hilton, which is at 1335 Avenue of Americas. We can handle a handful of last-minute RSVPs, so please let us know if you're able to attend. The event will also be webcast through our website.

We're also presenting at the Canaccord Genuity Growth Conference at 1:30 p.m. Eastern time next Wednesday the 13th. And at the Morgan Stanley Healthcare Conference, which our presentation time will be at 11:00 a.m., Eastern time on Tuesday, September 9.

Thank you again for joining us today. And we'll now open the call to your questions. [Operator Instructions] Thank you.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Chris Pasquale of JPMorgan.

Christopher T. Pasquale - JP Morgan Chase & Co, Research Division

Scott, I appreciate the commentary around the outlook and guidance. Could you just talk about the different buckets here? So take the mid-point of the revenue guidance range, $18-million reduction, how much of that was due to the U.S. IVUS business and the pressures you're seeing there versus the lower expectations for some of the new product launches recently versus Japan and some of the other things?

R. Scott Huennekens

Yes. Thanks, Chris. So if you break out the $18 million, I think John can go in greater detail. But about $1 million is FX, $10 million is U.S., $5 million is Japan, $1 million is Europe and $1 million is Axsun APLAC. So 2 main drivers are the U.S. at $10 million and Japan at $5 million. If you look at Japan, take that one first, there's 2 main factors. Number one is loss of share from an imaging standpoint. And then our expectations for slightly slower ramp in FFR market share gains with iFR and Verrata than we had in our original forecast. If you look at the U.S., one major contributor is Crux, which we projected growth substantially in the second half of the year. We're probably 2 quarters behind in our expectations for that product versus where we're at. So John can speak to the percentage of the 10.

John T. Dahldorf

Yes, I would say that between Coronary IVI, coronary FM and Crux, they're probably a 1/3 each.

Christopher T. Pasquale - JP Morgan Chase & Co, Research Division

Okay. That's helpful. And then you talked about improving profitability is one of your strategic goals. But on the other hand, also wanting to increase the scale of the business in some geographies and expand your sales force to do that. At what point do you kind of rethink the size of the sales organization? I know you did a reorganization recently. But the top line is falling short of expectations, and that would appear to be the bucket with the most room for leverage in terms of moving the profitability needle.

R. Scott Huennekens

Yes, so fair question. Our global scale in that point, are not tied to the next 18 months, Chris. That's -- we'll talk more about it more on Monday. That's tied to -- it's more of a 5-year statement and will be reflective of the product line and our sales and revenue expectation. I would expect our sales organization to be flat. We've actually reduced a few headcount in Japan. We've also reallocated some resources in the U.S. with some modest reductions here this week based upon our expectation in the U.S. as well. So as we talked about it, if you take an $18 million out of guidance, $10 million of it from the U.S., and $5 million from Japan, we took some expense out relative to those sales channels as well, but feel comfortable we have better coverage and are properly aligned, priority-wise, to what we need to focus on and achieve for the second half of the year. So getting -- divesting Axsun, improving the margin, improving the operating income relative to those expenses, the previous cuts we made to FL.ICE [indiscernible], eliminating those expenses and eliminating the burden of the legal expenses, getting the Costa Rica by the end of the year, 100% of disposables. We're kind of in the latter part of a cleanup, for lack of a better term, or rationalization of expenses to drive to improve gross margins overall as a business, and then operating income improvements and profitability, which we'll talk about in more detail, relative to our guidance going forward, on Monday as well.

Operator

Our next question comes from Mike Matson of Needham & Company.

Michael Matson - Needham & Company, LLC, Research Division

I guess, first of all, I wanted to ask about there was a study, observational study, published from London that showed no mortality benefit for IVUS and FFR. Just wondering if you -- how meaningful that is? Do you think that's something that will actually affect clinical use of these technologies? Or is -- there are other reasons that the clinicians are using these products?

R. Scott Huennekens

Yes. No, I don't see any effect from a small observational study versus the overwhelming multi-center, randomized clinical trials that support the use of FFR from FAME I, II, III DEFER -- well 3 coming, DEFER [indiscernible] Study, et cetera. So no, I don't see any effect from that. On the IVUS side, you've got the largest study, ADAPT-DES, with 8,000 patients and 3,000 IVUS catheters. And I think the bigger factor, as I mentioned during the script, is the economic pressures on hospitals in the U.S., relative to IVUS use which also then those economic pressures have led to more FFR use.

Michael Matson - Needham & Company, LLC, Research Division

Okay. And then, I guess, one of your competitors in the U.S. and maybe actually globally, I guess, this company, ACIST Medical, recently entered a co-promotion agreement with Medtronic. I just wanted to get your thoughts on that. Do you think that's meaningful at all? Do you think that'll make them a more serious competitor? Or do you think it's just kind of some basic headlines out there that don't really mean a whole lot?

R. Scott Huennekens

Yes. No, we take all competitors seriously. ACIST entry into the market with Medtronic was already in our projections. We'll talk about that more on Monday, relative to how we see the coronary imaging market developing over time, which we see is a not-very-attractive market; a red ocean, so to speak; with a number of competitors; flat PCI growth; maybe some penetration down; the big part of that market being Japan; with every-other-year price reduction. And so as we've stated the last year, we want to decrease our dependency on coronary imaging and decrease our dependency on Japan coronary imaging. So we think they'll gather some modest level of share. They're not going to have the scale to drive a profitable or a meaningful business on a global basis or any particular geography. And so I don't see it as -- them as a serious competitor to, say, Boston, St. Jude or Volcano, for substantial share in the market, given their limited product offering. And the customers demanding broader product offerings, like you get from Volcano with peripheral IVUS, coronary IVUS, phased array rotational FFR flow, iFR. We've got -- next year, we'll have upwards of 17, and we'll talk about it on Monday. Modalities on our system, the Boston's and St. Jude's are in the 4 to 6 range, ACIST is at a couple. The other thing I would add is these are high-touch products and require quite a bit of time from the sales reps to support cases, and be in the labs. And I just don't see Medtronic reps were going to be focused on stents and balloons and other products, having that clinical knowledge and depth of understanding and want to spend that time. And that's been expensed in the past when Boston tried to have more sales of their staff reps doing it. It wasn't effective and they have a dedicated sales force, which makes sense.

Operator

And our next question comes from David Roman of Goldman Sachs.

Chris Hammond - Goldman Sachs Group Inc., Research Division

It's Chris Hammond in for David. So my first question is about FFR. There are pretty meaningful upticks in the EU and Japan. And I was hoping you could give a little bit more color on what is driving the share gains and incremental adoption and how we should really think about the sustainability of that ramp or the inflection of that growth going forward? Are there any factors, seasonality, stocking, anything that we should be aware of with regard to the ex-U.S. segment? And as you see additional competition approach that market, how are you thinking about the landscape in pricing? And then I have a follow-up.

R. Scott Huennekens

Sure. So, no, there's nothing relative to stocking. The EU, you have Verrata and iFR that are 1 quarter to 2 quarters ahead of other geographies with the launch, and it's going very well. The iFR launch in Japan started more aggressively a quarter before the U.S. That's going very well. So we have modeled in our guidance not the same level of growth going forward. We're trying to be conservative, given some prior -- maybe being a little too ambitious with our beliefs relative to FFR market growth and the like. So that's #1. We'll talk more about competition on Monday, as it relates to the FFR market segment. But with Boston entering the market at some point early next year, ACIST in the market, we have factored increased competition, and we have factored price -- slight pricing decreases into our guidance as we look to outer years and look forward, which make it -- which will make it more difficult, we believe, to maintain the growth rates on the FFR segment. But we'll share that in more detail on Monday. But we still project -- in both market segments, we still project our ability to be the market leaders, as I stated in our overall strategy. We have the broadest product portfolios. Feel like -- and have strong innovation, focused sales force to be the leaders, and expect to do so in both of those segments.

Chris Hammond - Goldman Sachs Group Inc., Research Division

Okay. Great. And as a follow-up, I have a little bit more of a macro-related question. Turning to FFR in the U.S. The sales continue to -- they're not growing like they used to, to be frank. And you mentioned the evolving health care landscape and how reimbursement is really shifting towards the outcomes-based therapy. You mentioned a survey. And at the same time, the consoles remain under pressure. So I hope -- I was hoping you could just elaborate a little bit about the balancing act that you guys are having, and the discussions you guys are having with hospitals about the need to invest in capital in order to save money down the road. And also, this comes in the context of Chris's question on reducing headcount. How are you balancing those goals? It seems like they run counterintuitive.

R. Scott Huennekens

Yes. So we've got a peripheral sales force, which we've been expanding. We haven't been expanding the coronary sales force. And the coronary sales force is where we've made some modest reductions in the last week, so aligning appropriately to the markets. The interesting thing is when you look at Japan and the EU, or the broader EMEAI geographies, these are single-payer systems, where you have the provider and the payer both with incentive alignment. The U.S. is a heterogeneous market with very little alignment of providers and payers. And so the FFR market is not growing as fast in the U.S. as it is in these other geographies, where you do have payer and provider alignment. And our expectation is the market would have continued to move faster towards this. I think St. Jude also probably shares the same perspective. And I think both of us are frustrated that the market has not adopted FFR at a higher level, based upon the overwhelming clinical evidence that shows you get better outcome and at lower cost. But you're in a state of flux in the U.S. health care system today, where people are kind of living quarter-to-quarter not knowing what's going to happen with the evolution of the health care system, where there's modest experiments with ACOs happening at different places. And people are just trying to make expense reductions if we cut supplies by 5% this year, cut by 3% here and there. They're not looking at it systemically on how to change things to lower overall health care costs. I think those changes are happening. It will continue to happen. And as they do, FFR, as a market, will evolve and grow faster. And as a, roughly, almost 50% share player, we're going to benefit along with St. Jude with that market evolution. It's more of a question of when is the timing of that happen.

Chris Hammond - Goldman Sachs Group Inc., Research Division

And as a -- just a gut feeling, given that the clinical data is there, what is your best guess before when you think that this could be a double-digit growth market again?

R. Scott Huennekens

We'll talk about that in more detail. I think -- on Monday, because we'll talk about it in the perspective of unit and penetration growth, which may be double-digit. But with increased competition and price erosion, we project it probably more like a 4% to 5% growing market.

Operator

Our next question comes from Bruce Nudell of Crédit Suisse.

Bruce M. Nudell - Crédit Suisse AG, Research Division

You mentioned in the preamble that the pressures in the U.S. were iFR, SyncVision and Crux relative to your expectations. And specifically, iFR, SyncVision and Verrata really are share gaining mechanisms. And just specifically in the U.S., what are the -- what forced you to kind of lower your expectations?

R. Scott Huennekens

Yes. So Crux, as a product, is launched, and there's a couple of things that have happened. The time to get the product through committees to get to trials is taking much longer than we had modeled or anticipated and what has happened historically. And this is part of hospitals trying to control costs by limiting trial of new technologies or products, even if they provide better clinical outfit. So as I said, Crux is probably 6 months behind from a product introduction than we'd anticipated. We still are very optimistic about the product. We also have filed our IDE or in the process of filing our IDE this quarter, I'm sorry, relative to the combination of IVUS and Crux together. So we're still very optimistic about this market segment and growing and having a substantial business in IVC filters. SyncVision is a product that's not launched. We're going with a slower market launch and release than we had anticipated at the beginning of the year. No function of the capability of the product or excitement in the market. It's more of us wanting to get the launch right and do it well. So we're probably a quarter behind in the launch of SyncVision in the U.S. and that then gets reflected in the guidance we had provided initially and what we have updated now. iFR is doing very well in the U.S. More of the factor that affected revenue was what John said, was coronary imaging. And that's a reflection of some modest share loss. But more importantly, decline in the penetration rate and use of IVUS in the U.S. market.

Bruce M. Nudell - Crédit Suisse AG, Research Division

And just picking up on -- I know you want to save a lot for Monday. But if FFR and iFR -- if that category market is more a 5%-type grower, it would seem that the company's bet to be viewed as a growth company is really driven almost exclusively by peripheral, given where coronary imaging is right now. I mean, is that a reasonable assumption?

R. Scott Huennekens

Yes, I would say, and we'll walk you through on Monday, that we believe the coronary imaging market is effectively a flat market. And that we, Volcano, remained relatively flat over an extended period of time in that segment, that the FFR market is a 4% to 5% growing market, we perform with market or even maybe modestly below the market, as we lose some share from new entrants. And that peripheral is a 25%-plus grower. And that's a combination of our peripheral imaging, as well as therapeutic products. And that'll add up to a company that's growing in the 6% to 8% range. And we'd walk you through that with expanding gross margins and expanding profitability over time.

Operator

Our next question comes from Danielle Antalffy of Leerink Partners.

Danielle Antalffy - Leerink Swann LLC, Research Division

Scott, I was hoping you could give a little bit more color on your peripheral IVUS business. It's growing well. I'm just curious of what the -- if you could sort of help quantify the runway that's left there. So I guess -- I imagine we'll go through this in more detail on Monday, but a little color on how much growth is left there? I understand we're in the early innings, so which you guys are penetrated [indiscernible] where the upside potential [indiscernible]?

R. Scott Huennekens

Yes, this is -- as I mentioned in our comments, this is a very under-penetrated market. And from our previous Analyst Day, as well as presentations, there's multiple markets here. There's FFA, there's AAA, there's the Venus side of things, et cetera. So you really have to look at each one. We will go through those each in detail. But we feel very comfortable in our ability to grow over a 4- to 5-year time horizon at 15% to 20% in the peripheral IVUS imaging area.

Danielle Antalffy - Leerink Swann LLC, Research Division

Okay. Great. That's helpful. And also, just a follow-up on that, you're adding new salespeople to that business. How quickly are they getting productive? What are you seeing on productivity perspective from them?

R. Scott Huennekens

Yes, great question. And that's part of what John alluded to and I alluded to in my commentary. We had anticipated a slightly faster ramp in the productivity of our peripheral sales force. Part of that has been slowed down by the time it's taken to get through committees for a trial for Crux, that being the main driver. Within 1 quarter to 2 quarters -- 1.5 quarter, really, we've seen productivity on the IVUS side of things, whether that was on straight peripheral IVUS imaging or the Pioneer CTO device or Valet Microcatheters. Crux is taking a little longer. People have to come in. And they have to get things into committee and through a committee and out the back. And we have factored that into our AtheroMed timing, and we have that built in our AtheroMed deal timing, the extended period. So we shouldn't run into that problem relative to that product launch. It's built into the deal model and our expectations going forward, which we'll talk about also on Monday.

Operator

Our next question comes from Joanne Wuensch of BMO.

Joanne K. Wuensch - BMO Capital Markets U.S.

A couple of questions. What percentage of your revenue is currently peripheral?

John T. Dahldorf

I would say that in the -- if you look at IVUS disposables in the U.S. or just the total -- I mean, take a step back. I would say that it's -- just hang on, let me do a quick calculation here. It's about 25%. 25% in the U.S., 30% in Japan and less than 10% in Europe.

Joanne K. Wuensch - BMO Capital Markets U.S.

And so all the peripheral revenue is in IVUS right now?

R. Scott Huennekens

That's just -- those are the percentage of our IVUS catheter revenue. Pioneer, that revenue is 100% peripherals, so you can take the 10 -- what's the revenue number, John?

John T. Dahldorf

It was a little over $2 million in the quarter.

R. Scott Huennekens

So a little over $8 million on an annualized run rate divided by our total revenue. You can pick that up as well. All of Crux revenue is peripheral. And then very, very little on physiology at this point in time, and most of Valet.

Joanne K. Wuensch - BMO Capital Markets U.S.

Okay. And with you talk about paring back some coronary salespeople and adding some peripheral salespeople, what's the magnitude of that?

R. Scott Huennekens

Yes, I didn't -- we're not adding peripheral. We have an existing peripheral group that is adequately sized, but it's a handful.

Joanne K. Wuensch - BMO Capital Markets U.S.

All right. But -- okay, so when you talk about paring back coronary...

R. Scott Huennekens

A handful of reductions in the U.S.

Joanne K. Wuensch - BMO Capital Markets U.S.

Paring back coronary in the U.S., how many people are we talking here?

R. Scott Huennekens

Just a few, a handful.

Joanne K. Wuensch - BMO Capital Markets U.S.

And there are plans or no plans to expand the peripheral sales force, you're happy with that?

R. Scott Huennekens

We will expand with the launch of AtheroMed. But no plans from our existing sales force. So we will be adding a few more reps with the launch -- this year, with the launch of AtheroMed, depending on the timing of the FDA approval.

Joanne K. Wuensch - BMO Capital Markets U.S.

Okay. And then final question. And I apologize if you hit on this. I've been jumping meetings and calls. When you took a look to giving this year's guidance range, what did you take into account that gives you confidence that this is now the right number?

R. Scott Huennekens

I think we have better clarity on the Crux ramp whereas we were launching the product at the beginning of the year and had to do our best estimate of a product we haven't sold before in our product category, now we have for 6 months. So we have a better feel for that. We also know exactly where iFR is, and we've launched it in the U.S. here recently. Previously launched and saw the effects in Japan and Europe. So we have better clarity on that. So I think with iFR and Sync and Crux, it's -- we have better clarity, and we have better understanding as some of the competitive response and entry in the imaging and FFR markets as well.

Operator

Our next question comes from Jayson Bedford of Raymond James.

Jayson T. Bedford - Raymond James & Associates, Inc., Research Division

I apologize for this, but did you say that the U.S. FM market grew in the 5% range this quarter?

R. Scott Huennekens

No. I said our projections for the 5-year time horizon, which we'll talk about in more detail on Monday, are that the market will grow, units-wise, probably in double digits, or probably mid 4% to 5% revenue, because of price declines from increased competition in the market. So the market we talked about grew in double digits in the U.S. this last quarter. We grew globally 12%.

Jayson T. Bedford - Raymond James & Associates, Inc., Research Division

Okay. That's helpful. And just you've alluded to iFR and Verrata as revenue drivers. Is the thought that the growth will accelerate due to increased use or is there a step-up in price that will allow you to grow even if volumes were static? I guess, it's more a question on the economics of these 2 products to Volcano.

R. Scott Huennekens

Yes. Not price in today's market or competitive market. These are things that would help drive penetration, as well as market share.

Jayson T. Bedford - Raymond James & Associates, Inc., Research Division

Okay. And then just finally for me. In Japan, in the IVUS market there, do you think that there's been a bit of a trade-off here. It looks like FM is strong, IVUS is a little weak. Do you think there's a bit of a trade-off between the 2 technologies going on that were basically FFR is taking away from IVUS?

R. Scott Huennekens

No. There -- Japan is a different market than the U.S. and Europe. In the U.S. and Europe, you usually use IVUS or FFR during a PCI case. In Japan, there's 2 markets, the diagnostic angio market and a stage of a patient for stenting case later. FFR is being used in the growth that's happening in the diagnostic angio market. In the PCI market, IVUS is used 90% of the time. So in the IVUS market in Japan, Volcano has got of a really strong, protected share in phased array, call that blue ocean. It's a market that someone likes fast, simple, plug-and-play use, our phased arrays is best -- is the only product in that category. And then you have kind of the red ocean of high-resolution IVUS -- or high-resolution imaging, which includes IVUS, as well as OCT. And in that segment, you've got a number of competitors: St. Jude OCT, Terumo OCT, Terumo IVUS, Boston IVUS, Volcano IVUS. And you have new entrants coming with InfraReDx and with SBMI. So that's a very crowded market, especially for one that's shrinking 5-plus percent because of reimbursement and a couple of percent over the last year because of PCI volumes. So that's a market that's crowded and difficult. Pricing is stable, but it's a market share game because reimbursement is at a stable price for IVUS. So that's where, in Japan, we've lost some rotational imaging share in that red ocean portion.

Operator

At this time, I'd like to turn the call back over to Mr. Huennekens for any closing remarks.

R. Scott Huennekens

Yes. Thank you very much for your time on the call today, and we look forward to seeing a number of you on Monday, or your participation via webcast. Thank you.

Operator

Thank you, sir. And thank you ladies and gentlemen for your participation. That does conclude your program. You may disconnect your lines at this time. Have a great day.

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Source: Volcano's (VOLC) CEO Scott Huennekens on Q2 2014 Results - Earnings Call Transcript
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