Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)

Cyberonics, Inc (NASDAQ:CYBX)

Q1 2015 Earnings Conference Call

August 21, 2014 09:00 ET

Executives

Dan Moore - President & CEO

Rohan Hoare - COO

Greg Browne - CFO

Analysts

Matthew Dodds - Citigroup

Matthew O'Brien - William Blair

William Plovanic - Canaccord Genuity

Steve Brozak - WBB Securities

Imron Zafar – Jefferies

Charles Haff - Craig-Hallum

Jim Sidoti - Sidoti & Company

Brooks West - Piper Jaffray

Operator

Welcome to Cyberonics’ First Quarter Fiscal Year 2015 Earnings Conference Call. My name is Saeed and I will be your operator for today. (Operator Instructions). I would now like to turn the conference over to your host for today, Mr. Dan Moore, President and Chief Executive Officer. Please proceed.

Dan Moore

Thank you Saeed. And let me add my welcome to Cyberonics fiscal 2015 first quarter conference call. Joining me today are Rohan Hoare, our Chief Operating Officer; and Greg Browne, our Chief Financial Officer. Greg will summarize the Safe Harbor statement and provide detailed financial information. Greg?

Greg Browne

Thank you, Dan. This presentation will include forward-looking statements. Forward-looking statements maybe identified by the use of forward-looking terminology, including may, believe, will, expect, anticipate, estimate, plan, intend and forecast, or other similar words.

Statements this morning are based on information presently available to us and assumptions that we believe to be reasonable. Investors are cautioned that all such statements involve risks and uncertainties.

Forward-looking statements include statements concerning building stockholder value; achieving consistent sales and profitability targets and growth worldwide; achieving clinical, regulatory, product development and market development projects and goals, evaluating and advancing other medical device and neuroscience opportunities; completing the previously announced stock repurchase program and fiscal guidance for fiscal year 2015.

Our actual results may differ materially. For a detailed discussion of the factors that may cause our actual results to differ, please refer to our most recent filings with the SEC, including our annual report on Form 10-K for the fiscal year ended April 25, 2014.

With that, I'll turn the call back to Dan for business update.

Dan Moore

Thanks Greg and good morning. Sales, financial and other results for the recently completed quarter reflect continued overall global growth and leverage throughout the P&L as well as good progress on our product development priorities including ProGuardianREST system and the Vitaria generator for chronic heart failure. Financial highlights for the first quarter of fiscal 2015 include our 25th consecutive quarter of year-on-year sales increases. Worldwide product net sales of $72 million, international net sales of 13.2 million, an increase of 14% on a constant currency basis. Worldwide unit sales of 3524 units, an increase of 5% including U.S. unit sales up 2500 units.

Income from operations of $22 million, an increase of 12% on an adjusted basis. Income from operations margin of 30.6% and EBITDA totaled $27 million for the first quarter. Other operational highlights in the first quarter of fiscal 2015 include regulatory submission of the ProGuardianREST system for U.S. clearance by FDA. Regulatory submission of the first module, the clinical data to support eventual CE Mark approval of the Vitaria generator which is for ART or CHF, that’s Autonomic Regulation Therapy. Constructive engagement with FDA concerning the regulatory process for the AspireSR generator in the U.S. and our first regulatory approvals for the new manufacturing facility in Costa Rica along shipment of CE Mark products from this new facility.

Here the U.S. epilepsy market development, although we missed our Q1 generator at unit plan by only four units worldwide and by 25 units in the U.S. Our U.S. sales results fell short of our expectations in a couple of areas in the first quarter most notably in the area of new patient growth and particularly within the comprehensive epilepsy centers, more on that in a minute.

We estimate that more than half of our approximate $1 million shortfall from our global revenue plan for the quarter was due to softness in new patient implants which results in lower generator and lead sales. The four quarter average growth rate in U.S. leads of approximately 2% and the decline in the same metric compared to the first quarter of last year is consistent with our internal estimates of new patient implants over the same periods. On a positive note generator replacement growth rates appear consistent with our guidance of mid-single digit growth.

Based on our analysis the shortfall of approximately 75 to a 100 new patients reflects lower adoption rates within comprehensive epilepsy centers across the country and does not appear to be geographically focused. We estimate new patient activity was down 5% overall in the U.S consisting of a decline of 9% in comprehensive epilepsy centers and unchanged numbers of new patient implants in other settings when compared with the prior year.

Recent publicity about an activity around alternative seizure treatments including a more invasive neuromodulation therapy in medical candidates appear to have contributed to a slowing of VNS Therapy implant. Because of the complexity of implanting the other neuromodulation system in the head including a depth electrode in the brain only some of the comprehensive epilepsy centers have the capability to are interested in and approve to implant the device. While we estimate the number of actual implants of this other neuromodulation system is low, working patients through diagnostic evaluation for the device maybe having an impact on our new VNS Therapy activity in some of these CECs.

It's screening and clinical testing suggests device eligibility and adequate reimbursement is available we expect some patients will opt for other device. However for others consideration of other therapeutic options generally represents a delay of costly and expensive evaluations occur. We continue to believe that the increased awareness and conversations around neurostimulation and the opportunity to compare the long term benefits and the relative risk of these two options will enhance VNS Therapy adoption over the medium term.

This is consistent with what we have seen in Europe over the last several years as new neurostimulation modalities for epilepsy have entered that market. Neurologist and epileptologist continue to treat epilepsy primarily with seizure medications. In 2014 to-date three new medications have become available. None of these drugs has demonstrated superior efficacy to any other seizure medications or to VNS Therapy. We have seen some delays as new drugs are tried prior to advancement of VNS Therapy.

Continued insurance related challenges also seem to have contributed to the slowing growth. First Medicaid patients in several states have seen challenges either associated with network changes or more difficult prior authorizations. Most of these are direct result of the contracting out of Medicaid services to private carriers. Second, higher deductibles and out of pocket maximums create barriers and delays for some patients.

No single one of these headwinds is critical although in combination they have contributed to an overall slowing of U.S. new patient activity. As previously announced expansion of the sales force which took place in April and May is expected to begin improving results commencing in the second quarter. Further we have already increased our focus on comprehensive epilepsy centers. These centers generally account for approximately half of our new patient implant. In addition those physicians whose new patient referrals are inconsistent from quarter-to-quarter have become more of an area focus for us.

Our international growth continues to be fueled by results in Europe. European unit growth was approximately 105 for the first quarter, our revenue growth in Europe was closer to 17% including currency effects. The increased sales of the AspireSR generator have resulted in planned price premiums in both the UK and in Germany.

The expanded launch of the AspireSR generator continues to progress well with several centers placing repeat orders as stated in our press release. Latin America continues to provide excellent growth with volumes up by over 35% on the comparable quarter of the prior year. As mentioned in our earnings release earlier today, utilization and adoption in Japan is improving. New patient implants are up, distributor inventory is at a low point and last month key professional societies relaxed rules that restricted number of physicians allowed to program the device, thereby significantly increasing the number of physicians who are now eligible to care for their patients after referring them to the implant procedure.

As mentioned earlier our performance in the first quarter was approximately a $1 million lower than our internal expectations. Expectations that were assumed when setting our annual guidance. As indicated in our press release, we’re maintaining our annual guidance. We will continue to monitor performance versus expectations to ensure that our results remain consistent with the guidance we have provided. Before I give an update on the significant number of upcoming product development milestones, Greg will now take us through a discussion of our financial results and our guidance in more detail. Greg?

Greg Browne

Thank you Dan. Good morning everyone. Net product sales in the first quarter of fiscal 2015 was $72 million representing growth of 6.8% over the first quarter of the prior year. U.S. unit sales increased by 1.8% over the first quarter of fiscal ’14 and combined with generator ASP growth of 3.4% this resulted in an overall increase in U.S. product revenue of 4.4% for the first quarter.

International unit sales increased by 13.9% to 1024 units and revenue increased by 19.2% to 13.2 million. This increase was 14.5% on a constant currency basis. Foreign currency movements when compared to the first quarter of last fiscal year had a positive impact on international revenue for this quarter of approximately $500,000. With respect to U.S. lead sales quarter-to-quarter variations will occur for a variety of reasons and it is important to note that physicians replace some leads in current patients each quarter.

The first quarter the U.S. lead sales were 1170 compared with 1235 in the previous year, a decrease of 5.3%. The trailing four quarter growth rate in U.S. leads was 1.9%.

Our original assumption for U.S. new patient growth of mid to high single-digits for the full year is being modified to low to mid-single-digit growth.

For fiscal year 2015, we guided growth for U.S. replacements in the mid-single digits. And our estimate for the growth rate of replacements for the first quarter is consistent with that guidance. The AspireHC generator accounted for approximately 38% of U.S. unit sales in the most recent quarter with most of this increase replacing sales of the Demipulse generator which were around 50% of unit mix.

Internationally AspireHC Generator accounted for approximately 38% of U.S. unit sales in the most recent quarter with most of this increase replacing sales of the Demipulse generator which were around 50% of unit mix. Internationally AspireHC generators accounted for 12% of unit sales. AspireSR unit sales accounted for approximately 17% of the sales in those countries participating in the limited commercial release and about 5% of all international sales for the quarter.

The reported gross profit of 91.1% in the first quarter was higher than the previous quarter and in-line with their annual guidance. The first quarter of fiscal 2015 operating income was 22 million or 30.6% of sales, an increase of 12.4% compared to an adjusted 19.6 million or 29% of product sales in the first quarter of fiscal 2014.

Adjustments to last year’s operating income include the litigation settlement as well as the license fee, it was fully recognized in the first quarter of fiscal ’14. Selling, general and administrative expenses were higher than the fourth quarter’s expenses primarily due to increases in the sales force and marketing activities as well as expenses associated with our annual sales meetings and equity compensation.

SG&A expenses are expected to be relatively flat in dollar terms over the year. R&D spending was 14.7% for the quarter, below our expectations for the year. We expect the rate of spending to increase as a percentage of revenue over the balance of fiscal 2015 and as previously stated we expect research and development expenditures to be approximately 15.5% of revenues this fiscal year.

Earnings before interest, depreciation, amortization equity compensation expense and other adjustments were 27 million in the first quarter, an increase of 12.4% over the first quarter of fiscal ’14. For the first quarter of our current fiscal year we had an adjusted effective tax rate of 35.5%. The adjustments reflect a one-time amount related to a reorganization of our corporate entities and an assumption that the research and development tax credit is extended for the full fiscal year. While this rate was slightly higher than our assumptions for the full year, we continue to expect an adjusted full year rate of approximately 35%.

Stock repurchases in the quarter reduced the number of shares included for the purposes of diluted earnings per share calculation to 26.9 million, approximately 3% lower than in the first quarter of the prior year. As stated in our press release we repurchased a 189,000 shares on the open market in the most recent quarter and we expect to complete the purchase of the remaining of 551,000 shares, the current authorization by the end of fiscal year 2015.

Adjusted income per diluted share of $0.53 increased by 17.8% when compared to an adjusted $0.45 per share in the first quarter of fiscal ’14. Day sales outstanding were 61 days down from 62 days at the end of the prior quarter. Balance sheet remained strong after spending $11.4 million repurchasing shares on the open market during the quarter, stockholders equity is approximately $264 million. We have over a $133 million in cash in short term investments and no interest bearing debt.

Fiscal 2015 guidance, as Dan mentioned we’re maintaining our guidance for fiscal 2015. Net sales are expected to be in the range of 300 million - 307 million. The assumptions used in setting this range include normalized revenue growth of approximately 10% over fiscal 2014 after adjusting for the single country order and the final recognition of license revenue. Worldwide unit growth of approximately 7%, again is normalized for the single country order. Growth in U.S. new patient implants is now expected to be in the low to mid-single digit range as I mentioned earlier, an adjustment from our previous assumption. Mid-single digit growth in U.S. replacement implants, continued international growth in the low to mid-teens and a Euro-Dollar exchange rate of a $1.35.

Gross profit is expected to be between 90% and 91% for the full year. Income from operations is expected to be in the range of 96 million and 99 million. The company continues to anticipate as I mentioned in adjusted effective tax rate of approximately 35% to fiscal 2015 which assumes the renewal of the research and development tax credit.

As a reminder during this fiscal year we expect to pay significant cash taxes for the first time, an amount expected to total between 20% and 25% of income before tax. Capital expenditure is expected to be approximately $10 million in the current fiscal year. Adjusted net income for fiscal 2015 is expected to be in the range from 62 million to 64 million and the company continues to expect that adjusted diluted earnings per share will be in the range from $2.33 and $2.39. Dan, will now update our product development activity.

Dan Moore

We continue to make progress with many of our projects. Here are few of the highlights by project, first the ProGuardianREST system. On our last call we reported the submission of the first product of the ProGuardianREST platform for regulatory approval in Europe. This quarter we’re pleased to announce the submission to the FDA. Consistent with our normal practice regulatory approvals will be followed by limited market launches and the first of these for the ProGuardianREST system is expected to occur in the UK within 3 to 6 months.

ProGuardianREST system is our in-home monitoring system designed to aid in the detection, recording and notification of seizures accompanied by heart rate changes or movement. The AspireSR generator, U.S. clinical and regulatory plans. We continue our interaction with FDA regarding the past to regulatory clearance, while we do not yet have an answer to as to whether or not FDA believes an additional premarket study should be completed prior to submission, we expect to gain clarity on this question shortly and be ready to submit this quarter for FDA approval.

Central generator, development of the wireless enabled VNS Therapy generator continues to progress although more slowly than anticipate. The central generator platform along with the RF enabled tablet programmer facilities faster communication and more efficient and convenient programming during the implant procedure and in routine follow-up session.

This platform also enables patients to be provided with information regarding their VNS Therapy. We now estimate the submission will occur later in fiscal 2015. Autonomic Regulation Therapy for chronic heart failure, the ANTHEM-HF clinical study assessing the safety of Autonomic Regulation Therapy has been completed as planned. Initial results of the study will be presented at the European Society of Cardiology meeting on September 1st.

We are encouraged that this topic was chosen for presentation at this prestigious meeting. As discussed on the last call we’re planning a staged submission for European regulatory approval. The clinical data has now been submitted. The remaining item including the technical files and device related analysis are expected to be submitted within the next several months. If approved for CE Mark a limited commercial launch would most likely follow in Germany.

We’re expanding our activities in this important area in fiscal ’15 and continue to evaluate partnership opportunities. Just one other update, treatment-resistant depression. In the fourth quarter of fiscal ’14 we estimated that 24 generators were implanted for TRD followed by an estimated 28 generators implanted in the first quarter of fiscal 2015. We believe that most of these implants were replacement generators with Medicare, Medicaid and some private plans providing limited reimbursement with patient seeking to continue with VNS Therapy after battery depletion.

We remain encouraged that patients with TRD are opting to continue with VNS Therapy and heartened to know that CMS is providing coverage for some of the replacement cases.

Just to recap, we’re expecting several important catalyst in the next six months including regulatory feedback on in a potential U.S. submission for the AspireSR generator. Second, regulatory approvals for the ProGuardianREST system and a European limited launch. Presentation of CHF initial results, completion of the submission and potential EU approval of the Vitaria generator, the central generator regulatory submission.

The first shipments to Europe and Costa Rica and our first direct employees in Japan, coupling our existing business with the potential benefits from these near term events. We remain confident that our ability to achieve increased growth rates and continued strong earnings is in front of us.

We will now open up the call for questions. Operator first question please.

Question-and-Answer Session

Operator

(Operator Instructions). Your first question comes from Matthew Dodds from Citigroup. Your line is open. Please go ahead.

Matthew Dodds - Citigroup

Couple of questions, Dan, when you -- give more breakout this time on the centers. I mean you look at the comprehensive centers and you said they were down more than overall. What’s the trend been before the last couple quarters where you’re seeing those same level of growth? Were they better? So just to get a magnitude of fall off here.

Dan Moore

I think the trend in the comprehensive epilepsy centers is down this quarter.

Matthew Dodds - Citigroup

So your take with the sales force is that this is going to continue the comprehensive centers that a lot of these things have a bit more of a focus to next at least quarter or do you think this is now rectifying itself already.

Dan Moore

I don’t think it will rectify itself, but our sales force is focused on those comprehensive epilepsy centers and we expect to turn that new patient number from a negative back to neutral and onto a positive.

Matthew Dodds - Citigroup

Okay and then just one quick follow-up, the outpatient codes that came out since we haven't talked about those since the preliminaries, you know what’s your take on the change. Do you think it's kind of a onetime shot and does a lower rate concern you for potential for price increases that come in fiscal year.

Dan Moore

It doesn’t concern us. I think we’re always focused on reimbursement on behalf of our customers to make it easier to bring VNS Therapy to patients but if you look over the years, in the earlier years we saw several decline. More recently we have seen good 5% to 7% increases in the last few years. The original proposal came out in March and showed an increase one in July, the proposed amount in July showed couple of decreases. We also know that -- we suspect that there have been other codes or other procedures added to our codes and we expect to go back and submit data and expect or hope that we will turn those codes around but the net effect of all of that I think as we have seen over the years, the reimbursement up or down slightly does not impact our ability to take price.

Operator

Thank you. Our next question comes from Matthew O'Brien from William Blair. Your line is open. Please go ahead.

Matthew O'Brien - William Blair

I was hoping to follow-up a little bit on Matt’s question about the comprehensive centers. Dan, I mean you mentioned that I’m not sure if I’m interpreting this the right way but I think you said a fair number had trialed the competitive product at this point, have all of them as far as you understand trialed it? And have the work-ups of those centers have been patients choosing between you guys and then competitive products, have been increasing, are they flat or they are down? How should we think about that?

Dan Moore

We regularly track a couple of 100 centers that we would consider comprehensive epilepsy centers but that doesn’t mean they can all do the surgery. I think you may have seen some press releases from others suggesting that they are looking at about a 100 accounts. We look today and we think that it's in about 35 accounts that other neuromodulation device but that’s 35 of 200. It is a pretty complicated procedure, it's a pretty invasive procedure and I think net if you compare the benefits of VNS Therapy versus the longer term benefits of that therapy we think we’re sitting in a very good position. So we will continue to use this as an opportunity to talk about ways of reducing seizures and show the over 1000 articles that we have that suggest the relative efficacy of VNS Therapy versus other therapies.

Matthew O'Brien - William Blair

Okay so just are you thinking though that overtime that they could potentially get some traction within those 200 centers in this trailing dynamic it persists for several more quarters.

Rohan Hoare

One of things we have seen is in the fee centers where the other neuromodulation modality is being used is we see a dynamic of VNS implants being up in a number of those centers and we also see VNS implants being down in some of the other centers and what we think is there is a limited number of implants in diagnostic evaluations going on. The people are trailing but the value and the core of the VNS value proposition in terms of being a foundational treatment is still very strong for these centers.

Matthew O'Brien - William Blair

Okay, fair enough and then as far as the replacement generators and this competitive product that’s out there. Are you seeing any centers that are working with patients that currently have a VNS system that are analyzing whether or not these patients that are coming back in that maybe they are new generator, would be better candidates for the competitive product or I guess what I’m really trying to ask is, is there a possibility this could seep into the replacement side of the business.

Dan Moore

I would expect that the other company is going to suggest that any person with VNS is the candidate for their device as well. What we know is we have roughly a 90, what I would consider a 90% satisfaction rate when a patient’s battery is depleted. We estimate that at least 70%, many of our key opinion leaders tell us that 9 out of 10 of their patients come back for replacement. When you’re talking about going to that more invasive procedure you’re really talking about really upping the game and invasiveness for what appears to be clinically anyway a similar result. So I don’t expect and I don’t think we have seen yet a big movement of our replacement cases from our device to their device nor do we expect that in the future.

Operator

Thank you. Our next question comes from William Plovanic from Canaccord Genuity. Your line is open. Please go ahead.

William Plovanic - Canaccord Genuity

Just on the heart failure approval, as we look at OUS, I think your commentary was start with, get approval and then start with Germany, commercialize in six months. Did I catch that correctly?

Dan Moore

We would expect that if we get CE Mark with the study we have that we would begin our commercial effort in Germany. Correct.

William Plovanic - Canaccord Genuity

In about six months?

Dan Moore

I don’t we think, we didn’t put a time on that. The time reference was expectation around submission of the remaining information and we said that would be in the coming months.

William Plovanic - Canaccord Genuity

Okay and then just on the U.S. as we think about this, for that just remind me the data will see at ESC that’s preliminary? And anything for U.S. would need a second pivotal trial in the U.S.?

Dan Moore

That’s a safe assumption Bill. Any activity in the U.S. will require a larger pivotal trial.

William Plovanic - Canaccord Genuity

Okay and then on the clinical standpoint or topic, just as you talk about the SR to be just clear you don’t know if the FDA needs another study or not at this point, that’s the negotiations that are currently going on in the U.S. for SR?

Dan Moore

That is correct. We do not know yet if they are going to recommend a second study.

William Plovanic - Canaccord Genuity

And if you don’t need a second study how quickly could you get a package together and submit and would that be a PMAS, so what would the timeline look like if you don’t need a second study?

Dan Moore

We would expect to submit in the quarter that we’re in and it is a PMAS and those are typically a 180 day.

Operator

Thank you. Our next question comes from Imron Zafar from Jefferies. Your line is open. Please go ahead.

Imron Zafar - Jefferies

I wanted to first follow-up on Bill’s question about the U.S. clinical regulatory pathway, I’m wondering if you actually have begun discussions with FDA in terms of what a PMA study would look like and whether we should assume it would be similar to the biocontrol study that’s ongoing.

Dan Moore

Are you talking specifically heart failure or?

Imron Zafar - Jefferies

In CHF exactly yes, sorry.

Dan Moore

Okay. So CHF, no we’re not in active dialogue with FDA for chronic heart failure.

Imron Zafar - Jefferies

Okay. And then in terms of the intellectual property around CHF, can you just talk about, I know you filed a bunch of cardiology related patents in the past few months. I just wonder if you could just sort of give us a sense of what the IP situation is there in terms of the competitive outlook?

Dan Moore

I think you could see and we said in the past that Reese Terry, our Founder filed a couple, they are very early patents as you would expect in a market that has this kind of potential. There are a lot of patent filings and patents that have already been allowed. So our expectation going forward is that we’re not the only ones filing and overtime providing the therapy work, there is a big growing market here. There will be likely legal action around patents for all parties involved.

Imron Zafar - Jefferies

Okay and then on the epilepsy business, I know you have added some reps off late and in-light of the slowdown in de novo. I wonder if we should expect additional rep hires going forward over the next few quarters incremental to your prior plan based on the prevailing trends?

Rohan Hoare

Our hiring of our reps is a part of a regular cycle we go through when our territories we feel are able to grow and be profitable with additional representation. Our growth in terms of our reps is not as a reaction to a specific market event as we see the economic potential of each of the areas we split them off and create new territories.

Operator

Thank you. And our next question comes from Charles Haff from Craig-Hallum. Your line is open. Please go ahead.

Charles Haff - Craig-Hallum

My first question is regarding Japan, you mentioned earlier that the inventories of the distributors were low this quarter. How should we think about inventories going forward? Would you expect them to remain low or we have some bouncing around there?

Dan Moore

I don’t expect a lot of bouncing around there. I think they are at a level that’s pretty normal at this point and they will probably be ordering what they implant. The good news is as we have mentioned in some of the comments that their implants are up and like we try to do around the world when implants are up we will ship product to support those implants. We won't be shipping product to and try to put it in a distributors inventory.

Charles Haff - Craig-Hallum

Okay. Another question I had was on Costa Rica, I was a little confused did you say that you have started shipping units to the EU from the Costa Rica plant now or is that still waiting to be done?

Greg Browne

We had not started shipping and neither we have all of the regulatory approvals required to ship from Costa Rica and to manufacture in Costa Rica and ship from there, we do expect between -- towards the end of this calendar year that we will have the remaining regulatory approvals and commence our initial shipments from Costa Rica to Europe and potentially other international markets.

Dan Moore

I will provide a little more light on that. We have started at the back-end of the process and we work our way back through the manufacturing process. So to the first approvals we have as Greg said to ship into Europe but it's product at this point that would have been sterilized, labeled and packaged there and you know we have said that one of our objectives is to begin manufacturing generators there this year. We do not yet have the regulatory approvals to manufacture a full generator and ship that full generator that was manufactured in Costa Rica from Costa Rica.

Charles Haff - Craig-Hallum

And my last question is regarding SR in the U.S. You mentioned that you would expect clarity shortly on whether or not clinical study would be required and I understand the sensitivity that you don’t want to front-run the FDA and try to project what they are thinking but you did say clarity shortly and I’m just wondering what causes you to make this statement that you expect that shortly. And if you could quantify that at all that would be really helpful too.

Dan Moore

Let me just remind everyone of our process and what we’re asking for here, from a process standpoint discussions with FDA began several years ago before we designed and agreed to the first trial, E37, but our basic premise here is that we’re automating a feature that already exist with the current product and that is automating the magnet mode. We’re not out there asking for labeling changes. We’re not asking to increase the number of patients eligible for VNS Therapy. It's really a very small ask and that ask is to automate this feature and because of that our position has been and continues to be that a second study should not be required.

On the timing front we have had meetings with FDA and we have another meeting scheduled with them shortly.

Operator

Thank you. Our next question comes from Jim Sidoti from Sidoti & Company. Your line is open. Please go ahead.

Jim Sidoti - Sidoti & Company

Can you just remind me how many sales people you added in the U.S. and what the total is now?

Dan Moore

We increased and we talked about I think on the last call that we increased our number of sales people about customer facing personnel by about 10% and we have approximately 70 direct sales people in the U.S. supported by a number of more junior reps approximately one junior rep for every two sales people and of course a number of other clinical support and training people in the field.

Jim Sidoti - Sidoti & Company

And then when you talked about some delays with new implants because of trailing the alternate stimulator as well as alternate drug therapies. How would you quantify those? Was it about half and half? Was it -- would you think it was more of the other neurostimulator or more the other drug therapies?

Rohan Hoare

Jim collectively we think that there was probably about 75 new patients in the CEC environment which were below our plan as a result of the three parts that you talked about. The alternative neuromodulation therapy, new drug launches and then also ongoing insurance issues associated with patient qualification. So we haven't been able to process in a great detail but we see that as sort of a collectively the impact.

Jim Sidoti - Sidoti & Company

Okay but it's not clear if anyone of those had a stronger impact than the other two?

Dan Moore

No you’re talking about pretty small numbers but 200 comprehensive epilepsy centers and as Rohan just mentioned 75 patients across those and three different factors. So the easiest way to do it is assume about a 1/3rd, 1/3rd and 1/3rd. But that's an estimate.

Jim Sidoti - Sidoti & Company

And then last question, if you do watch the chronic heart failure in Europe sometime in the next 6 to 12 months, how would that happen? Would you sell it to your sales people or who would distribute it?

Dan Moore

I think from the beginning we have talked about being open to a partnership, and consideration of partnerships is always underway but I think our base case is we would do it alone. It is a different call point so the idea would be that we would hire our own sales people to call on the prescribers and the implanters would likely be the people who are implanting our device today. So we have some familiarity with that call point. So yes, a new sales force, see how much traction we get in Germany as we expand to other countries and fill that sales force on the prescribing side in a profitable way. And I think we know who the implanters would be. But it would be a separate sales force.

Operator

Thank you. Our next question comes from Brooks West from Piper Jaffray. Your line is open. Please go ahead.

Brooks West - Piper Jaffray

Greg, just on the guidance thinking through all the moving parts, do you want to kind of directionally push us toward the bottom end of the range. Should we be a little more back-end loaded as we think about some of the efforts in the U.S. starting to take hold? Any further color there would be helpful.

Dan Moore

I think the original guidance we have put out and we have reaffirmed today is a relatively narrow range. Plus or minus 1% on the top line. I don’t think at this point we’re in position, we have only had one quarter after all. We’re in a position to pass that to any either end or anywhere else within that range. I do think as we went into this year we had some difficult comps obviously for the first couple of quarters and for various reasons those comps would hopefully going to get easier as the year went on and we did fill that into our own plan. So I think that’s about as far as we go at this stage.

Operator

Thank you. And our next question comes from Steve Brozak from WBB Securities. Your line is open. Please go ahead.

Steve Brozak - WBB Securities

Two questions, the first one Greg, you had mentioned something that actually took me -- that I focused on. The band that you’re talking about on sales and revenue is actually exquisitely tight. So I’m looking at that and saying, okay, you have been remarkable in terms of your ability to grow these numbers. Given a little bit of uncertainty as to what’s going to happen into the future. How did you arrive at these numbers as carefully as you did and then I’ve got a follow-up question after that.

Greg Browne

Well Steve, as always we start with the work that’s done by our sales management team both here and on the international side. When you come to look at the U.S. business we’re fortunate that a very significant part of our revenue comes from replacement business that replacement business has been traditionally very stable and growing, we’re also seeing growth in that on the international side and that already puts a good base under the business. I think we talked last fiscal year that the replacement revenue was over 42% of the total revenue for the fiscal year.

I think that in terms of the new patients as we have talked about on the margin of course, it can make a little difference when you lose those 75 patients that we have talked about today but we’re still implanting more than approximately 1000 new patients or more every quarter. Those numbers as we have mentioned when you spread across 70 sales people and over 500 ordering accounts in the U.S. You’re going to see some variations but I think the numbers that we put together are consistent with what we have seen coming out of the sales force and consistent with what we have seen in the past and that’s why we feel comfortable with.

Dan Moore

And Steve, it's not a onetime event at the beginning of the year. Our sales managers are in here every quarter working with Mark and his team to reassess by account where we’re and where we expect to go and that gives us the confidence to reaffirm the guidance.

Steve Brozak - WBB Securities

Okay and the follow-up Dan is to you, obviously you have now had a history in terms of refractory depression of implants. Obviously you’re still waiting for more favorable reimbursement climate. But what are you -- what now, even though you're looking at a smaller number, what's the feedback that you're getting from the refractory depression implants? What are you seeing? How strong is the patient satisfaction uptake? Obviously, as much color as you can give on that. And I'll hop back in the queue.

Dan Moore

So, Steve I think we have a pretty small base here. We’re talking about 3500 units in a quarter around the world. And in the U.S. in the last quarter we’re talking about 2500 units sold and when we look at depression we’re talking about 28 or so that’s a pretty low number overall to form any conclusions around. I think if you look at the depression and mental health, it continues to make the news in many unfortunate ways. We know it's out there, we know it seems to be dealt with, there aren’t many devices to help there and so as we have said in the past we will continue to support patient appeals because those who have been implanted you can see the results in the clinical trials which are to me much more meaningful than any commentary I can give about 28 devices that we think sold go back to those last four trials that we published and we think there are some pretty good results for VNS Therapy for people who are battling this condition. So I would refer you back to those clinical trials.

Operator

Thank you. We have a follow-up from William Plovanic from Canaccord Genuity. Your line is open. Please go ahead.

William Plovanic - Canaccord Genuity

Just a point of clarity here. Just as we looked at OUS, Greg, what was the number of leads for OUS?

Greg Browne

The number although is actually 715 leads on the OUS side.

Operator

Thank you. We have a follow-up from Charles Haff from Craig-Hallum. Your line is open. Please go ahead.

Charles Haff - Craig-Hallum

I had a question for you on the managed Medicaid side. You said that you saw some more strict criteria in the quarter as being one of the reasons for the weaker new patient growth. Managed Medicaid has been around for a while, so I'm just wondering, was this a geographical -- certain geographical areas that caused you some more problems? Or were there carrier transitions to new carriers that had more strict criteria than the previous carriers? Or any additional color there will be helpful.

Rohan Hoare

We did see geographically a small number of states move from their Medicaid plan to external third party managed Medicaid plans and as they move plans what you find -- you may have different providers, you may have different hospital networks that are in or out of these plants. And then also different pre-authorization criteria. So anytime you make a shift those dislocations take some time to work through. And so patients have to be reset and some get lost through the process, others need to sort of just go through the process again to be able to get to the appropriate care and VNS therapy implants at the end. We also see that with those Medicaid’s plans in general that we’re seeing higher deductibles, higher maximums to which we’re factoring in as a business as usual going forward that this will be more then norm than the exception in terms how we need to evaluate and manage our business.

Charles Haff - Craig-Hallum

Okay. And then my last question is regarding ProGuardian. Since you're getting close to a launch in Europe, I'm wondering if you could share any marketing plans? Trying to figure out if you are going to be going direct-to-consumer or if you're going to be going through providers? Any help you can give us there in terms of modeling costs and so forth would be helpful. Thank you.

Greg Browne

It's still early in terms of the overall plan because as a reminder what we have talked about and consistent with what we did in the past. We will be going through a limited more of an extended pilot to begin with in the UK, bear in mind it is likely to be direct-to-consumer in some markets with the prescription perhaps in some markets without. So with the change in the business model that would be involved with ProGuardian, we want to tread lightly to begin with and assess the strengths of what we have in-house to deal with that change.

Dan Moore

I think what we always want is the inclusion of endorsement from a physician to a patient. We’re not involved in the patient care. The physicians know their patients. I think the patients generally listen to their physicians, so the physicians are a key part of this whether there is a formal prescription or not is to be determined and again Greg said that might vary by country but the idea of having the physician front and center in this is definitely important but simplifying some of the shipping so that we could ship directly to a consumer makes sense as well.

Operator

Thank you. I’m showing no participants in question at this time. I would like to hand the conference back over to Mr. Dan Moore for closing remarks.

Dan Moore

Thank you Saeed. The last three quarters have proved more challenging for our U.S. commercial team after five years of above average growth. We continue to grow although not at the rate consistent with either our past performance or current expectations. We believe we understand the contributing factors and are confident that the action is already put in place along with the other important milestones outlined today will accelerate growth in the coming quarters. So thanks for listening and as always thanks for your interest and support in Cyberonics. We will talk to you next quarter.

Operator

Ladies and gentlemen thank you for participating in today’s conference. This concludes our program you may all disconnect and have a wonderful day.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Cyberonics' (CYBX) CEO Dan Moore on Q1 2015 Results - Earnings Call Transcript
This Transcript
All Transcripts